Business process SAP FI

Prepared by: Mona Ibrahim

ITI Intake 43

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SAP Organizational structure:

1. Client: “Contains more than one company code”

The highest level in SAP hierarchy which separates master records and its own set of tables.
Any specifications or data you enter at this level are valid for all company codes and for
all other organizational structure. Here comes the role of the Basis.
2. Company code:
The smallest organizational unit for which a complete self-contained set of accounts can
be drawn up for purpose of external reporting. Here comes the role of FI consultant.
3. Purchase organization:
An organizational unit serving to subdivide an enterprise according to the requirements of
purchasing. It procures materials and services and negotiates conditions of purchase with
vendors.
There are three types of purchase organizations:
1) Cross plant purchase organization.
2) Specific plant purchase organization.
3) Cross company code purchase organization.

Note:

The purchase organization contains purchase group.

To apply the purchase organization on SAP system we have two solutions

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Solution one

We will have one purchase organization with many purchase groups. Each purchase group
represents an employee.

Solution Two

One purchase organization and one purchase group. The purchase group contains many
employees.

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 4. Plant:
Plant is an organizational unit serving subdivide an enterprise according to production,
procurement, maintenance, and material planning aspects. It is a place where wither
materials are produced or goods and services are provided.
“Each plant must be assigned to only one company code. However, each company code
can be assigned to many plants”
5. Storage location:
An organizational unit allowing the differentiation of materials stock within a plant.
“Each storage location must be assigned to only one plant. However, each plant can be
assigned to many storage locations”

Company codes: “The most important org.element in FI”

• A company code is an independent accounting entity (the smallest organizational element

for which a complete self-contained set of accounts can be drawn up).
• The company codes are separate legal entities which means each one has its own financial
statements.
• The general ledger “GL” is kept in the company code level to create the legally required
balance sheets and profit/loss statements “Income statements”.

Note:

1. There is a feature provided by SAP called company. It is an optional feature facilitates for
the Company to collect the company codes together and make a consolidated financial
statement.

Consolidated financial statements definition:

Consolidated financial statements are the overall group's financial statements. They represent the
total of the parent company and all subsidiaries that are controlled by the parent company. They
include all three key financial statements; income statement, cash flow statement, and balance
sheet.

2. To apply the feature Company within the organization the different company codes should
have the same Chart of accounts and the same Fiscal year.

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 3. Each company code can be assigned to only one company. However, each company can
be assigned to more than one company code.

Chart of accounts:

A chart of accounts consists of a list of GL accounts used by an organization to book business

transactions and day-to-day activities. It is possible to specify whether cost elements are to be
created automatically or manually while creating a chart of accounts. In SAP configurations like
G/L account assignment happened on the chart of accounts only. GL account is to be created at
the chart of accounts level then it is possible to extend at the company code level.

Importance:

A chart of accounts (COA) is a financial, organizational tool that provides an index of every
account in an accounting system. This provides insight into all the financial transactions of the
company. Here, an account is a unique record for each type of asset, liability, equity, revenue, and
expense.

There are three types of the chart of accounts

1. Operating chart of accounts

GL accounts created under the operating chart of accounts are used to book day-to-day transactions
of a business. Cost element category maintained for an operating chart of accounts. Assignment of
an operational chart of accounts is obligatory.

2. Group chart of accounts

GL accounts under the group chart of accounts are meant for reporting the entire corporate group
purpose. In other words, we can say reporting of all company codes data. Assignment of the group
chart of account is elective.

Importance:

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Provides you with an overview of your business and how the different financial parts are
performing. Provides you with a clear picture of your company's financial health. Provides
shareholders and potential investors with a good overview of your business finances.

Group account number

Once an operating chart has been assigned to a group chart, the Group account number field
becomes required in the chart of accounts segment of the master record.

3. Country specific chart of accounts

GL accounts created under the country chart of accounts are as per the country's legal requirement
to provide reporting at per legal requirement of country. The assignment is elective to a company
code.

