Need it to be done by tomorrow night

BUS 301S – INTEGRATED BUSINESS EXPERIENCE

Chris McBride, Denise McBride, Stephen Tracy

Central Michigan University

CHAPTER 5 - FINANCIALS

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Table of Contents Chapter 5 - SAP Financial Accounting (FI) ..................................................................................................... 3

Chapter Introduction ................................................................................................................................ 3

Definition of Financial Accounting (FI) ...................................................................................................... 3

Basic Concepts .......................................................................................................................................... 5

Organizational Data .................................................................................................................................. 5

Client ..................................................................................................................................................... 5

Company Code ..................................................................................................................................... 6

Chart of Accounts .................................................................................................................................. 6

Fiscal Year.............................................................................................................................................. 6

Organizational Structure – BUS 301 ...................................................................................................... 6

Master Data .............................................................................................................................................. 7

General Ledger (G/L) Accounts ............................................................................................................. 7

Financial Statement Version ................................................................................................................. 8

Reconciliation Accounts ........................................................................................................................ 8

Subsidiary Ledger (Sub-Ledger) ............................................................................................................ 9

Reconciliation Accounts and Subsidiary Ledgers – Working Together ................................................. 9

Customer and Vendor Accounts ......................................................................................................... 10

Customer Accounts ............................................................................................................................. 10

Vendor Accounts ................................................................................................................................. 10

Review of Debits, Credits, and T-accounts ............................................................................................. 11

Journal Entry Screen ............................................................................................................................... 11

Header ................................................................................................................................................. 11

Line Item ............................................................................................................................................. 11

Line Item Display (Drill Down .............................................................................................................. 11

Fiscal Year / Posting Periods ................................................................................................................... 12

Reporting by Period ............................................................................................................................ 12

Postings Defined ..................................................................................................................................... 12

Posting - Customer .............................................................................................................................. 12

Posting - Vendor .................................................................................................................................. 13

Transactional Data .................................................................................................................................. 13

FI Financial Statements ........................................................................................................................... 14

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Balance Sheet ...................................................................................................................................... 14

Income Statement............................................................................................................................... 16

Final Note - Financial Statements ........................................................................................................... 16

SAP Document Principle ......................................................................................................................... 16

Accountants and Audit Trails .................................................................................................................. 17

SAP @ Pen Inc. ........................................................................................................................................ 17

SAP FI Module Integration ...................................................................................................................... 18

View from the Top .................................................................................................................................. 18

Key Terms ................................................................................................................................................ 19

Self-Assessment ...................................................................................................................................... 20

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Chapter 5 - SAP Financial Accounting (FI)

Chapter Introduction To drive profitability in today’s highly competitive marketplace, organizations need to analyze and manage their financial transactions. Financial Accounting (FI) tracks these financial transactions. As you read in Chapter 2, 76% of the world’s financial transaction revenues touch a SAP system. These “FI relevant” transactions are those that result in the inflow and outflow of business value. The SAP Financial Accounting module is designed to collect the transactional data that provides a foundation for preparing the standard portfolio of reports. Business professionals need to understand the financial impact of integrated and related business processes to interpret and properly prepare these reports. The structures and behavior of financial accounting, regardless of whether a company is using SAP or not, must be compliant with the legal and regulatory standard set forth by the country where business is being conducted. Examples of these legal and regulatory standards are Generally Accepted Accounting Principles (GAAP) or the International Accounting Standards (IAS). In the United States, publically traded companies are also regulated by the Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC) and must be compliant with the Sarbanes-Oxley Act of 2002, just to name a few.

Definition of Financial Accounting (FI) SAP FI is designed to manage the data, processes, and configuration involved with financial transactions. It allows managers to assess the financial position of the company in real time. The real-time functionality and integration of all SAP modules allow for better decision making and strategic planning. It is designed to collect the transactional data that provides a foundation for

preparing the standard portfolio of reports that are required for legal and regulatory purposes. These standard reports include:

 Balance Sheet

 Income Statement

 Statement of Cash Flows (also known as Profit and Loss Statement) The consumers of these reports are primarily external entities to represent compliance with regulatory agencies and financial health. Internal entities, of course, also use these reports to make financial decisions for the company. Examples are shown below.

External Internal Legal Authorities Executives Banks Senior Management Auditors Administrative Staff Shareholders Employees Insurance carriers Taxing Authorities

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There are many submodules in SAP Financial Accounting. The screenshot below shows these modules. As you can see, each part of the menu has folders. Each one of these folders opens to many more folders. Financial Accounting was one of the first modules in SAP. It is based on decades of investigating many companies best business practices.

