Introduction to Accounting

Melike Meterelliyoz Kuyzu

İŞL 448
Learning Objectives
1. Explain the differences between financial accounting and
management accounting.
2. Describe the organizational data related to financial
accounting.
3. Discuss and analyze the key types of master data
involved with financial accounting.
4. Explain and apply basic accounting concepts.
5. Execute key processes in financial accounting.
6. Identify key integration points between financial
accounting and other processes.
7. Prepare reports in financial accounting.
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Accounting
 Role of accounting processes is to record the financial
consequences of the various process steps
 Organizations use this financial information to plan and
manage these processes
 The accounting process is divided into two major
categories:
 Financial accounting (FI)
 Management accounting (CO)

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Financial Accounting
 Financial Accounting is designed to collect the
transactional data that provides a foundation for
preparing the standard portfolio of reports.
 Concerned with recording the financial impacts of
business processes as they are executed
 Use this data to generate financial statements to meet
legal or regulatory reporting requirements
 Externally focused

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FI Organizational Structure
 Represents the legal and/or organizational views of an
enterprise
 Forms a framework that supports the activities of a
business in the manner desired by management
 Permits the accurate and organized collection of business
information
 Supports the development and presentation of relevant
information in order to enable and support business
decisions
Management Accounting (controlling)
 Internally focused
 Provides the information the organization needs to
effectively manage the various processes
 Use financial data recorded during process execution to
generate reports, just like FI
 Focus on costs and revenues which management uses to
achieve basic business objectives
 Eg: increasing revenues, minimizing costs, and achieving
profitability.

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FI Accounting vs. CO Accounting

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Key Financial Accounting Processes
 General ledger accounting
 Accounts receivable accounting
 Accounts payable accounting
 Asset accounting
 Bank ledger accounting

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Key Financial Accounting Processes
 General ledger (GL):
 Used to record the financial impacts of business process steps
 It contains much of the data needed for financial reporting
 Accounts receivables accounting:
 Associated with the fulfillment process
 Used to manage money owed by customers for goods and
services sold to them.
 Accounts payable accounting:
 Associated with the procurement process.
 Companies use accounts payable accounting to record and
manage money owed to vendors for the purchase of materials
and services
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Key Financial Accounting Processes
 Asset accounting:
 Used to record data related to the purchase, use, and disposal
of assets such as buildings, equipment, machinery, and
automobiles.
 Bank ledger accounting:
 Concerned with recording data associated with bank
transactions.

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Financial Statements
 Balance sheet:
 A snapshot of the organization at a point in time.
 Identifies assets, liabilities, and equity.
 Income statement (profit and loss statement):
 Indicates the changes in a company’s financial position over a
period of time.
 Identifies revenues, costs, and profits or losses.
 Statement of cash flow:
 Displays all cash receipts and payments over a specified period
of time.
Data Related to FI

Organizational Levels:
 Client
 Company code – financial statements are prepared at
company level
 Business area

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Company Code

 Highest organizational level for financial reporting

(external, legal reporting)
 Four-digit alphanumeric field
 Smallest entity that supports a full set of books
 General ledger, journals, etc.
 At least one CC is required; can have more than one

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Multiple Company Codes

One for each legal entity One for each country

 Buick  GBI USA

 Cadillac  GBI Germany
 Oldsmobile  Consolidate to the
 Chevrolet ―parent‖ company code
 Hummer level
 Saturn
 Saab
 GMC

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Business Areas
 Internal division to generate financial statements
 Financial statements are generated for each business area
 Based on either a product line or geographic division
 GM
 Cars (Sedans)
 Cars (Sports)
 Pick-up
 SUV
 Minivan
 Across Company Codes

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GBI Business Areas (example)

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Apple Inc.
 Four business areas: Americas, Europe, Japan, Retail
 Americas includes 2 segments: North America and South
America
 Europe includes all Europe, Middle East and Africa
 Retail includes all Apple Stores
 Within each business area, Apple operates various units
for products such as Mac, iPods, iTunes, iPads
 Apple’s annual report include details by
 Business areas
 Product segment within each business area
 Product segment globally
Master Data
 Chart of Accounts:
 List of accounts that can be included in a GL
 General Ledger Accounts
 Balance sheet accounts
 Income statement accounts
 Reconciliation accounts
 Subsidiary ledgers (sub ledgers)
 AR(customers)
 AP (vendors)
 Assets

