9/11/2010

INTRODUCTION TO
ACCOUNTING

Fall 2010 Information Systems Implementation

Financial Accounting vs Managerial Accounting (Controlling)

Financial Accounting (FI)

Tracks financial impact of transactions on financial statements
Presents current financial situation of company
External, legally required reporting focus
Requirements defined by laws, govt. policies (US-GAAP, IFRS, etc.)
Country-specific variations and requirements
Managerial Accounting (CO)
Allocate and manage costs and revenues
Reporting to support managing the company
Internal focus
Reporting requirements are based on company needs

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Financial Accounting Process Integration

Financial Accounting Focal Elements

General Ledger: Balance Sheet and Profit & Loss (Income Statement)
focus.
Asset Accounting: transactions related to company assets.
Bank Ledger: booking of cash flows.
Accounts Receivable: transactions related to customers. (SD focus)
Accounts Payable: transactions related to suppliers. (Purchasing/MM
focus)
FI
GL
FI FI FI FI
AA BL AR AP

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General Ledger (G/L)

All accounting relevant transactions recorded in G/L.
Each G/L structured per chart of accounts (orderly
definition of all accounts in the G/L).
Account definitions in COA consist of account number, name, and
account type.
Each account designated as profit and loss statement account
(sales, expenses) or balance sheet account (assets, liabilities,
equity).
The G/L contains collective postings where the details are
contained in subsidiary ledgers (or subledgers) which
pass summary data on to the G/L.
Subledgers are not part of the G/L.

Subledgers
Subledgers exist for customer accounts, vendor accounts,
and assets.
Subledgers connect to G/L reconciliation accounts.
Reconciliation accounts cannot be posted to directly.
Posting to subledger account automatically posts to
reconciliation account.
Automatic posting is accomplished through process called
account determination.

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T account fundamentals
Within double entry accounting, each transaction results in
2 offsetting account postings. One posting debits an
account and the other credits an account.
Debits and credits always equal.
Asset accounts have a debit balance. Debiting increases the
total balance; crediting reduces the balance.
Liabilities and Equity accounts have a credit balance.
Crediting increases the total balance; debiting reduces
the balance.
Postings often illustrated using T accounts. Left side is
debit; right side is credit.

Accounts and classifications

Balance Sheet
Assets Liabilities & Equity
Equipment Equity Capital
FI
AA
Materials Loans

FI FI
AR
Receivables Liabilities AP

Bank Accts
FI
BL

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Account types, Balance Changes

Debit Credit
Increase Asset Decrease Asset

Increase Expense Decrease Expense

Decrease Revenue Increase Revenue

Decrease Liability Increase Liability

Decrease Equity Increase Equity

Example Scenario
We take out a loan from a bank for $10,000 and put that
money in our bank account.

Bank Account Notes Payable

Debit

$10,000
Credit

= Debit Credit

$10,000

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Example Scenario
We buy $1,000 of materials on credit from Johnson Lumber.
Materials Account Accounts Payable
Debit

$1,000
Credit

= Debit Credit

$1,000

Automated
Posting
Johnson Lumber Vendor Acct
Debit Credit

Subledger Acct $1,000

Example Scenario
We pay $1,000 to Johnson Lumber to settle our account.
Cash Account Accounts Payable
Debit Credit

$1,000 = Debit

$1,000
Credit

$1,000

Automated
Johnson Lumber Vendor Acct
Posting Debit Credit

Subledger Acct $1,000

$1,000

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Example Scenario
We sell $500 of merchandise to ACME Anvils on account
Sales Revenue Accounts Receivable
Debit Credit

$500 = Debit

$500
Credit

Automated
Posting
ACME Anvils Customer Acct
Debit Credit

Subledger Acct $500

Example Scenario
ACME Anvils pays us the $500 owed on their account
Bank Account (Cash) Accounts Receivable
Debit

$500
Credit

= Debit Credit

$500

Automated
Posting
ACME Anvils Customer Acct
Debit Credit

Subledger Acct
$500

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Example Scenario
Ultimate outcome of ACME Anvils Purchase
Sales Revenue Bank Account (Cash)
Debit Credit

$500 = Debit

$500
Credit

Role of Company Code in Financial Accounting

FI focused on legal requirements. CC is smallest legal entity

where FI can be conducted.
Tax law, commercial law, and accounting standards must be
considered before considering something as a candidate
to be CC.
Without 1 operating CC in a client, FI cannot be undertaken
and the system is not considered live.

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Charts of account
Each company code must have one chart of accounts
designated as the operative COA.
The same COA may be used by multiple company codes.
The COA segregates accounts into account groups.
Accounts within account groups are segregated into number
ranges and share the same field status variant settings
(which fields are suppressed, required, displayed, or
optional).