This course will focus on the General Ledger, Accounts Receivable, and Accounts Payable. These are required for the business processes established at Pen Inc. Each module is briefly described below and in greater detail throughout the rest of the text.

General Ledger – It is within the General Ledger (G/L) that all accounting postings are recorded. The data that has been entered in the SAP system is posted immediately. These postings are displayed in real-time providing up- to-date visibility of the financial accounts. The Balance Sheet and Profit & Loss financial statements are extracted based on general ledger accounting. The General Ledger is fully integrated with the other SAP modules.

Accounts Receivable – Accounts Receivable (A/R) records all account postings generated as a result of Customer sales activities (transactions). It is within the Accounts Receivables module that you can monitor aging of the receivables and generate customer analysis. It is tightly integrated with the Sales and Distribution module. It is part of the Order-to- Cash business process. It is the sell in the make, buy, and sell. Accounts Payable – Accounts Payable (A/P) records all account postings generated as a result of Vendor purchasing activity (transactions). It is within the Accounts Payable module that you can monitor outgoing payments and manage discounts offered by your vendors. Payment programs within SAP enable the payment of payable documents by check, electronic data interchange (EDI), or transfers. It is tightly integrated with the Materials Management module. It is part of the Procure-to-Pay business process. It is

the buy in make, buy, and sell.

This chapter is introducing specific FI topics and defining their usage. The detail behind the specifics of the processes, how FI is leveraged and integration between the modules, are investigated much more deeply in the specific logistics chapters. It is vital to your success in future chapters that you learn these topics. This will allow you to apply the knowledge later rather than having to relearn it every step of the way.

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Basic Concepts

As with all other modules, FI has a structure consisting of:

 Organizational Data – The reporting structure required for the business.  Master data - Entered and maintained by business users to be repeatedly used for many

transactions over a long period of time.  Business Rules (Internal Controls) – These rules control the creation of Master Data and

Transactions.  Transactional data - Entered and/or managed by business users and relating to a single business

transaction.

Organizational Data The organizational data objects used in SAP Financial Accounting (FI) represent the legal and/or organizational views of an enterprise. This also includes, but is not limited to, Generally Accepted Accounting Practices (GAAP), International Accounting Standards (IAS), or accounting standards of other countries’ accounting requirements. The purpose of creating these organizational data elements is to permit the accurate and organized collection of business information. It also supports the development and presentation of relevant information in order to enable and support business decisions. The organizational data forms a framework which supports the activities of a business in the manner desired by management while satisfying the legal and regulatory requirements of governments and regulating bodies. This structure represents the reporting view for financial statements; how data is collected, reported on, and aggregated. This structure does not tie people to jobs; that is the function of the HCM Enterprise Structure covered in the last chapter. The organizational structure defines how we report to external entities on the health of our business. We cannot manage our business with FI information alone, but we need a broad understanding of the tools available to us. These items will be covered in greater detail later. The organizational data elements of SAP FI that are required to function properly include the Client, Company Code and Chart of Accounts.

Client The client in FI is the same as discussed in Materials. The user logs into the client and has access to that client’s data. As you know, this is often referred to as the highest level of organization in SAP. Master data with a global scope is defined at the client level. This helps reduce data redundancy which increases data integrity.

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Company Code

As previously stated, a company code represents an independent legal accounting unit. It is the organizational structure responsible for the generation of financial statements such as the balance sheet and income statement. The company code is the basis for Financial Accounting in SAP. From a practical perspective, a company code is the smallest organizational unit for which legal, financial accounting transaction can be carried out.

Following specific rules and regulations, a balanced set of books is created at the company code level of the organization. A company code may not be an entire enterprise, but a portion of an enterprise that operates independently under different laws, in different countries, or as a separate legal entity.

Chart of Accounts The chart of accounts is an ordered list of G/L accounts (G/L accounts are master data) that are available to a company code. It provides a framework for creating G/L accounts for a company code. The chart of accounts listing primarily contains the definition of each general ledger account including the account number, account name, and type of account (balance sheet or income statement). In order for a company to use a general ledger account, it must exist in a chart of accounts. Each company code is assigned to one operating chart of accounts. The chart of accounts may be shared by multiple company codes. When company codes share the same chart of accounts, this means that they can use the same general ledger accounts. You will see the value and purpose of this when SAP Controlling is discussed in the next chapter.

