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In the SAP system, accounting and controlling exist as separate but highly related elements. Financial Accounting accomplishes the necessary processing and recording of accounting transactions along with the creation of financial statements and other reports for external users (e.g., individuals and entities outside of the company such as shareholders, government agencies, trade associations, etc.). Financial accounting is thus referred to in many instances as external accounting and as such must follow Generally Accepted Accounting Principles (GAAP) and external regulatory requirements. Controlling, on the other hand, takes care of the internal management uses of accounting information. Controlling provides the company with information for management decision-making. It facilitates coordination, monitoring and optimization of all processes in an organization. This involves recording both the consumption of production factors and the services provided by an organization. The major activity of Controlling involves the assignment of costs to products and to cost centers to permit cost and profitability analysis. Although Financial Accounting (FI) and Controlling (CO) are independent components in the SAP system, data flow between the two components on a regular basis. Therefore, all data relevant to costs automatically flow from Financial Accounting to Controlling.
example, receivables, down payments, and bills of exchange). The system contains a range of tools used to monitor open items such as account analyses, alarm reports, due date lists, and a flexible dunning program. The correspondence linked to these tools can be individually formulated to suit company requirements. This is also the case for payment notices, balance confirmations, account statements, and interest calculations. Incoming payments can be assigned to due receivables using screen functions or by electronic means such as EDI and data telecommunication. Accounts Receivable is not merely one of the branches of accounting that forms the basis of adequate and orderly accounting. It also provides the data required for effective credit management (as a result of its close integration with the Sales Logistics) as well as important information for the optimization of liquidity planning through its link to Cash Management. Accounts Payable processing records and administers accounting data for all vendors. It is also an integral part of the purchasing logistics and management. Deliveries and invoices are managed according to vendors. The system automatically makes postings in response to the operative transactions. In the same way, the system supplies the Cash Management application component with figures from invoices in order to optimize liquidity planning. Payables are paid with a payment program. The payment program supports all standard payment methods (such as checks and transfers) in printed form as well as in electronic form (data medium exchange on disk and electronic data interchange). This program also covers country-specific payment methods.
In Financial Accounting, business transactions are always entered, saved and processed at company code level. Likewise, accounts are also always managed at company code level. Further levels can be created by using internal organizational structures. All companyspecific specifications such as how payment transactions are to be carried out are made at company code level. Customer and vendor master records have a company code area, which contains data that are only relevant to one company code. This includes, for example, data representing the business relations between the company code and a customer or vendor. The terms of payment that apply to each customer or vendor are assigned in the company code area of the master record.
CREDIT CONTROL AREA: The credit control area is an organizational unit that represents the area where customer credit is awarded and monitored. Credit and risk management takes place in this area. A credit control area can serve one or more company codes, but it is not possible to divide a company code into several credit control areas.
Accounting. Transactions are recorded in and reports are generated from the general ledger based on accounts. An account is a structure which records value transactions within an accounting unit (in this case a company code) as an element from a value grouping such as assets, liabilities, revenues, etc. The account contains transaction figures, which reflect the changes to the values in a summarized form per company code. The accounts are listed in a chart of accounts. The chart of accounts is a list of all G/L account master records that are used in one or several company codes. For every G/L account master record, the chart of accounts contains the account number, the account name and controlling information. Generally a company code utilizes one of the master charts of account that come with the SAP system. Accounts can be added to that master as the company so desires. Accounts in the general ledger are classified as assets, liabilities, equity, revenues, and expenses. ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER: The Accounts Receivable Subsidiary Ledger is set up to account for the values from business transactions with customers. The accounts receivable ledger records values at company code level. When a sale is made to a customer (as processed and recorded in Sales Logistics), an entry is made in the accounts receivable ledger under that customer number indicating that there is an amount owed by that customer to the company. The accounts contained within the accounts receivable ledger are the entire customer numbers created in the company code. The sum of all amounts owed to those customers (i.e., the sum of the account amounts in the ledger) is the total amount owed by customers to the company. When a payment is received from a customer, the customer account in the accounts receivable ledger is reduced by the amount of the payment. Therefore, in transaction processing, sales to customers are recorded by customer number and payments received from customers are recorded by customer number. ACCOUNTS PAYABLE SUBSIDIARY LEDGER: The Accounts Payable Subsidiary Ledger accounts for the values of business transactions with vendors. The accounts payable ledger records values at company code level. When a purchase is made and goods are received from a vendor (as processed and recorded in Procurement Logistics), an entry is made in the accounts payable ledger under that vendor number, indicating that there is an amount owed to that vendor for the goods. For each vendor there is a subledger account to which all amounts concerning this vendor are posted. A posting to the vendor account is not the same as a payment. For example, payment is only executed when the Financial Accounting department posts the vendor's payment to a bank account, for example. The accounts contained within the accounts payable ledger are all the vendor numbers created in the company code. The sum of all amounts owed to those vendors (i.e., the sum of the account amounts in the ledger) is the total amount owed by the company to all of its vendors. When a payment is made to a vendor, the vendor account in the accounts payable ledger is reduced by the amount of the payment. Therefore, in transaction processing, purchases from vendors are recorded by vendor number and payments made to vendors are recorded by vendor number.
