Bpc fin terminology_final[1] (2)

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Foundation for BPC - Financial Accounting Terminology

SAP FICO (or Financial Accounting) � SAP FICO (or Financial Accounting) Terminology/Building Block has been explained in this presentation

Sushma Kulkarni , CA , CPA

Financial /Business Intelligence Expert

[email protected]

http://[email protected]: 800.836.5696

CloneSkills, Inc. A Pioneer in EPM/BI/EIM Implementation Learning

1 Journal Entry� All accounting transactions are recorded in the form of a

journal entry

� Accounting journal is a collection of all journal entries

� All accounting journal entries have two sides, debit and � All accounting journal entries have two sides, debit and credit

� For each accounting journal entry, the total of debit sides is equal to the total of credit sides

� i.e. debit side total = credit side total

� If debit side total is not same as the credit side total, the journal entry does not balance and it is not accurate



2 Journal Posting� Posting is the process of moving the balances of

journal entries to appropriated accounts in the ledger

� An example of journal entry

� (Debit) Cash 2,000 ($2,000 debit balance is � (Debit) Cash 2,000 ($2,000 debit balance is posted to the cash account in GL)

� (Credit) Sales 2,000 ($2,000 credit balance is posted to the sales revenue account in GL)



3 Journal Opening� In BPC, You create and maintain journal entries using the

journal entry template that has been built by your administrator.

� You can reopen one or more journal entries from a previous � You can reopen one or more journal entries from a previous year, and post them to another set of accounts for the following year.

� When you reopen journal transactions, you define translation information for the dimensions you want to reopen. The translation table defines the source and destination accounts. You typically do this for specific accounts, but you can do translations for other detail dimensions.



4 Cash Flow� The cash flow statement reports activity in cash and

cash equivalents for a period of time

� The statement of cash flows has four main sections: Three are used to classify the types of cash inflows and Three are used to classify the types of cash inflows and outflows during the period and the fourth reconciles the total cash balance from the beginning to the end of the period.



5 Account Transformation� You define data transformations so that you can map

external data to internal BPC data structures using the following files

� Transformation file – This file allows you to set up the rules � Transformation file – This file allows you to set up the rules for reading data from an external source and put it in the proper form for your BPC database.

� Conversion file – This file allows you to map member names from external to internal dimension structures.

� Examples: The source application is converted as follows

� Category as Cat, Account as Acc, Entity as Ent, Time as Tim, Rptcurrency as Currency, Intco as Int, Datasrc as Dat

6 Account Validation� Validations exist to help control integrity of data, for

example, the test whether the account and cost center is a valid combination



7 Income Statement� Reports the results of operations for the period ending

on a particular date.

� It reports revenue and expenses during the fiscal periodperiod

� It has 2 formats Single-step and multiple step

� net income = total revenue - total expense



8 Balance Sheet� Balance Sheet reports the financial position at the end

of the fiscal period i.e as of certain date

� Statement of financial position is another name of balance sheetbalance sheet

� It reports assets, liabilities and stockholders' equity

� In SAP, one can get a balance sheet for a company code or for a business area. Each account is either a Balance sheet account or a P&L account.



9 P&L: Profit and Loss Account� This is same as Income Statement or Income and

Expenditure statement. Details are explained later.



10 Opening Balance� Profit and Loss accounts are not carried forward to

next year. Only balance sheet accounts are carried forward to next year at closing balance of earlier year. Next year this balance is called opening balance.Next year this balance is called opening balance.



11 Closing Balance� Closing balances are cumulative balances after all

entries are posted to balance sheet accounts. They refer to balances at the end of reporting period.



12 Retained Earning� Retained earnings represent the amount of the

company's past net income retained inside the company (or not paid as dividend to stockholders).If the amount of retained earnings is negative, it is If the amount of retained earnings is negative, it is called as "accumulated deficit".



