CONCEPTS IN ENTERPRISE
RESOURCE PLANNING
FOURTH EDITION
CHAPTER FIVE
ACCOUNTING IN ERP SYSTEMS
ACCOUNTING ACTIVITIES
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• 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
• Common financial statements: balance sheets and income statements
• Balance sheet General Ledger: an
• Statement that shows account balances such as: accumulation of balances
from transactions and
• Cash held
postings
• 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
Fitter Snacker sample balance sheet
Accounts Payable – identifies the balances
owed to every vendor calculated from
purchases, returns and allowances,
purchase discounts, payments, and other
adjustments
Accounts Receivable – records all
account postings generated as a result of
customer sales activity
• 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)
• Managerial Accounting: determining costs and profitability of company’s activities
• Managerial accounting Overhead Costing –costs that
• Determine costs and profitability of company’s activities cannot be directly assigned to a
specific product (Direct costs –
• Provide
4 managers with detailed information
costs that have true origins and are
• Informed decisions more easily assigned to the proper
• Create budgets product)
• Determine profitability
• Information that managers use to control day-to-day activities, develop long-term plans
Fitter Snacker sample income statement
• 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
USING ERP FOR ACCOUNTING INFORMATION
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• 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• Accounting’s data were often out of date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
THE ENRON COLLAPSE
• October 16, 2001: Enron was one of the world’s largest electricity and natural gas traders
• Reported a $618 million third-quarter loss and disclosed a $1.2 billion reduction in shareholder
equity
• U.S. Securities and Exchange Commission (SEC) inquiry into possible conflict of interest related to
company’s dealings with partnerships run by CFO Fastow
• Volume of financial contracts was far greater than volume of contracts to actually deliver commodities
• Some partnerships were faked to mask billions of dollars in debt
• Enron’s financial
6 statements had been audited by Arthur Andersen, a highly regarded accounting firm
• Andersen employees on the Enron engagement team were instructed to destroy documentation relating
to Enron
• Shareholders lost an estimated $40 billion dollars
• Thousands of workers lost their jobs
• 31 individuals were either charged or pled guilty to criminal charges
• Jurors convicted accounting firm Arthur Andersen for obstructing justice by destroying Enron documents
• U.S. Congress passed Sarbanes-Oxley Act of 2002
• Act was designed to prevent the kind of fraud and abuse that led to the Enron downfall
ASSET MANAGEMENT
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• Settlement and Capitalization – since the overhaul may have affected the value of
the machine, this new value will impact the PP&E account and related future
depreciation
Maintenance and Use – maintenance costs associated with that asset are continually
monitored
Retirement – provides information for an asset retirement such as its accumulated
depreciation, salvage value, and whether the asset could be overhauled and put
back in service
Replacing Investment – case to replace an asset is based on maintenance and operation
costs
• Planning – dedicating resources to the project an d establishing expectations
about the execution of steps
Approval – sanctioning the project an d requesting the budget assign me n t and
approval
Budgeting – ensuring sufficient c a s h will be available to meet e x pe n se s a s they
arise
Implementation – executing an d validating the steps of the PP&E project plan
Asset Management Life Cycle
USER AUTHORIZATIONS
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• 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
• Tolerance Groups: Setting limits on the
size of transaction an employee can
process
• 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
Default tolerance group
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SUMMARY
• Use of an integrated system and a common database to record accounting data has important
management-reporting benefits
• Built-in drill-down and query tools available
• Sarbanes-Oxley Act, 2002 U.S. federal regulation
• Written and passed in the wake of Enron collapse
• Promoted management accountability by requiring extra financial approval and reporting
• ERP systems can help companies meet the requirements of this legislation
QUESTIONS TO BE RESOLVED IN CLASS
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TRUE/FALSE
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This figure is an example of Fitter Snacker’s Income
Statement.
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