Fiscal Year

The fiscal year details the specific annual reporting period dates as defined by the company. The fiscal year or financial year does not necessarily use January 1st as the first day of the year, but it is the budgeting period for the company. The fiscal year is not a piece of organizational data, but rather a business rule or internal control created and assigned during configuration. It is included here because it defines a very important requirement of a business. For much of our integrated and cross-company reporting discussed later, the same chart of accounts and fiscal year must be shared by the entities on which we are reporting.

Organizational Structure – BUS 301 Each section of BUS 301S is assigned a client. You will have access to your own company code where you have complete control over the accounting transactions you enter into the system. Each student is assigned a company code, and as such accesses, the chart of accounts and general ledger created for that company code. That is why your user number is a part of the name of each of these entities. Each Pen Inc. company code is a representation or “accounting view” for a portion of the Pen Inc. enterprise. As you know, a unique document number is assigned to each transaction. Many times students become concerned because a classmate will have the same document number. Even though the number is the same, this is a wrong assumption. Keep in mind you are using your own company code. As such, you have your own number range. Documents are stored using the Company Code, the Fiscal Year, and the document number. This structure ensures that each document is unique.

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Note - Because everyone in the same class uses the same client of SAP, you can potentially impact your fellow students if you do not use your own user information. Please use caution when completing your exercises to ensure you are only using your assigned number. In the exercises, your number is represented by three dashes (_ _ _). Do not use what is shown in the screen shots as it is an example only and do not use a number that was not assigned to you.

Master Data Master data defines the data that we use on a daily basis to conduct our business. Master data is created at certain organizational levels and exists in the context of the organizational data. FI master data, for the purposes of this text, will include general ledger accounts, customer sub ledger accounts, and vendor sub-ledger accounts.

If master data isn’t created, you can’t use it. Consider the following: if a general ledger account does not exist, you cannot post to it. If a customer does not exist, you cannot sell to them. If a vendor does not exist, you cannot buy from them. This is how all master data works. This seems like an obvious statement, but it is often misunderstood by students.

Key master data in FI are:

 General Ledger Account o Financial statement version o Reconciliation accounts o Subsidiary ledgers

 Customer Account (Financial Accounting and Sales and Distribution)

 Vendor Account (Financial Accounting and Materials Management)

General Ledger (G/L) Accounts General ledgers represent the company's main accounting records. A general ledger contains a complete record of financial transactions over the life of a company. The ledger holds account information that is needed to prepare financial statements. It includes accounts for assets, liabilities, revenues, and expenses. Asset and liability accounts are balance sheet accounts; revenue and expense accounts are profit and loss statement accounts. The general ledger is managed at the company code level and contains a listing of all transactions affecting each general ledger account. The data that is posted to the general ledger accounts allows for real-time reporting to be available to the company. This allows for business decisions to be made with accurate information. Companies can assign a specific first number to a specific grouping. For example, any number that starts with a seven can be an expense account and any that start with an eight could be a revenue account.

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Financial Statement Version

To prepare financial statements, SAP requires a company to add the needed G/Ls into certain groupings for usage in the financial statements. This grouping is a requirement because SAP does not know what the G/L names really mean and all companies use different numbers and number ranges for their G/Ls. The structure a company creates is referred to as the Financial Statement Version. The financial statement version is linked with the company code through the Chart of Accounts. SAP systems use the financial statement version that is assigned to the company code when creating the balance sheet and P&L reports. The Financial Statement Version is a hierarchical listing and positioning of G/L accounts which mirror the required financial statement. It groups together related accounts into financial statement report

formats (Balance Sheet & Income Statement) for the purpose of financial reporting. Financial statement versions are used to create the financial statements used to run account balance reports and for General Ledger Accounting Planning. In SAP, the Financial Statement Version is a ‘tree’ that organizes and groups general ledger accounts. Creating a general ledger account should be viewed as a process. Once it is created, it must be attached to the Financial Statement Version. If it is not, it will not be

classified with one of the balance sheet or income statement accounts. It will be considered unassigned and will not be included in any of the financial reports. You will have the experience of creating G/L accounts and the financial statement version in the SAP exercises.