13 Minority Interest� Minority interest is the stockholders’ equity relating to

outside equity stake holders in the consolidated financial statement



GAAP14 US GAAP, 15 UK GAAP, 16 EUR GAAP

� GAAP = Generally Accepted Accounting Principles

� These standards are prerequisites for preparing the financial statements. Each country has its own GAAP

� There are differences among GAAP� There are differences among GAAP

� For example, treatment of accounting for goodwill on acquisition

� US GAAP – Capitalize and amortize over 40 years

� UK GAAP – Direct write off to reserves

� German GAAP – Capitalize and amortize over 4 years

� Switzerland – Direct write off of capitalize

17 Equity� Stockholders’ equity represents the interest of owners

in the organization

� Owners’ Equity = Total Assets – Total Liabilities

� Or � Or

� Owners’ Equity = Par value of Equity Shares + reserves



18 Assets� Represent future economic benefits.

� Examples of types of assets: Cash, Bank, Accounts Receivables, Marketable Securities, Inventories, Property, Plant, and Equipment (PP&E), Intangible Property, Plant, and Equipment (PP&E), Intangible Assets, Short term investments e.g. Stock and Mutual Fund Accounts, Foreign Currency accounts



19 Liabilities� They represent future economic sacrifices.

� They are divided in Long Term and Short Term Liabilities. Examples of current liabilities are Accounts Payable, Notes Payable, Bonds Payable, Long Term Payable, Notes Payable, Bonds Payable, Long Term Borrowings, Credit Card Accounts

� Long-term liabilities include liabilities that are expected to be paid after a year from the balance sheet date.



20 Subsidiary� Subsidiary means an acquired or investee company

where the investment is 50% or more of that company’s share capital.



21 Cash account� Cash account represents cash on hand. However, cash

accounts typically represent cash and cash equivalents e.g. money market funds, bank balances in a summarized balance sheet.summarized balance sheet.



22 Bank account� Bank accounts are cash balances available in the bank.

Sometimes clearing accounts are used to include different types of bank accounts. The firm can decide to use dedicated bank accounts for a particular to use dedicated bank accounts for a particular purpose e.g. payroll account, expense account for better control.



23 Credit Card account� Credit Card accounts are current liabilities for the

holder and are represented so in the balance sheet.



24 Asset and Liability accounts� In addition to the earlier explanation, keep in mind

that in the balance sheet total assets must be equal to total liabilities. In other words, Total Assets = Liabilities + Equity.Liabilities + Equity.



25 Stock and Mutual Fund accounts

� These are short term investments parked in short term maturity financial instruments e.g. CD’s or a mutual fund that invests in them. They are used to earn interest that would be lost if the money is kept in a interest that would be lost if the money is kept in a checking account.



26 Income and Expense account� Income statement (or P&L or I&E Account) reports the

results of operations for a period. It summarizes the profit or loss relating to that period. It is not cumulative and relates to that particular period only.cumulative and relates to that particular period only.

� Examples of components of Income Statement

� Revenues: Sales

� Expenses: Rent, Salaries, Travelling Expenses, Interest Expense

� Net Income = Revenues - Expenses



27 Equity accounts� Stockholders’ equity represents the interest of owners in the organization.� Components of equity� Equity capital or common stock. It represents the owners' equity. Equity is a

residual concept. Hence, equity is what's left after subtracting liabilities from assets. Equity = Assets - Liabilities

� Preference capital. It has preferences in returns e.g. in receiving dividends or in liquidation but they may lack voting rights to control day to day operations

� Preference capital. It has preferences in returns e.g. in receiving dividends or in liquidation but they may lack voting rights to control day to day operations

� Additional paid in capital: Paid in capital is the par value of shares in exchange of the shares of common stock or preferred stock. While, additional paid in capital represents premium paid for acquisition of shares in the public offering.

� Retained earnings: It is sum of net income for the current year plus accumulated in retained earnings. Dividends are paid from retained earnings

� Equity accounts have normal balances on the credit side. Increases in equity accounts are recorded on the credit side. Decrease in equity accounts are recorded on the debit side.



28 Currency Accounts� Foreign currency accounts are maintained in the

respective currencies and are translated to the reporting currency on the balance sheet date.

� In SAP the foreign currency tracking should be � In SAP the foreign currency tracking should be enabled without which amounts cannot be tracked in foreign currency.



29 Capital Gains� Capital gains represent sums (gains) received over and

above the cost of acquisition. For example, land acquired at $100,000 is sold for $150,000 will result in capital gain of $50,000. Any asset that is sold can lead capital gain of $50,000. Any asset that is sold can lead to a capital gain or loss



30 Asset Appreciation� Asset appreciation represents unrealized gains as of a

particular point of time. They do not represent earnings and are ignored for P&L account. The reason behind this treatment is the values do change over behind this treatment is the values do change over time. Thus, assets appreciation is normally not considered as income unless sold



31 Acquisition� There are many forms of acquisitions – whole

company, departments, vertical, horizontal, etc. For BPC, we are concerned with investment in equity of other companies. other companies.