Example:

A company operates in different countries. Some countries follow IFRS standards and other
countries follow GAAP, so country specific chart of account is very important to help the company
to provide separate reports to allow the company to provide reports according to the company that
it operates in.

Alternative account number

In the company code segment of the master record, each GL account must be assigned to an
account from the country chart of the company code. This is done using the Alternative account
number field.

Fiscal year

A fiscal year is a one-year period that companies and governments use for financial reporting and
budgeting. A fiscal year is most commonly used for accounting purposes to prepare financial
statements.

There are two types for fiscal year:

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 1) Calendar.
2) Non-calendar.

Controlling area:

Is an organizational unit used to subdivide the business organization from a cost accounting stand
point.

Importance:

Track and analyze the revenues and expenses.

Restrictions:

To assign all company codes under the same controlling area. All company codes must have the
same chart of accounts and the same fiscal year.

Note:

Each company code must be assigned to only one controlling area. However, each
controlling area can be assigned to more than one company code.

The controlling area contains two parts:

1. Cost center:
Is a part of a business where costs can be calculated and controlled.
EX)
Marketing department is considered a cost center because it does not generate profit in its
own right. However, it is considered as an indirect way to generate profit.
2. Profit center:
Is a part of a business where costs and revenue can be calculated and controlled.
EX)
Sales department is considered a profit center because it generates profits on its own right.

Note:

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 The profit center is created on the controlling area. so, if we have different company codes
with different controlling areas, we will have different profit centers. But if we have the
same controlling area across all company codes, we will be able to have same profit center.

If we have company codes on the

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If we do not have company codes on the same controlling area

In this case there is a must to use the Segment

Segment: it is a function in SAP used to collect the different profit centers.

Business Area:

It is a complete set of financial statements across all company codes. It allocates all business lines
from all company codes.

Note:

If I have one business line generates revenues more than 10% so it must have its
own/separate financial statements.

The main purpose of having segments:

1. Provide better overview of a company’s economic performance.

2. Improve forecasting of potential sales and financial reserves of a company.
3. Avoid risks and provide better opportunities for the company
4. Provide an insight into different business activities of a diversified company.

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Reconciliation Accounts:

In SAP GL can contain more than one sub-ledger. This is called reconciliation accounts (RE-CON)

There are only three types in the reconciliation accounts

1. Accounts Payable (AP):

There is a General Ledger called AP it contains all of the transactions of all vendors. However,
each vendor has his/her own sub-ledger with his/her own name on the system.

2. Accounts Receivable (AR):

There is a General Ledger called AP it contains all of the transactions of all customers. However,
each vendor has his/her own sub-ledger with his/her own name on the system.

3. Fixed Assets:

Contains all transactions of all assets including

a) Gain from sale.

b) Loss from sale.
c) Acquisition.
d) Rent.
e) Depreciation.
f) Purchase.

Exercise: Determine which of the following is a RE-CON account

Cash X
AR ✓
Inventory X
Machines ✓
Building ✓
Land ✓
AP ✓

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Note:

1. To know all of the transactions made by the client, vendor, or on fixed assets, we have to
enter on the sub-ledger of each one because the GL shows the total.
2. While creating new vendor or new customer there is a must to identify the reconciliation
account that is related to him/her.
3. Only AP, AR, and FA have the RE-CON accounts. However, all other accounts have GLs.

In the business process courses there are Five topics will be taken into account

1. GL.
2. AP.
3. AR.
4. FA.
5. Banks.

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General Ledger

The GL in SAP is identified by two parts

1. Chart of account 2. Company code

Account Group Currency
Name Tax
Number Recon
Type (P/L or B.S)

Account Groups

Account groups define criteria that affect how the GL accounts in the group are created. The
account group determines the allowed range from which the account number can be selected.

The main functions of the account group:

1. Organize
2. Number Range
3. Controls the field status which is known as HDRO

Assets 1……...19999
Liabilities 2……...29999
Expenses 3……...39999
Revenues 4………49999
Equity 5……...59999

The account group controls the appearance of the company code’s fields.

