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Enterprise Systems Configuration for Business

MIS 490

CHAPTER 5

Accounting in ERP Systems

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Objectives

After completing this chapter, you will be able to:

• Describe the differences between financial and managerial accounting

• Identify and describe problems associated with accounting and financial reporting in unintegrated information systems

• Describe how ERP systems can help solve accounting and financial reporting problems in an unintegrated system

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Objectives (cont’d.)

• Describe how the Enron scandal and the Sarbanes-Oxley Act have affected accounting information systems

• Explain accounting and management-reporting benefits that accrue from having an ERP system

• Explain the importance of Extensible Business Reporting Language (XBRL) in financial reporting

Introduction

• In this chapter, you will learn about the activities in the Accounting functional area

• Accounting is tightly integrated with all other functional areas

• Accounting activities are necessary for decision making

Accounting Activities (Ref. Pg:118)

• Areas of accounting: • Financial accounting

• Managerial accounting

• Financial accounting • Documenting all transactions of a company that have an impact on the

financial state of the firm

• Using documented transactions to create reports for external parties and agencies

• Reports, or financial statements, must follow prescribed rules and guidelines of various agencies

Accounting Activities (cont’d.)

• Common financial statements: balance sheets and income statements

• Balance sheet • Statement that shows account balances such as:

• Cash held

• Amounts owed to company by customers

• Cost of raw materials and finished-goods inventory

• Long-term assets such as buildings

• Amounts owed to vendors, banks, and other creditors

• Amounts owners have invested in company

Figure 5-1 Fitter Snacker sample balance sheet

Accounting Activities (cont’d.) (Ref. Pg:119)

• Income statement • Profit and loss (P&L) statement

• Shows company’s sales, cost of sales, and profit or loss for a period of time (typically a quarter or year)

• Integrated information system simplifies the process of closing the books and preparing financial statements

Figure 5-2 Fitter Snacker sample income statement

Accounting Activities (cont’d.)

• Quarterly financial statement • Close books

• Closing entries to nominal accounts

• Nominal accounts – zero balance to start next cycle

• Ensure accounts accurate and up-to-date

• “Adjusting” entries

• Integrated information system advantage • Simplifies process of closing books and preparing financial statements

Figure 5-3 Balance sheet and income statement for Fitter Snacker in SAP

ERP system

Accounting Activities (cont’d.) (Ref. Pg:121)

• Managerial accounting • Determine costs and profitability of company’s activities

• Provide managers with detailed information • Informed decisions

• Create budgets

• Determine profitability

• Information that managers use to control day-to-day activities, develop long- term plans

Using ERP for Accounting Information (Ref. Pg:121) • Problems associated with unintegrated systems

• Data sharing usually did not occur in real time • Accounting’s data were often out of date

• Accounting personnel had to do significant research

• ERP system, with its centralized database, avoids these problems

• In traditional accounting, company’s accounts are kept in a record called a general ledger

Using ERP for Accounting Information (cont’d.) (Ref. Pg:122) • In the SAP ERP system, input to general ledger occurs simultaneously

with business transactions

• Many SAP ERP modules cause transaction data to be entered into general ledger, including: • Sales and Distribution (SD)

• Materials Management (MM)

• Financial Accounting (FI)

• Controlling (CO)

• Human Resources (HR)

• Asset Management (AM)

Operational Decision-Making Problem: Credit Management (Ref. Pg:123) • Unintegrated information system

• Out-of-date or inaccurate accounting data can cause problems when a company is making operational decisions

• Industrial credit management

• Fitter Snacker’s credit management procedures

• Credit management in SAP ERP

Industrial Credit Management (Ref. Pg:123)

• Credit management requires a good balance between: • Granting sufficient credit to support sales and

• Making sure that the company does not lose too much money

• Setting a limit on how much money a customer can owe at any one time • Monitoring that limit as orders come in and payments are received

Industrial Credit Management (cont’d.)