32 Depreciation of Assets� Depreciation is the process of allocating the cost of long-lived assets

over the useful life of the asset.Depreciation base = cost of the asset - residual value. Amount to be depreciated each period is determined by the depreciation method applied. For example, Entity A purchased an equipment at the cost of $650,000Useful life = 10 yearsUseful life = 10 yearsResidual value = $50,000Using the straight line depreciation method for equipment Annual depreciation = (cost - residual value) / useful life

= ($650,000 - $50,000) / 10= $600,000 / 10 = $60,000

Monthly depreciation = annual depreciation / 12= $60,000 / 12 = $5,000

� Land is not depreciated



33 Net income� Net income = Revenue – Expenses



34 Dividends� Dividends are allocation of reserves to shareholders.

These can be in cash or in kind (although rare in practice). These are paid to shareholders on the record as of the record date for dividends that is decided by as of the record date for dividends that is decided by the board.



35 Shareholders' equity� Already covered under equity



36 Statement of retained earnings� An enterprise needs to (a) classify items of other

comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Statement of retained earnings essentially displays additions to and appropriations from retained earnings.



37 Joint Stock Company� The term implies a company that has limited liability

whose controlling interest is divided in equity shares of equal par value. For example, a company has equity with 100,000 equity shares with par of $0.10 will have with 100,000 equity shares with par of $0.10 will have equity capital of $10,000. A company can have different series of shares with varying rights and varying par value.



38 Balance Sheet in Balance� In all ERP systems, you cannot post any journal entry

that is not balanced. The system validation will not allow this to happen. The system therefore will always produce a balance sheet that is in balance i.e. total produce a balance sheet that is in balance i.e. total assets = total liabilities + equity. However, in BPC, you can post entries that are out of balance. This can also happen while revaluing foreign currency for the balance sheet.



39 Balance Sheet Out of Balance� In line with the above logic, This “out of balance”

Balance Sheet needs to be balanced out by making entries. This task must be performed otherwise the result is not acceptable for any accounting / result is not acceptable for any accounting / management analysis.



40 Company Code� "Company Code (for external purposes) A company code

represents an independent balancing/legal accounting entity. An example would be a company with independent accounts within a corporate group. Financial statements required by law can be created at company code level. Therefore, a company code is the minimum structure necessary in mySAP ERP Financials. In an minimum structure necessary in mySAP ERP Financials. In an international business, operations are often scattered across numerous countries. Since most government and tax authorities require the registration of a legal entity for every company, a separate company code is usually created per country. Defining a company code involves 4-charachter company code key and the company name."

� Chart of accounts are combined with CC

41 Cost Center� Cost centers play important role in controlling costs

and analyzing profitability. They need to be defined in SAP before using them. If cost center tracking is enabled, cost center becomes a required field for all enabled, cost center becomes a required field for all journal entry postings both debit and credit.

� Allocation to cost center based on activity is common practice in Activity Based Costing.



42 Controlling Area� "Controlling Area is the central organizational unit

within CO module. It is representative of a contained Cost Accounting entity where costs and revenues can be managed. A controlling area may include one or be managed. A controlling area may include one or more company codes which must use the same operative chart of accounts as the controlling area. A Controlling Area can contain multiple company code assignments but a single company code can be assigned to only one controlling area."



43 Posting Period� The Posting period variant controls which posting

periods, both normal and special, are open for each company code. It is possible to have a different posting period variant for each company code in the period variant for each company code in the organization. The posting period is independent of the fiscal year variant.



44 Fiscal Year� In accounting terms fiscal year is a period of 12 months. It

need not be calendar year. In the first year of operation, fiscal year can be shorter than 12 months.

� In SAP, fiscal year is divided in periods and every SAP document is uniquely identified by fiscal year. document is uniquely identified by fiscal year.