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Transaction Figure

A transaction figure describes the total of all postings on an account in debit or credit. One
transaction figure for debit and one transaction figure for credit are always kept for each account
in the SAP system. The financial statements for the company code are calculated using these
transaction figures.

Transaction figures are the sums of line items on the debit or credit side. The balance is the
difference between the debit and the credit transaction figure.

If a GL account has a line-item display marked in its master record, one can drill down from the
balance of the account to the line items and then to the documents.

Posting Key

The posting key in SAP is a two digits numerical key that determines the type of transaction
entered in a line item.

Posting Key refers to a double-digit numeric key that is defined to control the entry processes of
document line items in an FI Transaction. These posting keys specify whether the line item is a
debit or credit entry account type. It also specifies the screen layout of the line items.

Field Status Group Vs. Account Group

1. Field status group:

Controls the appearance of the fields in the transactions.
2. Account group:
Controls the appearance of the fields while creating the master data.

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Line-Item Display (LID)

Shows the details of the GLs not only the final balances of the GL

Open Item Management (OIM)

OIM is very important because it facilitates to know the open items status whether open or
cleared. OIM status known throughout two colors

1) RED for OPEN items.

2) GREEN for CLEARED items.

Note:

We cannot make open item display without line-item display.

Note:
If we forgot to check on OIM on the GR/IR we have to REVERSE the whole account transactions
then the total balance will be ZERO. Then we will put all of the transactions again and we will
check on OIM.

Only balances in local currencies

It is only specific for the accounts that will be cleared such as GR/IR to avoid the currency
exchange and then the amounts will be cleared.

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Before starting to illustrate the AP, AR and FA. There is a must to know some basic concepts
in accounting

1. Periodic inventory system

A periodic Inventory System is defined as an inventory valuation method in which inventories are
physically counted at the end of a specific period to determine the cost of goods sold.

What type of companies use periodic inventory systems?

Business types using the periodic inventory system include companies that sell relatively few
inventory units each month such as art galleries and car dealerships.

2. Perpetual inventory system

The perpetual inventory system is a computerized record-keeping arrangement for continual

inventory evaluation in real time. It utilizes the program to monitor, follow the rules immediately,
and upgrade the system. Moreover, the perpetual inventory system example incorporates barcode
scanners to register transactions as they occur and maintain their journal entry.

what type of companies use perpetual inventory systems?

The perpetual inventory system is usually employed by businesses that have larger numbers of
inventory units and simply don't have the time to manually count items of inventory. Grocery
stores, for example, typically use the perpetual inventory accounting method.

3. Cost of Goods Sold (COGS)

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company.
This amount includes the cost of the materials and labor directly used to create the good. It excludes
indirect expenses, such as distribution costs and sales force costs.

COGS is an important metric on financial statements as it is subtracted from a company’s revenues

to determine its gross profit. Gross profit is a profitability measure that evaluates how efficient a
company is in managing its labor and supplies in the production process.

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 What is the COGS formula?

Accounting methods and COGS

The value of the cost of goods sold depends on the inventory costing method adopted by a
company. There are three methods that a company can use when recording the level of inventory
sold during a period: first in, first out (FIFO), last in, first out (LIFO), and the average cost method.

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Accounts Payable (AP) in accounting

Definition:

Accounts payable (AP) is a short-term debt and a liability on a balance sheet where a business
owes money to its vendors/suppliers that have provided the business with goods or services on
credit.

Typical accounts payable journal entries

1) Purchase of merchandise inventory account

2) Damaged or undesirable inventory returned to the supplier

3) Entry when the payment is made to the creditor or to payable

Notes:

The meaning of purchase return and allowance

The purchases returns and allowances account is a contra account to purchases since it reduces
purchases by the number of returns and allowances. In purchase returns, a customer purchases a
defective product and returns it to the seller for a full or partial refund.

