Financial Accounting Basics and ERP Systems

Introduction

Financial accounting and reporting needs at high level are still the same and basic transactions and calculations required by all companies are also similar. The growing globalization of businesses and cross country, overseas business handling has created some complexity as well as need for more standardization in reporting for international companies. Needless to say that for several countries there are still their own local legal accounting and business needs that has to be complied by the companies operating internationally.

On one hand for publicly listed and traded companies the shareholders require full transparency and standardized reporting of their financials that are audited by independent auditors and are accurate plus trust worthy. On other hand the international companies still have to deal with the complexities of import, export, taxes, and local fiscal requirements fulfillment.

This leads to need of enterprise wide resource planning system that can bring together all functions and related transactions of production, purchasing, supply, sales and internal organization operations costs. This is more and more required by all companies having international presence, by international it means operations and sales in more than 1 country.

Let’s initiate with understanding of financial accounting needs of companies and then move towards the international legal and compliance needs followed by how MySAP ERP can help in meeting the required needs as well as what needs to be taken care for implementation.

Classification of Accounting

Accounting of companies and enterprises are done using two broad categories namely Financial Accounting and Management Accounting. Financial Accounting is outward focused to meet the needs and standards of outside world (e.g. Shareholders, Legal, International Accounting practice standards etc.)

Management Accounting focuses inwards on company financial reporting needs internally. This helps give financial overview in terms of reports at various levels of the organisation. Management accounting helps companies keep track of internal spending, cost allocations and cost controls.

Why Accounting is classified

The Accounting information is classified in two broad categories to ensure that the Organisations use standard accounting practices for reporting their costs and revenues in a standard way that can be understood by shareholders, customers and society in one standard way. On the other hand, given the globalization and growing needs of the companies to expand, it’s essential to have some flexibility for companies to be able to manage their internal costs and revenue reports as per their business needs.

Classification helps companies to use one standard reporting practice for outside world while having the flexibility to arrange internal financial reporting as per their own needs in various businesses and locations.

What Activities Are Undertaken in Accounting

The accounting information is classified and required to accurate, up to date and in required standard industry format to be able to present it to outside world as well as for the company to practice it effectively for internal accounting with full transparency.

For Financial Accounting to work effectively the key activities and features required are,

• accounts receivable and payable transactions management in the general ledger
• company’s assets management and accounting to handle assets registration and depreciation
• Banking Transactions, Cash and Funds Management of the company
• Consolidated financial reporting with full drill down to details of each section of the report as per industry and government standards.

For Management Accounting to work effectively the key activities and features required are,

• Cost centre accounting and management for the ability to track internal organization’s respective department costs
• Profit centre accounting and management for the ability to track company’s profit and loss details at various levels of the organization
• Profitability Analysis and Reporting for the ability to review company’s profit at various levels of the organization.
• Product costing analyses to be able see actual product costs which can help in deciding products price.

What Feature MySAP ERP has to meet the Accounting Requirements

MySAP ERP has two modules in financials management for companies. One of them is Financial Accounting (FI) focused on company’s external sales and legal reporting needs. The second module is Controlling (CO) focused on company’s operations management and internal management reporting needs. Controlling module helps company’s management in effective planning and decision making.

The seamless and real time integration of financial management modules with other modules like sales and distribution, material management, logistics, human resource management etc. makes MySAP ERP a top leading system for enterprise resource planning.

Financial Accounting (FI) Module

The FI module is made up of several sub modules that help cover the needs of financial accounting based on industry standard – best practice processes. The FI sub modules with brief features are described below.

General Ledger - Accounting postings are recorded from various modules using General Ledger. The postings are real time and latest with full audit log details.

Special Purpose Ledger – For any financial records from external applications to be accommodated, MySAP ERP has special purpose ledger that can be used to capture data and make them available for reporting and analysis purposes.

Accounts Receivable – This sub module focuses on financial postings and records management resulted from customer sales. General Ledger is auto updated for every posting.

Accounts Payable – This sub module posting generated from supplier / vendor purchase activities. General Ledger is auto updated for every posting.

Asset Accounting – As the name suggest the sub module is used for fixed assets management. It allows comprehensive configuration and setup for assets of all types and their depreciation methods.

The financial accounting module also has sub modules that help in travel related transactions, banking transactions, funds management and consolidation (reporting of financial statements in required consolidated way.

Controlling (CO) Module

The CO module is made up of several sub modules that help cover the needs of internal company management reporting and operations management. The CO sub modules with brief features are described below.

Cost Center and Cost Element Accounting – This sub module helps in capturing all costs incurred by a department within a company. Cost Centers are assigned to various departments in an organization. Cost center are assigned to Cost Elements that capture the sub details of costs incurred.

Internal Orders – This sub module is used for detailed level costing and collection of costs spend on internal tasks.

Profit Center Accounting – This sub module is used to check company’s profit and loss visibility. Profit centers in a company are setup for production lines (like factories), geographic business divisions. Profit Centre enables company’s management to have internal controls and reviews. Profit centers show the cost and revenue balance.

Product Cost Controlling – This sub module helps in analyzing product cost details and helps the organization to decide on product pricing based on costs. Product Costing has two sub sections that help in product costs analysis based on costs object controlling and actual costing.

Profitability Analysis – This sub module helps in bringing full visibility on company’s or specific business division’s profit. The analysis can be done using two methods namely Cost based analysis and Account based analysis.

Activity-Based Costing – This sub module helps in identifying the costs source and the driving process. It helps in having a process oriented view for cost centers.