� You can also use the fiscal year variant to make the following system settings:� Beginning and end of your fiscal year

� Number of "normal" posting periods (01-16)

� Number of special periods (remaining periods up to 16 after selection of normal periods)

� Posting period length

45 Transaction Currency� A currency in which each transaction originates is

called transaction currency. The currency defined in the company code is known in mySAP ERP Financials as local currency. The transactions are effectively as local currency. The transactions are effectively posted in local currency. All other currencies are treated as foreign currency. In SAP the foreign currency tracking should be enabled without which amounts cannot be tracked in foreign currency.



46 Local Currency� The currency defined in the company code is known in

mySAP ERP Financials as local currency.



47 Group Currency� Similar to group chart of accounts, you can define

group currency in SAP. It would need to be assigned to a company code before making it either local currency or foreign currency.or foreign currency.



48 Reporting Currency� The currency used for preparing financial statements

is called reporting currency. In SAP this is defined as the local currency while defining company code and used for preparing financial statements. If original used for preparing financial statements. If original transactions are entered in foreign currency, you can run reports in foreign currency which will be reporting currency for those reports.



49 Month End Close Process� Closing operations is a periodic task and involves

certain activities to be carried out. Usually check lists are maintained to execute all the activities in a systematic manner. The typical activities include systematic manner. The typical activities include running depreciation on fixed assets, accrue expenses and incomes, enter recurring entries, reconcile bank balances, value AP for payables in foreign currency, print financial statements etc.



50 Quarter End Close Process� This is similar to month end process. Additional SEC

filings like 10Q are required for listed companies.



51 Opening Balance� Balance Sheet accounts which have closing balances

are carried forward to next period. The closing balance of last period becomes opening balance of next period.



52 Balance Carry Forward� After closing entries are journalized and posted, only

balance sheet accounts remain open. The balances are carried forward to the subsequent period, these become opening balances for the subsequent periodbecome opening balances for the subsequent period



53 Consolidation on Investment� Consolidated FS are prepared when a parent-

subsidiary relationship has been formed. An investor is considered to have parent status when more than 50% of the voting stock of the investee has been acquired. of the voting stock of the investee has been acquired. The subsidiary may be acquired for cash, stock, debt securities etc.

� In consolidated FS, the “investment in subsidiary” in the parent’s books are netted off against “Owner’s Equity” in the subsidiary’s books.



54 Trial Balance� After posting all transactions from an accounting

period, accountants prepare a trial balance to verify that the total of all accounts with debit balances equals the total of all accounts with credit balances. The trial the total of all accounts with credit balances. The trial balance lists every open general ledger account by account number and provides separate debit and credit columns for entering account balances.



55 Flows� Workflow management is providing employees with

right task, right information at the right time.

� In SAP, workflows are usually initiated by a triggering event. Events are used to display the changes in status event. Events are used to display the changes in status of objects within the system. Like methods, they are defined in the object repository for each object type. Events are initiated in the respective applications.

� Example: The workflow for account assignment approval (WS0100000) is started by triggering the marking for organizational change event when saving a parked document with the specification of a measure

56 Transaction TypesFollowing are standard business transaction categories and their

postings:� Expense (E) Expense/Cash desk� Revenue (R) Cash desk/Revenue� Cash transfer:� Cash transfer:� From cash journal to bank (B) Bank/Cash desk� From bank to cash journal (C) Cash desk/Bank� Accounts receivable (D) Customer payment receipt

Cash office / customer� Customer outgoing payment Customer / cash office� Accounts payable (K) Vendor payment issue

Vendor / cash office� Vendor incoming payment Cash journal/Vendor

57 Fiscal Year Variant � "The fiscal year variant contains the number of posting periods

in the fiscal year and the number of special periods. You can define a maximum of 16 posting periods in the Controlling component (CO). You define the fiscal year variant during customizing of the Financial Accounting component (FI) in the Implementation Guide (IMG). You must also define which fiscal Implementation Guide (IMG). You must also define which fiscal year variant is used in the company code.

�

� When you create a controlling area, you must also specify the fiscal year variant. The fiscal year variants used by the controlling area and the corresponding company codes can only differ in the number of special periods used. You must ensure that the fiscal year variants use the same number of equally-defined standard periods. "



58 Payables� Accounts payable represent the amounts to be paid to

vendors from whom the company purchased merchandise. In SAP, payable transactions (both bills and payments) are posted to sub ledger and summarily and payments) are posted to sub ledger and summarily to Accounts Payable Control Account to reconciliation accounts (account type K). You can also create onetime vendors.