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Chart of Accounts
 An orderly definition of accounts in the general ledger
 Three types of chart of accounts:
 Operative COA: record financial impact of day-to-day
transactions
 Country-specific COA
 Group COA: group accounts to consolidate over multiple
companies
 Multiple charts of accounts exist
 US (CAUS) , Germany (GKR), Canada (CANA)
 Country specific to meet reporting requirements
 International Chart (INT)

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Chart of Accounts

 A chart of account can be used by multiple company

codes
 Different GM companies (Buick, Cadillac, Oldsmobile) can
use the same (US) chart of accounts
 Saab will use the German chart of accounts
 A company must use at least one chart of account
 Can use more than one chart of account to create
alternate ledgers

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GBI Chart of Accounts and Company Codes

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GBI 2.0 Structure for Financial Accounting

Global Bike Client

Company
Global Bike Inc. Global Bike Germany GmbH Code

Global Bike Chart of

Chart of Accounts Accounts

Bikes Business Area

Global Credit Control Credit Control

Area
GBI 2.0 Enterprise Structure in
SAP ERP (Accounting)

Business Area – Bikes BI00

Company
CC US00 CC DE00 Code

Chart of Accounts (global) GL00

Credit Control Area (global) GL00
Controlling Area
CA North Am. NA00 CA Europe EU00 CA Asia AS00 (see Controlling unit)

Operating Concern
Operating Concern (global) GL00 (see Controlling unit)

Client GBI
General Ledger Accounts

 G/L accounts are master data

 Recording of all accounting-relevant business
transactions occurs in a G/L account
 Data in the general ledger accounts are segmented by
organizational level
 Chart of account segment
 Company code segment
 General ledger = COA data + Company code data

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General Ledger Account Data

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Balance Sheet Accounts

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Profit and Loss Accounts

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Account group
 Groups together accounts with similar characteristics.
 Ex: All bank and cash accounts are consolidated in one account
group called liquid assets.
 Accounts within each group are numbered within a
specified number range.
 Ex: Accounts in the liquid assets group are located
between100000 and 110300.
 Accounts in different account groups require different
types of data when they are used in a company’s general
ledger.
Demo 3-1: Review Charts of Accounts

 Review the contents of the chart of accounts.

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G/L Account Example

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Sub-Ledger and Recon Accounts
Sub ledger account Reconciliation account
Customer Accounts Receivable
Vendor Accounts Payable
Asset (specific) Assets

Reconciliation accounts
Subsidiary or sub-
 Are general ledger accounts
ledgers  Consolidate data in sub-
 Are not part of the ledger
general ledger.  Cannot be posted to directly

 Used to separate  Maintain the sum of the

postings in corresponding
accounting for customers,
sub-ledgers
vendors, and assets
 Are specified in the
definition of the sub-ledger
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Demo 3-2: Review General Ledger
Accounts

 Review the contents of the general ledger.

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Key Concepts

 Key concepts to financial accounting are:

 Accounting document
 Parallel accounting
 Concepts in Management Accounting

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Financial accounting document
 Records the impact (financial data) of a transaction step
on financial accounting.
 Structure:
Document Type

 Two-digit code that identifies the process that

generated the document
 Financial accounting document (FI)
 Customer invoice (DR)
 Customer payment(DZ)
 Goods issue (WA)
 Goods receipt (WE).
 Determines the document number range and the
account type that can be posted to

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Account Type
 Customer(D)
 Vendor (K)
 Asset (A)
 Material (M)
 General ledger accounts (S)

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Posting Keys

 A posting key is a two-digit code that determines how

a line item is posted
 The posting key specifies the following:
 Account type for posting the document item
 Whether the document item is posted as a debit or a
credit
 Field status of the additional data

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Posting Key Examples

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Demo 3-3: Review an FI Document

 Review the contents of an FI document.