Reconciliation Accounts A reconciliation is a special kind of general ledger. We do not post to a reconciliation account, in fact, it is impossible to post to a reconciliation account directly. Postings to reconciliations accounts are automated and are made from subsidiary ledgers (sub-ledgers). These will be further defined in the next section. Reconciliation accounts represent the aggregation of detailed data contained in the sub-ledgers to be used to report overall company code wide balances. To designate an account as a reconciliation account, the type of reconciliation account must be indicated when creating the company code view of the general ledger account. Customer Accounts, Vendor Accounts, Asset Accounts, and Contract Accounts Receivables can be designated as reconciliation accounts. (Note: In this class, we will use Account Receivable and Account Payable reconciliation accounts for our customer and vendors respectively.) Once the general ledger account has been identified as a reconciliation account, the reconciliation account is assigned to a customer or vendor in their respective master records. In this manner, the reconciliation account

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always remains in balance with the total of all the subsidiary accounts (individual customer and vendor accounts) which have been assigned.

Subsidiary Ledger (Sub-Ledger)

A subsidiary ledger (sub-ledger) is used for tracking detailed transactional data separate from the reconciliation general ledger account. Sub-ledgers are created when we have a level of detail needed to manage an account that is much more detailed than is needed for the overall financial management of the business. Without a sub-ledger/reconciliation account system, individual customers and vendors would require their own GL account. This would make the GL unnecessarily large, as a business may have hundreds or thousands of these kinds of accounts. This set-up allows us to see what amount is owed or to be received quickly, as it is not a part of the aggregated total in the reconciliation account in the general ledger. Sub-ledgers discussed in this course will be for customer accounts which reconcile to Accounts Receivable (AR) general ledger account and vendor accounts which reconcile to Accounts Payable (AP) general ledger account. There are other sub-ledgers available in SAP, but they will not be addressed here.

Let’s walk through an example of a sub- ledger using customer. A company has many customers and may have thousands, or millions of customer orders in a given year. Each financial transaction for each customer has value from a reporting standpoint but is not a level of detail that is needed for successful financial reporting. In order to keep track of the detail, each customer is created as a Financial Accounting sub-ledger to capture the entire financial transaction history (how much they were billed and paid) and then that data is consolidated or synchronized with the Accounts Receivable (AR) reconciliation G/L account.

Sub-ledgers allow for more specific detail to be captured in transaction details. Each customer sub- ledger links to the G/L by way of a reconciliation account. The real-time integration between the customer sub-ledger and the assigned reconciliation account provides access to the detail we need about the individual customer account. The aggregated data is recorded in a single account receivable account on the balance sheet. At all times, the total of the sub-ledger accounts should equal the balance in the reconciliation account to which they have been assigned. Individual transactions are posted to the sub-ledger and never directly to the reconciliation account. This configuration is defined as part of the business rules.

Reconciliation Accounts and Subsidiary Ledgers – Working Together A reconciliation account ensures real-time integration of a subsidiary ledger or sub-ledger account with the general ledger. Configuration prevents direct postings to reconciliation accounts thereby assisting in maintaining the integrity of the data. This allows reconciliation between the sub-ledger and general ledger to always be guaranteed. The accounts payable and accounts receivable general ledgers are a

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reconciliation account type which means it can only be updated from the subsidiary ledger. In this fashion, we can track our current accounts receivables for customers, accounts payable for vendors, and other things even before the business transaction is completed. As soon as we post our customer’s payment, the accounts receivable general ledger is immediately automatically updated to show the receivable has been received.

Customer and Vendor Accounts

The customer master record is created in both the Financial Accounting and Sales and Distribution Modules. Vendor master records are created in both the Financial Accounting and Materials Management modules. These records belong to both FI and their respective logistics module. Customer and vendor accounts are being introduced in the FI module chapter because of the very tight integration between the modules and the concept of reconciliation accounts. Very simply stated, in sales, we bill our customer which has integration with FI, and we receive the customer payment through FI. With purchasing, we receive invoices which have integration with FI and send out payments to vendors through FI. When a customer or vendor master record is created, a sub-ledger is created using the customer or vendor assigned identifier. The assigned reconciliation account is master data maintained in the Accounting view of the customer or vendor record. Customer and vendor accounts are sub-ledger (subsidiary ledger) accounts and individual balances are maintained in FI using the subsidiary ledger created with that specific customer or vendor was created. It is through the use of reconciliation accounts that our customer and vendor sub-ledger accounts are linked to the general ledger. Financial postings for customers and vendors are made directly to their respective sub-ledger account and are automatically and concurrently updated in the reconciliation account to which it has been assigned in the general ledger. In this manner, the summation of all our customer accounts is represented in the accounts receivable reconciliation account of the general ledger. Likewise, the summation of all of our vendor accounts is represented in the accounts payable reconciliation account of the general ledger.