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The meaning of contra accounts

Contra Account is an opposite entry passed to offset the balances of related original accounts in
the ledger and helps the organization retrieve the original amount and the amount of decrease in
the value, thereby presenting the net balances of the account.

a) Contra Asset Account

Contra Account is an opposite entry passed to offset the balances of related original accounts in
the ledger and helps the organization retrieve the original amount and the amount of decrease in
the value, thereby presenting the net balances of the account.

It has two types

1. Allowance for doubtful accounts:

Allowance for doubtful accounts primarily means creating an allowance for the estimated part of
the accounts that may be uncollectible and may become bad debt and is shown as a contra-asset
account that reduces the gross receivables on the balance sheet to reflect the net amount that is
expected to be paid.

Allowance for doubtful accounts is the percentage of bad debts estimated from the Accounts
receivable account. This account offsets a company’s accounts receivable account.

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 2. Accumulated Depreciation:

Accumulated Depreciation – Depreciation is the reduction in the value of an asset. Accumulated

depreciation represents the cumulative amount of depreciation incurred by an asset. This account
offsets the company’s real property assets, including machinery, furniture, buildings, etc.
Accumulated depreciation reduces the value of an asset.

b) Contra Liability

A liability recorded as a debit balance is used to decrease the balance of a liability. The balance of
a contra-liability account is a debit balance. This account decreases the value of the liability. Contra
Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since
it does not represent a future obligation.

It has two types

1. Discount on bonds payable:

This is the difference between the amount of cash a company receives when issuing bonds and the
value of the bond at maturity. A Discount on bonds payable reduces the value of a bond Discount
on Bonds Payable Discount on bonds payable is the markdown value of a bond's coupon rate or
selling price compared to its market interest rate or fair value. Such bonds trade at a lower price
than their face value.

2. Discount on notes payable:

The discount is offered on the liability created when a company borrows a specific amount of
money and repays it early. Discount on notes payable reduces the total amount of the note to reflect
the discount offered by the lender.

c) Contra Equity

Equity recorded as a debit balance is used to decrease the balance of a standard equity account. It
is a reduction from equity because it represents the amount paid by a corporation to buy back its
stock. The contra-equity account reduces the total number of outstanding shares. The treasury
stock account is debited when a company buys back its shares from the open market.

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 d) Contra Revenue

The contra revenue account is a reduction from gross revenue, which results in net revenue. These
transactions are reported in one or more contra-revenue accounts, which usually have a debit
balance and reduce the total amount of the company’s net revenue.

It has three types

1. Sales Returns:

Sales returns are a Contra Account of the sales account. This transaction records when a customer
returns the paid goods, and a refund must be given.

2. Sales Allowances:

Sales allowances are also a part of the sales account. Sales allowance reduces the selling price
when a customer agrees to accept a defective unit instead of returning it to the seller.

3. Sales Discounts:

Sales discounts are offered on sales of goods to attract buyers. It is an incentive to purchase the
goods.

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Accounts payable in SAP

SAP Accounts payable accounting is also called sub-ledger accounting, as the business
transactions are carried out individually in the vendor accounts. All the transactions that are
processed in accounts payable are recorded directly in the general ledger account. The real-time
updating will be done through the settings made in the general ledger master while creating the
account. The settings are done by choosing vendors for reconciliation accounts for the account
type. Every posting that is done in accounts payable generates a respective posting to an assigned
general ledger account and ensures that the sub-ledgers are always reconciled with the general
ledger.

Creating vendor in SAP

To create vendor in SAP we will simply make it through two areas

a) Client level:

This area contains the general data of the vendor such as the vendor’s name and address

b) Company code-specific settings:

This area contains only data relevant to the company code such as payment terms and
reconciliation accounts.

Account Group:

A vendor account group is a classifying feature of vendor master records in SAP ERP. It
determines the following: Interval from which a unique number is assigned to a vendor. Whether
the number is assigned by the user (external number assignment) or by the system (internal number
assignment)

The account group is a summary of accounts based on criteria that affect how master records are
created. The account group determines the number interval from which the account number is
selected when a G/L account is created.