New General Ledger

G/L allows parallel accounting. Companies can maintain
multiple parallel ledgers. The primary ledger is the
leading ledger, the others are non-leading ledgers.
Accounts in the operative COA are mapped to alternative
COAs.
Common structures: country-specific COAs, use common
COAs to consolidate records across subsidiaries or
Business Areas.
Features of new G/L:
Ability to associate debits/credits with organizational entity.
Ability to split documents among entities.
Real-time reconciliation between FI and CO.
Multiple books (parallel accounting with leading ledger).

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Financial Accounting (FI) document

Header section
Situational Document date Company Code Organizational
Data Document type Data
Document number
Posting date
Currency
Reference number
Detail/line item section

Account number
Master Data
Description

Posting key (debit/credit)

Situational
Amount
Data

Business Areas
Business Areas can be used to consolidate FI reporting in a
manner apart from company codes.
BAs facilitate external reporting across company codes where
that reporting is legally required.
BAs are entirely optional and flexible.
BAs typically differentiate company structure based on
product lines and/or subsidiaries.
BAs are company-code independent and posting can be made
to them from any company code.

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Cost Centers
Cost Centers within CO reporting allow tracking of costs
based on where they were incurred.
Organizational areas are designated as cost centers. These
cost centers absorb costs.
All costs within an organization are assigned to cost centers.
Cost Objects are documents such as production orders
related to business process execution that accumulate costs
until they are settled to cost centers.
Costs assigned to a cost center can be reallocated by the cost
center to other cost centers.

Asset Accounting
3 types of assets: tangible (equipment, buildings, etc.),
intangible (intellectual property, patents, etc.), and
financial (securities, receivables).
Tangible asset categories: fixed assets, leased assets, assets
under construction.
Each asset tracked in its own subledger account. Assets are
assigned to company codes, business areas, and cost
centers.
Like kinds of assets are grouped in an asset class. An
account for the asset class is used as the G/L
reconciliation account.
3 primary transactions types: acquisition, depreciation,
retirement.

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Example Scenario
We buy a $10,000 lathe from Custom Millworks.

Factory Equipment
Debit

$10,000
Credit
= Accounts Payable
Debit Credit

$10,000

Automated
Automated Posting
Posting
Lathe #146 Custom Millworks Vendor Acct
Debit Credit Debit Credit

Subledger
$10,000 Accts
$10,000

Clearing Accounts
Assets can also be acquired through use of a clearing
account.
Clearing account: account that receives temporary
postings to achieve time synchronization between
transactions or record additional data on process steps.
Clearing accounts can be used in buying, selling, or other
processes.
Often used for one time transactions where we do not
want to establish a customer or vendor account.

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Asset acquisition using a clearing account

Scenario: We buy a $5,000 shredder on credit. This is a one-time
transaction, so we do not want to set up a vendor account.
Office Equipment Asset Acquisition Clearing
Debit

$5,000
Credit

= Debit Credit

$5,000

Automated
Posting
Shredder #182
Debit Credit Subledger Acct

$5,000

Asset acquisition using a clearing account

We receive the invoice for the shredder.
Misc. Payables Asset Acquisition Clearing
Debit Credit

$5,000 = Debit

$5,000
Credit

Customer
Subledger
Account

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Asset acquisition using a clearing account

We pay for the shredder.
Misc. Payables Bank Account (Cash)
Debit

$5,000
Credit

= Debit Credit

$5,000

Why?
Why did we need to use a clearing account?
Why not bypass the clearing account?

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Answer

Asset Depreciation
Most fixed assets value goes down over time. Depreciation
reflects an estimation of the items current value.
Depreciation is an expense and reflects the company being
charged for using an asset over time.
Key concepts:
Useful life: How long an asset is expected to last.
Residual value: Amount received when asset is disposed of
Book value: Asset cost less accumulated depreciation
Depreciation Posting Run: A transaction, generally run
annually, that posts depreciation expenses to G/L and cost
centers.

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FI Reporting
Account Information
Balance display, line item listing (if enabled for the account),
original FI document
Asset Explorer
Detailed reporting on asset acquisition, depreciation (shown
using multiple variations), all asset-related transactions
Financial Statements
Variations possible depending on reporting requirements
financial statement version

Copyrights
Presentation prepared by and copyright of Dr. Tony
Pittarese, East Tennessee State University, Computer and
Information Sciences Dept. (pittares@etsu.edu)
Podcast lecture related to this presentation available via
ETSU iTunesU.
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