Customer Accounts Customer master data is created in the Financial Accounting and Sales and Distribution modules. Customer accounts show the balances of invoices and payments made in conjunction with the sale of our enterprise’s goods and/or services in the sub-ledger account. There is a significant amount of integration between FI and Sales and Distribution (SD) at the time of goods issue, billing, and incoming payment. Due to the linking of the customer subsidiary account to the accounts receivable reconciliation account, the general ledger will be automatically and concurrently updated.

Vendor Accounts

Vendor master data created in the Financial Accounting and Material Management modules. Vendor accounts show the balances of invoices and payments made in addition to the purchasing of goods and/or services from a vendor. There is a significant amount of integration between FI and Material Management (MM) at the time of goods receipt, invoice receipt, and outgoing payment.

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Review of Debits, Credits, and T-accounts

You have each completed at least two accounting

courses if you are in BUS 301. You should

understand the concepts of credits, debits, and t-

accounts. If you need some review, here are some

links to some YouTube videos below.

https://www.youtube.com/watch?v=j71Kmxv7smk

https://www.youtube.com/watch?v=onq8AfjxjRo

https://www.youtube.com/watch?v=dtwxQw9EFkE

Journal Entry Screen Below is an example of a journal entry screen in SAP. This screen consists of three parts: the header and information are which are on the top half of the screen and the line items which are the bottom half.

Header

Header data applies to the entire document. The header of the journal entry contains the document date, the posting date, and the company code. This means that all line items will be posted into the general ledger accounts for this company code. There are additional fields to record both reference and document header text. On the right side of the header, notice the Amount Information area. This area totals the debits and credits for this transaction.

Line Item

The line item section of a journal entry must contain at least two line items. The debits must equal the credits for all line items in the journal entry. The line items on a journal entry contain information such as the general ledger account number, the short text (the name of the general ledger account), whether this line item is a debit or credit, the amount, and other information as needed. Line items represent the individual detail for the transaction. When you post (save) the journal entry, the system automatically updates general ledger accounts and the balances in these accounts. This allows the information to be used in a real-time manner.

Line Item Display (Drill Down) Line Item Display allows the user to drill down. This means you have the ability to open up layers of detail in a report. By selecting the line item drill down in certain report selections, the user can double- click on lines to see further detail and continue to drill into report until the user sees the originating posting documents. It is important to note that without the line item display being enabled for a given

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general ledger account, it is not possible to see the individual documents that make up the balance in the account using this functionality. Some line items in accounts, like input/output tax accounts, are only relevant in conjunction with the posting, and as such, do not have line item display enabled. However, it is always possible to view postings within the system even if you can’t drill down for additional information.

Fiscal Year / Posting Periods

A fiscal year is usually defined as twelve months. It can correspond with the calendar year, but it is not necessary. For example, CMU’s fiscal year starts in July and the State of Michigan’s fiscal year starts in October. A fiscal year is divided into posting periods. Each posting period is defined by a start and finish date. These dates must be defined before any posting and take place in SAP. Pen Inc. uses a calendar year as its fiscal year. That means that Period 1 is January, period 2 is February, period 3 is March, and so on.

Reporting by Period

To display the balance in a general ledger account, the user executes a report. This report provides you with a period by period balance within the selected general ledger account as shown below.

The figure above shows the debits and credits on a period by period basis. If the “line item display” has been enabled, you will be able to drill down into the individual line items that make up the balance for that period. In the figure below, the debit/credit balance was selected, and as such, we can see all the individual documents or transactions that make up the $1,710.00 balance for Period 1. (Add up the credits which equal 3,540. Minus this amount from 5,250 which equals 1,710.)

Postings Defined

Posting is the process of entering debit and credit amounts to ledgers. This is how SAP “saves” transactional data to record financial transactions.