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Parallel Accounting

 An enterprise can use multiple ledgers

 Multiple ―books‖ for different purposes
 One leading ledger for all company codes
 Global principles are consolidated
 All transactions are posted to it
 Non-leading ledgers for each company (company code)
 Local accounting practices and reporting

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Parallel Accounting

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Concepts in Management Accounting

 Most of the data used in management accounting are

derived from financial accounting
 A key function of CO is to manage and allocate costs
 Companies incur these costs as they carry out various
business processes such as fulfillment

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Cost Center
 To allocate and track costs of processes
 Master data in controlling
 Associated location where costs are incurred
 Department, individuals, special projects
 Cost bucket used to accumulate costs
 Accumulated costs are then ―charged‖ to other cost centers –
CO process
 Many processes have ―orders‖
 Purchase orders, Production orders, Sales orders
 Expenses can be charged to these orders
 Collectively objects that can absorb costs are called cost
objects

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Processes

 Recording of value flows ($$) as a result of other

processes and transactions
 General Ledger Accounting
 G/L postings for rent, utilities, wages, etc.
 Accounts Payable Accounting
 Part of the procurement process
 Accounts Receivable Accounting
 Part of the fulfillment process
 Asset Accounting
 Acquisition, depreciation, retirement

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General Ledger Accounting

 Concerned with recording the financial impact of all

process steps performed within the organization
 Double-entry accounting is used for every transaction
 Accounts are divided into balance sheet accounts and
income (profit and loss) statement accounts

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Debits and Credits

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Posting Example 1: Investment in a
Company
A venture capitalist invests $50,000 in GBI US on January 10, 2010, which GBI
deposits into its bank account. In exchange, the investor receives GBI common
stock at $1 per share

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Posting Example 2: Purchase of Supplies
With Cash

GBI purchases office supplies for $500 with a check.

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Posting Example 3: Purchase of Supplies On
Credit

GBI purchases $1,000 of office supplies, but on credit rather than with cash.

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Demo 3-4: Post General Ledger Entries

 Review the posting of general ledger entries.

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Accounts Payable Accounting

 Concerned with vendors

 Involve sub-ledgers to track money owed to individual
vendors: vendor master
 Involve reconciliation accounts: Accounts payable-
reconciliation
 Recall the non-reconciliation AP account (payables-
miscellaneous) discussed earlier
 Accounts payable reconciliation designated account in
GBI GL: #300700

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 Accounts Payable Accounting

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Demo 3-5: Review Reconciliation and
Non-reconciliation A/P Accounts

 Review the posting of reconciliation and non-

reconciliation accounts payable accounts.

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Accounts Receivable Accounting

 Concerned with customers

 Involves sub-ledger accounts: customer master
 Involves reconciliations accounts: Accounts receivable
– reconciliation
 Non reconciliation AR accounts also exist (Misce AR)
 For GBI, the designated reconciliation account is
accounts receivable reconciliation (#110100).

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 Accounts Receivable Accounting

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Demo 3-6: Review Reconciliation and
Non-reconciliation A/R Accounts

 Review the posting of reconciliation and non-

reconciliation accounts receivable accounts.

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Asset Accounting

 Concerned with tracking the financial consequences

associated with the entire lifecycle of an asset, from
acquisition to disposal (retirement).
 Assets can be categorized as tangible, intangible, and
financial
 Tangible assets can be further categorized as:
 Fixed assets
 Leased assets
 Assets under construction

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Asset Accounting

 Assets are assigned to

 Company code (posted to G/L w/ Company code)
 Business area
 Cost centers
 Asset accounts
 sub-ledgers accounts (acquisition and depreciation)
 General ledger
 reconciliation accounts (in the general ledger)
 Not straightforward
 Involves account determination of which asset class the
asset belongs to (via asset classes)

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GBI Asset Accounts in the GL
Asset class: Grouping of assets that possess similar characteristics
Each asset class is associated with a specific reconciliation account
in the general ledger account.

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Asset Accounts and Account
Determination

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Demo 3-7: Review Asset Classes and Asset-
Related Accounts

 Review the uses of asset classes and asset-related

accounts.

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Asset related transactions
 Acquisition
 Depreciation
 Retirement
Asset Acquisition

 Asset acquisition is concerned with acquiring assets

via internal or external processes

 Internal: production process or project systems

 Asset class during production: assets under construction
 Costs are tracked in a corresponding G/L recon account

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Asset Acquisition

 There are three options for purchasing assets

externally:
 Purchase from an established vendor without using the
purchasing process
 Purchase from an established vendor using the purchasing
process (different GL accounts)
 Purchase from a one-time vendor or a vendor for whom
master data are not maintained (via clearing account).