RECONCILIATION ACCOUNTS: Transactions with customers are posted to customer accounts in the accounts receivable subsidiary ledger, which carry a unique customer number for each customer. Transactions with vendors are posted to vendor accounts in the accounts payable subsidiary ledger, which carry a unique vendor number for each vendor. The customer subsidiary ledger contains all of the customer accounts (and numbers), while the vendor subsidiary ledger contains all vendor accounts (and numbers). However, vendor and customer numbers are not part of the general ledger set of accounts, even though that ledger contains an account both for accounts receivable and for accounts payable. In order for the general ledger accounts for receivables and for payables to reflect the total of the accounts in the respective subsidiary ledgers, a linkage between the subsidiary ledgers and their respective general ledger accounts is created. The Accounts Payable Subsidiary Ledger and the General Ledger are related through the general ledger reconciliation account for accounts payable. The Accounts Receivable Subsidiary Ledger and the General Ledger are related through the general ledger reconciliation account for accounts receivable. Each of these general ledger reconciliation accounts is automatically updated when transactions are recorded in their respective associated subsidiary ledgers. This ensures that the developments in the subsidiary ledgers accounts are accurately reflected in the general ledger. Therefore, in the general ledger the amount shown for Accounts Payable is the total of all of the individual vendor accounts in the accounts payable subsidiary ledger. THE GR/IR CLEARING ACCOUNT: In the business world, ordered materials may arrive either before or after the invoice for the goods is received from the vendor. If the goods are received prior to invoice receipt, the company would not want to delay entry of the goods into the material management system simply because no invoice had yet been received. To do so might delay production or other activities that are material dependent. However, since the invoice for these materials has yet to be received and the exact amount of the obligation determined, the company would not want to enter an assumed amount into the accounting system. The use of a GR/IR (goods receipt/invoice receipt) clearing account allows the organization to record the receipt of the materials and enter the materials into the materials management system but suspend the amount owed until the actual invoice is received. Thus, the GR/IR account functions like a traditional suspense account. The GR/IR clearing account is an intermediate account between the warehouse stock account and the vendor account. At goods receipt, the cost of the goods is posted to the inventory stock account and the net invoice amount expected is posted to the GR/IR clearing account. When the invoice is received, the posting in the GR/IR account is then cleared by an offsetting entry to the vendor account
Many of the data transactions involved in Financial Accounting involve the payment of invoices or the receipt of payments from customers. However, payments for invoices involving purchased goods must be approved by the invoice verification process in Procurement Logistics before payment can be authorized. Customers are billed as the final step in the Sales Logistics. Financial Accounting processes the payments from customers that are received as the result of the billing invoices from Sales Logistics.