Posting - Customer

Posting an incoming payment from a customer will credit (reduce) the customer’s account in the sub- ledger which results in an automatic credit posting to the accounts receivable reconciliation account and a debit to the cash or bank G/L (increase). As previously stated, because the linking of the customer’s account to our accounts receivable reconciliation account, the accounts receivable reconciliation general ledger will be automatically and concurrently updated anytime a posting is made to the

Period Debit Credit DC bal. Balance

C/f bal. 750,000.00

Period 1 5,250.00 3,540.00 1,710.00 751,710.00

Period 2 25,000.00 15,000.00 10,000.00 761,710.00

Period 1

Doc. no. DT Doc. date Currency Amount

1500000013 KZ 01/05/04 USD 1,800.00 -

1500000014 KZ 01/06/04 USD 990.00 -

100000012 SA 01/08/04 USD 750.00 -

1400000342 DZ 01/14/04 USD 5,250.00

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customer sub-ledger. This is true regardless of the number of customer accounts. This gives us the aggregated value of all customers in the accounts receivable reconciliation general ledger account.

Posting - Vendor

Posting an outgoing payment for a vendor, a debit (decrease) is posted to the vendor’s sub-ledger which is immediately and automatically posted as a debit to the accounts payable reconciliation general ledger. There is also the credit side posting, credit (decrease) to the cash or bank general ledger.

Transactional Data

Transactional data is used to keep track of all “FI relevant” activities in our system. What is meant by “FI relevant?” It means that this activity should save (post) information into our general ledger for use on the company’s balance sheet, income statement, or statement of cash flows. Assets and liabilities are tracked in the balance sheet. Revenues and expenses are tracked in the profit and loss statement (Income Statement). Remembering this simple rule will help you understand how to make specific journal entries later in the course. Transactional data is the record of what happened in a business transaction. This historical view of what, when, by whom, and why form the basis of the “snapshot” for reports such as a balance sheet or income statement. Therefore, it is critical that you understand how transactions work.

When the title (ownership) of the products we sold to the customer is transferred to the customer, we no longer own the products. As such, the quantity of our inventory is reduced along with the value of our inventory. The quantity is tracked by Inventory Management and integrates with FI to also track value (remember value and quantity updates from the last chapter). Inventory is an asset on the balance sheet. Since we removed the goods we sent to the customer, the value of inventory on the balance sheet is lowered (Credit to Inventory) because we no longer own those products. The offsetting posting is to the expense account, Cost of Goods Sold (Debit to COGS).

When we send an invoice (bill) to the customer, it creates an accounts receivable item, which is a record that our customer owes us the sales price of the product times the ordered quantity. This action, sending the invoice, results in a posting to our customer sub-ledger account which creates a posting in the general ledger to the Account Receivable Reconciliation account with an offsetting posting to Revenue. From the sales order standpoint, we will eventually get paid; we will clear the customer’s account balance and the assigned Account Receivable Reconciliation account in the General Ledger and the offseting posting will put the cash from the sale in our bank account. All of these steps will be discussed in later chapters. The important thing to remember when discussing FI is that the numbers we post to our financial statements are based on the transactional data produced in our various business processes.

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FI Financial Statements

When talking about financial statements in this text, we will primarily be working with the balance sheet (which reflects solvency for the enterprise) and income statement (which reflects the enterprise's profitability). There are clearly other financial statements, as you learned in accounting, which will not be addressed in this text or class. This does not reflect on their importance but rather the time limitations associated with presenting the content of this text.

Balance Sheet

The balance sheet, is a presentation of the organization’s assets, liabilities, and equity at a specific point in time. The company’s financial standing at a point in time (month, quarter or year) is represented by the balance sheet. The structure of the balance sheet is provided in a standard format so that consistent interpretation and side-by-side comparison is possible. As you know when working with balance sheets, there are three main types of accounts. They are:

 Assets

 Liabilities

 Equity The balance sheet is comprised of assets, liabilities, and equity. The paragraphs below will provide a definition of these items.

Assets—what the company owns. Examples are cash, accounts receivable, assets, equipment, inventory, and buildings. These assets have value because the business can utilize them to purchase or produce the products or services for the business. Liabilities—what the company owes. Examples are accounts payable, notes payable, and loans. Equity—the difference between Assets and Liabilities. Equity consists of capital stock and retained earnings. Retained earnings are the accumulated net income of the enterprise less any dividends paid to stockholders.

Key concept: The accounting equation for the balance sheet is: Assets = Liabilities + Equity This can also be written as Equity = Assets – Liabilities. The first example helps us remember which side of the balance sheet the entries appear on, assets to the left, liabilities and equity on the right. The second example is how we can calculate the amount of equity. The graphic below depicts the balance sheet and income statement, as well as some of the different types of accounts in the balance sheet. In reviewing the balance sheet items, you will see that many of them are presented as aggregated values. The term aggregated value means the data is summarized or rolled up into a total amount.