Number ranges:

The number ranges are usually internal.

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Vendor invoices in SAP

While creating vendor invoices in SAP through Enjoy screen, the screen will be divided into 4
areas:

1. Work template

Here we can select screen variant, account assignment templates, or held documents as references.

2. Header and vendor data

3. GL account data
4. Information area

Note:

There are two screens that we can use while creating vendor invoice

1) Enjoy screen

2) Complex screen

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Document splitting

Document splitting is used to automatically split the various document lines in amount basis
according to related cost objects

With doc. Splitting the system automatically split all the amounts in all lines according to the
related cost object.

Document splitting is very important when an invoice has multiple account assignment
objects such as two different cost centers.

The Recurring Entry Program

Recurring entries are business transactions that are repeated regularly, such as rent or insurance
payments. They are posted by the recurring entries program based on recurring entry documents.

Recurring business transactions must be stored in the system as recurring entry original documents
for this to be possible. Each recurring entry original document contains the date of the first and
last postings, the frequency at which posting should be made, and the date of the next planned
posting.

Closing operations in AP

This can be divided into two main sections

1) Legal requirements (procedures required by the government authorities)

2) Technical and organizational requirements (procedures that are technically required or
needed to support the accounting organization)

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Accounts Receivable (AR) in accounting

Definition:

Accounts receivable (AR) are the balance of money due to a firm for goods or services delivered
or used but not yet paid for by customers. Accounts receivable are listed on the balance sheet as a
current asset. Any amount of money owed by customers for purchases made on credit is AR.

Typical accounts receivable journal entries

1. Journal entry for credit sales

2. Journal entry for cash received in full for credit sales

3. Journal entry for cash received for credit sales after-sales discount

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Account Receivable (AR) in SAP

Accounts Receivable is a submodule of SAP FI used to manage and record accounting data for all
the customers. It handles customer invoices, approvals, payments, and other allied activities.

Creating customer in SAP

To create customer in SAP we will simply make it through two areas

a) Client level:

This area contains the general data of the customer such as the customer’s name and address

b) Company code-specific settings:

This area contains only data relevant to the company code such as payment terms and
reconciliation accounts.

Account group:

Customer account groups in SAP are used to classify customers into business partner functions
that fit best the nature of the business transaction. Customer account groups control the customer
hierarchy containing the customer master record. It determines the role of a customer and customer
master data.

The accounts in an account group usually have similar characteristics. For example, you could
have one account group for domestic customers, one for customers abroad, one for affiliated
customers, and one for one-time customers.

Account groups have a number range assigned to them. Number ranges are of two types:

1. Internal
2. External

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Customer invoices in SAP

While creating vendor invoices in SAP through Enjoy screen, the screen will be divided into 4
areas:

1. Work template

Here we can select screen variant, account assignment templates, or held documents as references.

2. Header and vendor data

3. GL account data
4. Information area

Note:

There are two screens that we can use while creating vendor invoice

3) Enjoy screen

4) Complex screen

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Incoming payments

1. Full payment

2. Partial payment: The item being short-paid does not clear. A new open item in the amount
of the payment is created on the credit side. This credit entry shows up right above the open
item being paid and it references the open item being short-paid.

3. Residual item: The open invoice is cleared and a new open item (residual item) in the
amount of the payment, the difference is created.

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References

• AC0110
• https://www.investopedia.com/terms/a/accountsreceivable.asp
• https://www.netsuite.com/portal/resource/articles/accounting/accounts-payable-accounts-
receivable.shtml
• https://synder.com/blog/accounts-receivable/
• https://www.investopedia.com/terms/c/contraaccount.asp#:~:text=A%20contra%20accou
nt%20is%20an,to%20the%20current%20book%20value.
• https://www.accountingtools.com/articles/what-is-a-contra-account.html

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