Controlling (CO)
Controlling involves the internal accounting system used within the organization for management decision making. The information produced within Controlling is intended solely for internal use only. Controlling facilitates coordination, monitoring and optimization of all processes in an organization. This involves recording both the consumption of production factors and the services provided by an organization. The consumption of product factors and services provided are encompassed in the costs of those items. Although such costs are tracked in the Financial Accounting system, that tracking is primarily aimed at determining the value of ending inventory for the balance sheet and the cost of goods sold for the income statement for external reporting purposes. Therefore, these costs are not very useful for management decision-making such as the minimum sales price for the product, which customers or distribution channels are most profitable, whether overhead costs under or out of control, etc. Controlling meets the information requirement for such considerations. Unlike Financial Accounting, Controlling is not governed by outside sets of rules such as GAAP. As well as documenting actual events in terms of costs, the main task of Controlling is planning. Controlling allows the determination of variances by comparing actual data with plan data. These variance calculations enable the company to control business flows. Income statements such as contribution margin accounting (not permitted for external reporting) are used to control the cost efficiency of individual areas of an organization, as well as the entire organization. Controlling (CO) and Financial Accounting (FI) are independent components in the SAP system. The data flow between the two components takes place on a regular basis. Therefore, all data relevant to costs flow automatically to Controlling from Financial Accounting. At the same time, the system assigns the costs and revenues to different CO account assignment objects such as cost centers, business processes, projects or orders. The relevant accounts in Financial Accounting are managed in Controlling as cost elements or revenue elements. This enables the reconciliation of the values from Controlling and Financial Accounting. Within Controlling there are a number of features that provide different information sets for management decisions. Cost center accounting is used for the source-related assignment of overhead costs to the location in which they occurred. Activity-based costing can be used to analyze cross-departmental business processes in order to optimize overall organizational goals and to prioritize business flows. Internal orders are used to collect and control costs according to the job that incurred them. Product cost controlling calculates the costs that occur during manufacture of a product, or provision of a service; it enables the company to calculate the minimum price at which to profitably market a product. Profitability analysis within Controlling analyzes the profit or loss of an organization by individual market segments. The system allocates the corresponding costs to the revenues for each market segment. Profitability Analysis provides a basis for decision-making, for
example, for price determination, customer selection, conditioning, and for selection of the distribution channel. Profit center accounting evaluates the profit or loss of individual, independent areas within an organization. These areas are responsible for their costs and revenues. Profit Center Accounting is a statistical accounting component of the SAP system that occurs on a statistical basis at the same time as true accounting. In addition to costs and revenues, the system can display key figures, such as Return on investment, working capital or cash flow on a profit center.
COST CENTERS: A cost center is an organizational unit within a controlling area that represents a defined location of cost incurrence. A cost center can be defined based on functional requirements (e.g., accounting, plant security, company cafeteria, etc.), allocation criteria (how costs are allocate to the unit such as by headcount of employees, square feet, etc.), physical location (e.g., the northern sales office, the southern sales office, etc.), or responsibility for costs. Cost centers are used for differentiated assignment of overhead costs to organizational activities, based on utilization of the relevant areas (cost determination function) and for differentiated controlling of costs arising in an organization (cost controlling function). Overhead costs are collected in a cost center and then allocated to the organizational units or functions that use the services provided by that cost center. Cost centers can be collected into groups according to various criteria. Those groups can be used to build cost center hierarchies, which summarize the decision-making, responsibility, and control areas according to the particular requirements of the organization. The individual cost centers form the lowest hierarchical level. For example, the vice president in charge of sales may have four regional sales cost centers that report directly to him/her. Each regional sales cost center may have numerous area sales cost centers within the region; each area sales cost center may have numerous local sales office cost centers within its area. Linking these various cost centers together would allow tracking and analysis of operations and costs throughout the overall sales organization, by region only, by area only, or by individual sales office. There must be at least one group that contains all cost centers and represents the entire business organization. This cost center group is described as the standard hierarchy. The user can assign additional cost center groups to the standard hierarchy if needed.
Any number of alternative groups of cost centers can be created. Groups can be structured, for example, by organizational and/or functional viewpoints. Cost center groups enable the user to perform evaluations for each decision-making, responsibility, or control area. These groups also support the processes during planning and internal allocations. Following the sales organization example, assume that each local sales office sells a particular line of the companys products. Sales offices selling product line A could be grouped together in an alternative hierarchy along with all other local sales offices that sell the same product line regardless of the area or region. In this way, operations and cost could not only be followed by geographical location (under the standard hierarchy) but also by product line. Users can assign each cost center to only one group within the standard hierarchy, but to as many alternative groups as required. This allows for the information related to each cost center to be sliced and diced any way management desires.
as secondary costs to the various internal organizational units that use the center. Therefore, secondary costs do not originate (in that they do not represent transactions with outside parties) but are created from internal allocations. Secondary cost elements can only be created and administered in Controlling. They portray internal value flows such as those found in internal activity allocation, overhead calculations and settlement transactions. When a secondary cost element is created, the SAP System verifies that a corresponding account exists in Financial Accounting. If one exists, it cannot be created as a secondary cost element in Controlling. A secondary cost does not have a matching expense account in Financial Accounting. Secondary costs are therefore valuated consumptions of internal activities (activities performed inside the company rather than purchased from outside.) Secondary costs are overhead costs.
department occupies only part of the building. Also housed in the building are human resources, corporate sales, various vice presidents offices, and data processing. At the end of the month or at some other predetermined time, the rent cost charged to accounting must be allocated to all of the occupants of the building through a distribution. A distribution has been chosen for this allocation so that each receiving department will show a rent cost in its operating reports. This may have been decided so that if a department increases its share of the space in the building, it would be charged an increased rent cost. The distribution, therefore, has been set up based on the number of square feet occupied by a department as a percentage of the total square feet occupied by all departments. The table below indicates the various percentages of the total building space occupied by the departments.