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Some of those aggregated values such as receivables and liabilities (such as accounts payable) are shown as the result of the relationship between our subsidiary ledgers and the reconciliation account to which it is assigned. For example, if we have $100,000 in sales from five customers and two hundred individual sales orders the balance sheet only reports the aggregated value of $100,000 that we have in accounts receivable reconciliation account, not the individual customer accounts from where it originated. The concept of reconciliation accounts can be confusing, however, with repetition in future chapters and your participation in assigned exercises, you will become comfortable with subsidiary ledger accounts and reconciliation accounts. The subsidiary ledger account allows at a glance to see how much a company is owed or if it owes us. The reconciliation account allows this amount to be tracked in the general ledger, so the aggregated amount is included in the balance sheet.

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Income Statement

The income statement, commonly referred to the profit and loss statement, reports the profitability of the enterprise for a given period of time. Unlike the balance sheet, the income statement is reported for a period of time rather than a point in time. When measuring profitability for a period, such as a month, quarter, or year, we are comparing the revenues for that period with the expenses related to the generation of those revenues.

• Revenues – revenues are the inflows of cash as a result of selling goods and/or services to customers

• Expenses– expenses are the costs incurred in order to produce revenue. Examples of expenses would include payroll and benefits for employees, purchasing of materials used in manufacturing, or utility payments.

Key concept - The accounting equation for the income statement is: Income = Revenues - Expenses

The Figure above shows the income statement for Pen Inc. in the graphic above. Notice the net income for the period ending December 31, 2013, is the retained earnings amount on the balance sheet on December 31, 2013.

Final Note - Financial Statements There are many different financial statements that a company will be required to generate related to country specific or industry specific rules and regulations. A chemical company is covered by different regulations than an aerospace company. The important thing to remember is that financial account tracks value coming into a company from outside, tracks the value contained within the company and tracks value as it leaves the company. The specific reporting requirements are secondary to the understanding of how this value is captured and the importance of capturing the data quickly, correctly, and with integrity.

SAP Document Principle

Each SAP FI transaction creates a unique numbered electronic document. SAP uses documents to record each business transaction for all modules. This is called the document principle. The document principle means a document must be created for each business transaction impacting our enterprise. That unique document number can be used to recall the transaction at a later time allowing the opportunity to display and change the document. Each FI document is referenced in the system using the fiscal year, the company code, and the document number ensuring each document is unique. The

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document contains information including who created the document, the date and time the document was created, and the commercial content associated with the transaction. Once an FI document is written to the SAP database, it can no longer be deleted as it impacts the financial position of the company. The system logs the data made to documents once it has been created. However, certain fields can be changed, as you will see in the hands-on exercises. All changes to documents are logged as to who changed, what was changed, and when the change was made. The SAP document principle provides a solid and important framework for a strong system of internal controls. These internal controls enforce the requirements of law for companies that operate in the United States.

Accountants and Audit Trails

An audit trail allows oversight into financial transactions. The audit trail begins with an account balance on a financial statement and traces through the accounting records to the transactions that support the account balance. What an audit trail is, in reality, is the review of the SAP documents created that supports the document principle described above. The course, specifically the hands-on exercises, will expose you to the concepts of audit trails in much greater detail.

SAP @ Pen Inc.

A typical scenario of people using the FI module may include such functions as financial accountants, clerks, financial analysts, and supervisors. The FI function may be one big department or broken out into several smaller units such as accounts receivable, accounts payable, tax accounting, credit management, or fixed asset accounting. At Pen Inc., many functions are happening all the time in FI. Below are some examples.

 Managing general ledger accounts (create new, close out obsolete, manage current)

 Managing the chart of accounts (add new G/L, remove obsolete, manage)

 Generate reports

 Analyze data for trends

 Transact G/L postings (make postings or reverse postings manually on G/L)

 Run queries on G/L to help business users with problems

 Generate invoices (accounts receivable)

 Process incoming payments (accounts receivable)

 Process outgoing payments (accounts payable)

 Create or maintain master data for FI related views of customers or vendors This list does not include everything that can be done but rather functions that happen on a typical day. The exercises in this class will provide you the opportunity to execute and learn many of these transactions for yourself as we progress through the course.