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1st Scenario
 Do not employ the full purchasing process – a
purchase order is not created
 Manual entry in GL and sub-ledger
 Similar to AP accounting but
 Company uses the vendor subledger account and a
corresponding accounts payable reconciliation
account instead of the supplies expense account.
2nd Scenario
 Finish the entire purchasing process – purchase order,
goods receipt, invoice receipt, payment

3rd Scenario
 A vendor subledger account does not exist
 The accounting impact of the acquisition is manually
recorded using the asset account (subledger), the
corresponding reconciliation account, and a specially
designated clearing account.
 Clearing accounts are used to hold data temporarily
until the data are moved to another account.
Asset Acquisition With a Clearing Account
A company purchases a new desktop computer from the
vendor for $5,000, with payment to be made at a later date

3 - 5000

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Demo 3-8: Acquire an Asset

 Review how an asset is acquired.

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Asset Depreciation

 Asset depreciaton is concerned with the decrease in the

value of an asset over time
 Depreciation can be planned or unplanned
 Depreciation methods are used
 Straight line:
 Depreciated by the same amount every year
 Double declining balance:
 Depreciated at a fixed rate each year
 Useful life
 Residual value
 Book value:Value after depreciation

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Straight Line Depreciation

The same computer … purchase price is 5000.

We will assume that the asset was purchased at the beginning of

the year, has a useful life of four years, and a residual value of $1,000.

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Double Declining Balance Depreciation

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Asset depreciation
 Parallel valuation:
 Different depreciation methods for different purposes
 Depreciation areas:
 book depreciation:
 used to prepare financial statements for shareholders and to meet
regulatory requirements

 cost accounting depreciation:

 used to allocate the cost of using the asset to a cost center

 tax or legal depreciation:

 used to file federal and state income tax returns
Demo 3-9: Depreciate an Asset

 Review how to depreciate an asset.

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Asset Retirement

 Concerned with the disposal or retirement of an asset

after its useful life
 Retirement may be:
 Revenue generating (sold)
 Non-revenue generating (scrapped)

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Integration of Financial Accounting with
Other Processes

 Financial accounting is integrated with other

processes in SAP within the organization (enterprise)
 Numerous steps in different processes have a financial
impact

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Integration of Financial Accounting with
Other Processes

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Reporting

 Financial reporting is broadly divided into two

categories:
 Displaying account information
 Generating financial statements

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Account Information

 Account information can be displayed at three levels:

 Account Balance
 Line item
 Original FI document

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Account Information

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Demo 3-10: Review Account Information

 Review account information.

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Asset Explorer
 Asset explorer provides an overview of all activities
related to the asset
 Acquisition data
 Planned and posted depreciation for different depreciation
areas
 Comparisons of data across multiple years
 Drill down details for:
 Master data
 Transactions
 Documents

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Asset Explorer
 Distinguishes between planned values — depreciation
amounts that have not yet been posted to the general
ledger accounts—and posted values, which have been
posted
 Accomplish these tasks by executing depreciation
posting run, which posts the planned values for the
specified time period for all depreciation areas to the
appropriate general ledger accounts.
 It also charges the appropriate cost centers with the
depreciation expenses incurred.

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 Asset Explorer

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Demo 3-11 Review Asset Explorer

 Review the capabilities of asset explorer.

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Financial Statements
 Financial statements are created from financial statement
versions.
 A financial statement version is a hierarchical grouping
of general ledger accounts that must be included in the
financial statements.
 Financial statements can be generated from either the
operative chart of accounts or the country-specific chart of
accounts

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Financial Statements
 Three types
 Balance Sheet
 Income Statement
 Statement of cash flows
 Required for external reporting
 Quarterly filings with the SEC?
 Accuracy is critical – SOX compliance
 Certified by CEO and CFO

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Financial Statement Version with Balance
Sheet Accounts

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Financial Statement Version with Profit and
Loss Accounts

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Demo 3-12: Generate Financial Statements

 Review the generation of financial statements.

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Financial Statements Based on Depreciation
Areas

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