When the distribution is executed by the system, Accounting will receive an allocation of $1,500, Human Resources $1,000, Corporate Sales $2,000, Vice Presidents $3,000, and Data Processing $2,500. Each of these units will display this amount in the Rent Distribution line on its operating reports. In this way, each unit knows exactly how much it is charged for rent and that the charge is transferred from the Accounting department. For accounting, the entire $10,000 will be eliminated from its Rent Cost collection account (resulting in $0 in that account) but it will indicate a distribution of Rent of $1,500. Distributions can be based on square footage, employee headcount, number of telephones, or other criteria found to be meaningful by management. These various criteria are known as statistical key figures. These statistical key figures can be fixed value (for which the values are carried forward from one period to the next) or total value (for which the values must be recorded for each period independently). Fixed values are used for elements that remain relatively stable from period to period such as square feet occupied in a building. Total values are appropriate for items that fluctuate from period to period such as employee headcount. ASSESSMENTS: An assessment is an additional way through which costs are allocated. Assessment is a method of internal cost allocation by which the company allocates (Transfers) the costs of a sender cost center to receiver CO objects (orders, other cost centers, etc.) under an assessment cost element. The method works according to the keys defined by the user. Unlike Distribution, where only primary costs can be allocated, an assessment is a method of allocating both primary and secondary costs. In Assessment the original cost elements are assigned cumulatively, or in groups, to assessment (secondary) cost
elements. The original cost elements are not recorded in the receivers accounts but are recorded as an assessment from the sender cost center. Also, sender and receiver information (sender cost center, receiver cost center, or business process) appears in the Controlling (CO) document. Allocation through assessment is useful when the composition of the incoming costs is unimportant to the receiver. For example, the assessment of cafeteria costs to a cost center need not be itemized in the receiving cost centers records. Assume a company operates a subsidized cafeteria. The cafeteria incurs expenses for food, wages, electricity, etc. during operations. The cafeteria may also receive secondary cost charges such as maintenance, electricity, rent occupancy, etc. The amount of total cafeteria expenses not covered by revenue from food sales is to be charged to the cost centers whose employees use the cafeteria. Assessment will accomplish the allocation of both these expenses (primary costs) and secondary costs to other cost centers in the company. The company can assess the costs from the cost center "Cafeteria" to receiver cost centers in proportion to the statistical key figure "Employees" for each cost center. Receiver cost center I has 10 employees, while receiver cost center II has 90. In this case, the system would assess 10% of the costs from the cost center "Cafeteria" to receiver cost center I and 90% to receiver cost center II. The credit entered in the sender cost center "Cafeteria" and the debits entered in the receiver cost centers are all assigned by the assessment cost element. Depending on the system settings, the system can assess all the costs of the sender cost center "Cafeteria" or only part of those costs. Under Assessment, the receiving cost centers or other objects receive the amount assessed with only a general description of what is being assessed. For example, the receiver cost centers in the example above will receive their assessment as Cafeteria Assessment with no indication of the nature of the expenses within the cafeteria.
Amounts owed to vendors are contained in accounts payable until actual payment is made. An outgoing payment must be posted to clear the vendor invoice that is recorded in accounts payable. This posting clears the liability and decreases the cash available to the company. In cases where a customer owes the company for purchases made in the past, the specifics of that transaction are contained in accounts receivable. This account generally arises due to activities in sales logistics. The customers payment for the items, however, is processed in Accounting. This requires a receipt of payment from the customer. This receipt clears the receivable from the customer for the amount remitted. In cases where the company has made the business decision to allocate costs to cost centers, either a distribution cycle or an assessment cycle must be created. Either involves, of course, the cost centers from which and to which the charge is to be made. Each of these cycles must contain the tracing factor or basis on which the distribution or assessment is to be made (e.g., headcount, square feet, etc.). The company must make a business decision to allocate by a distribution (where costs retain their nature as they are allocated) or by an assessment (where the costs lose their identity and are simply charged as a lump-sum assessment).