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SAP FI Module Integration • Fully integrated, the SAP FI module is integrated with other SAP modules. Quite frankly, if it has

something to do with an asset, liability, revenue or expense, it is the FI module that tracks the transactions or reports it for us. The following list identifies these modules. – Managerial Accounting (CO) - integration between FI and CO occurs when posting to a revenue

or expense account in financial accounting. This integration will be discussed in detail in the next chapter.

– Sales and Distribution (SD) - integration between FI and SD occurs at the time of post goods issue, billing, and incoming payment. This integration will be discussed in detail when the order to cash business process is presented.

– Materials Management (MM) - integration between FI and MM (purchasing) occurs at the time of goods receipt, invoice receipt, and outgoing payment. This integration will be discussed in detail when the procure-to-pay business process is presented.

– Production Planning and Execution (PP) - integration between FI and PP (manufacturing execution) occurs at the time of goods issue, goods receipt, and settlement. This integration will be discussed in detail when the make to stock business process is presented.

View from the Top

by Art Worster, President, Worster Associates, LLC Author: "Maximizing Return on Investment Using ERP Applications," John Wiley & Sons

From a senior management perspective, let’s take a look at how and why the whole financial and

accounting function is so critical to the business regardless of whether your individual interest may lay in

other fields such as the various logistics disciplines (production planning, procurement, inventory

management, and several others) or HR functions (employee records, recruiting, hiring, payroll, and

others). At the same time, for the accountants in this course or reading this textbook, it is a good time

to understand these relationships because you will be able

to evaluate and structure approaches to resolving issues

or even recognizing them in some cases. It also happens

to be where business information systems started more

than six decades ago. The first business applications

developed using computer technology (in this case,

mainframe computers) were in the financial area. To

some extent, that was because the business application in

the financial area mostly dealt with numbers and both

moving and recording activity with money in one way or

another. Starting with General Ledgers and moving on

quickly into reconciliation accounts such as accounts payables and receivables, the development and

implementation of these systems grew quite quickly. This allowed businesses to move from manual

balance sheets into getting reports of ledgers from their computers. We will talk in later chapters about

how the other functions of business information systems evolved, but for now, we will focus on the core

function that is used to manage the overall enterprise.

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So, why is this so important? First of all, in order to manage and steer a business to become or remain

profitable, it is necessary to know your current status, and it has to be accurate. This is key for all of the

various legal reporting requirements such as taxes or SEC filings for example. But, it is also the most

important management tool for steering a business. For accountants, it is critical to understand the

relationships between financial elements and the general ledger where it all comes together. For other

functions, it is equally important to understand how the effects of your activities create financial

impacts while performing non-financial functions. It is also important to know how those transactions

will be gathered and reported through the financial records.

While some workers have viewed financial accounting as simply a necessary and sometimes difficult

function; operating a business without one is inconceivable. How this is set up and how it operates,

however, has many design opportunities that will ultimately define the options that are available to your

own process designs. In management accounting, how all of these elements come together will

determine what reports and analyses can be developed as well as what levels of performance results

can be broken down for analysis. While it is important to understand the internal workings of whatever

piece of the puzzle is yours, the effort you expend to understand where the information comes from,

how it is recorded and tabulated, and ultimately what analyses you are able to produce will be

dependent on how well you understand the basic designs of the entire financial structure of the

enterprise business information system.

In our case, we are going to talk about Enterprise Resource Planning applications in general and use SAP

as our learning tool. The use of SAP in addition to learning that particular software package provides an

opportunity to see how the structures in SAP will, to a great degree, determine how other functions can

operate. In other words, at the end of your business design project, it will all boil down to how this

financial system is designed and implemented. There is an adage that goes “How can you play the game

if you don’t know the rules?” This applies to most things in life, but it applies constantly in business.

Key Terms Accounts payable Financial statements Accounts receivable General ledger Aggregated value Income statement Asset Journal entry Audit trail Liability Balance sheet Master data Chart of accounts Organizational data Credit Posting Customer account Posting period Debit Reconciliation account Document principle Revenue Expense Subsidiary ledger FI Transactional data Financial statement version Vendor account

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Self-Assessment

Can you answer the following? Review the following questions. If you can’t answer them, go back to that section and re-read to make sure you understand the topic.

 What kind of information is the FI module designed to collect?

 How do sub-ledgers interact with reconciliation accounts?

 According to the document principle, when must a document be created?

 What definitions does the chart of accounts contain?

 What is the value of using the same chart of accounts for multiple companies?

 What are some problems that could arise if bad data exist in master data?

 What is the value of tracking FI relevant data?