59 Receivables� Accounts receivables represent the amounts to be

collected from the customers who purchased the company's products on credit. In SAP, receivable transactions (both bills and payments) are posted to transactions (both bills and payments) are posted to sub ledger and summarily to Accounts Receivable Control Account to reconciliation accounts (account type D).



60 Ledger� General ledger is collection of accounts used in the

chart of accounts. These represent master records. By assigning a number range to an account group, you can ensure that accounts of the same type are within the ensure that accounts of the same type are within the same number range. Number intervals for G/L account master records can overlap.



61 Cash� In financial terminology cash includes cash

equivalents. In SAP separate reconciliation accounts are created for each type of cash or bank account / journal.journal.



62 Cash Management � Cash management services covers very vast array of services including:� Account Reconcilement Services� Advanced Web Services� Armored Car Services� Automated Clearing House� Balance Reporting Services including all forms of payment activity, including � Balance Reporting Services including all forms of payment activity, including

deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc.

� Cash Concentration Services to electronically "pull" the money into a single interest-bearing bank account

� Lockbox services for collecting checks � Positive Pay using electronically shared check register of all written checks� Sweep accounts move excess funds from a company's bank accounts into a

money market mutual fund overnight, and then moved back the next morning. This allows them to earn interest overnight. This is the primary use of money market mutual funds

� Wire Transfer

63 Inventory� Inventory represents company's merchandise, raw

materials, finished and unfinished products which have not yet been sold. These are considered liquid assets, since they can be converted into cash quite easily.

� Management is responsible for determining and � Management is responsible for determining and maintaining the proper level of goods in inventory. If inventory contains too few items, sales may be missed. If inventory contains too many items, the business pays unnecessary amounts to warehouse, secure, and insure the items, and the company's cash flow becomes one sided-cash flows out to purchase inventory but cash does not flow in from sales.

64 Invoice� Invoices are raised while recording each sale made.

Sometimes, orders are met locally but invoices are prepared for central processing with the vendor. Invoices are entered per customer or vendor using Invoices are entered per customer or vendor using relevant master data. The invoices have line items which typically include items purchased, rate, currency, extended amounts, sub-total, tax etc.

� In SAP the two document types used are DR for Customer Invoice and KR for Vendor Invoice.



65 Credit Memo� Credit Memos are issued for goods or services not

accepted or returned by customers.

� In SAP the two document types used are DG for Customer Credit Memo and KG for Vendor Credit Customer Credit Memo and KG for Vendor Credit Memo.



66 Debit Memo� Debit Memos are issued for goods or services not

accepted or returned to vendors.

� In SAP the two document types used are DG for � In SAP the two document types used are DG for Customer Credit Memo and KG for Vendor Credit Memo.



67 Internal Trading Partners� The economic unit concept, however, states that the

consolidated balance sheet cannot include payables and receivables from companies within the same group. The balance sheet value in the individual financial statements is due to the legal independence of the internal trading partners. The legal independence of the internal trading partners. The consolidation activity 'Elimination of intercompany unit payables and receivables' eliminates group-internal financial relationships.

� All intercompany profits/losses have to be adjusted including profits on transfer of assets within internal trading partners. Eliminations are always posted in pairs. To enable the system to eliminate IC trading partner relations, therefore, you need to enter the relevant financial statement item data using trading partner account assignments

68 Sub Ledger� For all sub ledgers a reconciliation account is created

in the General Ledger. The transactions line items are maintained in the sub ledgers.



69 Inter-Company Transfers� Refer to Internal Trading Partners.

� All intercompany profits/losses have to be adjusted including profits on transfer of assets within internal trading partners.trading partners.



70 Reclassification� Reclassification stands for regrouping. It is the process

of adjusting the entry to an account at the end of the calendar or fiscal year in order to properly state it for financial statement preparation purposes. Types of required adjustments include accrual or deferral of a required adjustments include accrual or deferral of a revenue or expense item, reclassification, adjustments to conform book figures to physical counts (i.e., inventory), and reflecting unusual transactions.

� Normally, the characteristics of the transactions and events are reclassified for presenting the financial statements to conform to GAAP.

Sushma Kulkarni , CA , CPAFinancial /Business Intelligence Expert

[email protected]



Bpc fin terminology_final[1] (2)

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