• Sales representative needs to be able to review an up-to-date accounts receivable balance when an order comes in

• Problems arise if Marketing and Accounting have unintegrated information systems • Less than full cooperation on updates

• Problems should not arise with an integrated information system • Accounts receivable is immediately updated

Fitter Snacker’s Credit Management Procedures (Ref. Pg:124) • FS sales clerk refers to a weekly printout of a customer’s current

balance and credit limit to see if credit should be granted

• Sales data are transferred to Accounting by disk three times a week

• Accounting clerk can use sales input to prepare a customer invoice

• Accounting must make any adjustments for partial shipments before preparing the invoice

• Accounting clerks process customer payments

Credit Management in SAP ERP (Ref. Pg:124)

• SAP ERP would allow FS to set a credit limit for each customer

• Company can configure any number of credit-check options in SAP ERP system

• Advantages of using SAP ERP to manage credit • Process is automated

• Data are available in real time

Figure 5-5 Credit management configuration

Product Profitability Analysis (Ref. Pg:127)

• Business managers use accounting data to perform profitability analyses of a company and its products

• When data are inaccurate or incomplete, the analyses are flawed

• Main reasons for inaccurate or incomplete data • Inconsistent recordkeeping

• Inaccurate inventory costing systems

• Problems consolidating data from subsidiaries

Management Reporting with ERP Systems (Ref. Pg:136) • Generating the right reports for the right situation is often challenging

• Without an ERP system, the job of tracking all the numbers that need to go into a report is a monumental undertaking

• With ERP system, vast amount of information is available for reporting purposes

Document Flow for Customer Service (Ref. Pg:136) • With an ERP system, all transactions in all areas of a company get

posted in a centralized database

• Each transaction posted in SAP ERP gets its own unique document number • Allows quick access to the data

• In SAP ERP, document numbers for related transactions are associated in the database • Provides an electronic audit trail

Built-In Management-Reporting and Analysis Tools (Ref. Pg:138) • Accounting records maintained in the common database

• Advantage of using a database is the ability to query the records to: • Produce standard reports

• Answer ad hoc questions

• SAP provides a data warehouse within each major module • Data warehouse: repository for data from various sources

Implications of the Sarbanes-Oxley Act for ERP Systems (Ref. Pg:142) • To meet the internal control report requirement, a company must:

• Document the controls that are in place

• Verify that the controls are not subject to error or manipulation

• Companies with ERP systems in place will have an easier time complying with the Sarbanes-Oxley Act than will companies without ERP

Archiving (Ref. Pg:143)

• SAP ERP software offers very few ways to delete items

• Data are removed from SAP ERP system only after they have been recorded to media (tape backup, DVD-R) for permanent storage

• Archive: permanent storage

• SAP ERP systems keep track of when data are created or changed • Change Record

User Authorizations (Ref. Pg:145)

• SAP ERP has sophisticated user administration tools that allow different levels of authorization management • Ensure that employees can perform only the transactions required for their

jobs

• Profile Generator • Provides a simple method for selecting functions that a user should be

allowed to perform

Tolerance Groups (Ref. Pg:146)

• Setting limits on the size of transaction an employee can process • In an SAP ERP system, this is done using tolerance groups

• Tolerance groups • Preset limits on an employee’s ability to post transactions

• Set limits on the dollar value for a single item in a document as well as the total value of document

Financial Transparency (Ref. Pg:147)

• ERP systems provide the ability to drill down from a report to the source documents (transactions) that created it • Makes it easier for auditors to confirm the integrity of reports

• With a properly configured and managed ERP system, there are direct links between the company’s financial statements and individual transactions that make up the statements • Fraud and abuse can be detected more easily

Trends in Financial Reporting (XBRL) (Ref. Pg:150) • Extensible Business Reporting Language (XBRL)

• Standard based language

• Extensible Markup Language (XML) coded data directly from web page into database

• Reports processed faster and validated easier

• ERP systems accept data in XML and XBRL