There are three types of accounts in Finance
Real Accounts: Stock Account, Cash Account, Bank Accounts, Tax account
Nominal Accounts: Revenue Accounts, Expense Accounts
Personal Account: Customer account, Vendor Account
A summary of all Real accounts and Personal Accounts is the Balance sheet.
A summary of all Nominal accounts is the Profit and Loss statement.
Three basic rules of accounting
For Real Accounts: Debit what comes in, Credit what comes out.
For Nominal Accounts: Debit Expenses and Losses, Credit Revenues and gains.
For Personal Accounts: Debit the Receiver, Credit the giver.
Every P&L/ Nominal Account in FI can have an equivalent primary element in CO. Revenue account in FI will have a revenue element in CO & Expense Account will have a cost element in CO.
Costs are debited to a cost element against a cost object. A cost object can be a cost center, internal order, profitability segment or any other source of costs such as a MTO sales order, a work breakdown structure etc. The cost element acts as a connecter between the transaction and the cost center. A summary of secondary cost elements cost object wise becomes important for costs analysis. In a way my reports dictate the creation of secondary cost elements.
Revenues can be posted against cost centers only as a statistical entry (not relevant for further settlement).
Profitability Segment is a unique combination of characteristics at the operating concern level for which values are stored.
Internal Orders are cost objects, which capture certain unique costs. Internal Orders are created at the same level as that of cost centers. Internal orders can also be used for detailed controlling.
Statistical Internal orders are cost objects used to map certain events across cost centers and represents an event-based subdivision of the cost center. This helps in reports for certain types of costs (primary cost elements) against all the statistical internal orders.
The cost center is created for a combination of a controlling area and a company code. Cost centers have to be grouped in a cost center hierarchy. However other than the standard hierarchy, alternate multiple hierarchies can be created for information purposes.
A profit center is attached to a cost center by inserting the profit center in the master record of the cost center. This link enables costs to flow from a cost center to a profit center, the moment costs hit a certain cost center.
For every revenue account in FI, a revenue element is created in CO. Transactions then create an extra document through which revenue hits revenue elements using the right profit centers. Profit centers can be determined from individual material masters.
Activity types are the kind of activities that can be outputted for a cost center. Activity types are made relevant for a cost center category.
Costs are settled (redistributed) amongst same type of cost objects through assessment/distribution.
Costs are settled amongst different type of cost objects (from internal orders to cost objects) through settlement.
Primary cost elements capture costs from FI transactions against certain cost objects (cost center=canteen). Captured costs in primary cost elements against a cost object has to be further redistributed to certain cost centers (cost center=marketing, production). This redistribution (structuring) of costs can be done using secondary cost elements.
This redistribution is done by a month end settlement cycle.
Assessment is the redistribution of indirect costs between cost objects (e.g.: overheads) using a secondary cost element. Cost components are recorded as separate line items having the origin of costs.
Distribution is the redistribution of direct costs between cost objects (e.g.: Accumulation of direct costs).Costs components do not exist as separate line items.
Funds management is done at the financial management area level. A financial management area is connected to a controlling area (for the sake of planning) and to company code (for the sake of capturing commitments/expenses).
Planning of expenses/Budgeting happens in controlling and then is passed to the financial management level as a matrix of fund centers and commitment items.
A fund center corresponds to a cost center or a cost center group, whereas the commitment item refers to a group of GL expense accounts or cost elements.
Asset Accounting is done at the depreciation area level. There are different reasons why we depreciate asset, each is mapped by a depreciation area. A list of depreciation areas makes a chart of depreciation. This chart of depreciation can be attached to multiple company codes.
Different types of Assets are mapped by Asset classes. Account determination and definition of master layout is done at the Asset class level. Account determination involves an accumulated depreciation accounts ( B/S), a depreciation (expense) account ( P/L) and a P/L account for write ups The number of asset accounts & accumulated depreciation accounts should ideally reflect the number of asset accounts.
When ever an asset comes in the asset account is debited and vendor is credited. Whenever a depreciation run begins for assets belonging to an asset class, a credit entry goes for every asset for the value it is depreciated, with a corresponding debit into a P/L expense account. End of year balance of asset value for an entire class is calculated as a sum of the debits in its asset account & the credit in its accumulated depreciation account
Different methods & rates of depreciation would be applicable for every cell in a matrix of depreciation areas and Asset classes. These different methods & rates are mapped by depreciation keys, which are created for a combination of an asset class and a depreciation area.
So when I create an asset for a combination of a company codes and an asset class, the system proposes a number of depreciation keys for some depreciation areas, some of which we rightfully activate.
Unique bank Ids are created for each country. Also multiple house banks are created at the company code level. House banks are also assigned a bank id.
A house bank can have multiple accounts each having an account id. Each Account ID should be connected to a GL account. Ideally each house bank should have 3 accounts, an incoming cheque account, an outgoing cheque account and a main account.
Receiving cheques triggers of a debit in the incoming cheque account while giving out cheques credit an outgoing cheque account. Only upon receiving a daily bank statement can we offset the incoming/outgoing cheque account and post into the main account.
An operating concern defines the cumulative market of all the company codes attached to it via the controlling area. Operating concern is divided into segments, which are different views of the same market.
Accounting in the Purchase cycle
Debit Stock Account (Real Account-Debit what comes in)
Credit GR/IR Account (Real Account)
Debit GR/IR Account (Real Account)
Credit Vendor Account (Personal Account- Credit the giver)
Debit the Vendor (Personal Account- Debit the receiver)
Credit the Bank (Real account- Credit what goes out)
Accounting in the Production cycle
Goods issue to Production
Debit Raw material Consumed account (Nominal account-Debit Expenses) + Debit cost element with appropriate production order x
Credit RM Stock Account (Real Account-Credit what goes out)
Receipt of semi finished goods
Debit stock of Semi Finished
Credit change in RM (Production order x)
Issue of semi finished
Debit change in Semi Finished Account (production order Y)
Credit Semi finished stock
Receipt of Finished Goods
Debit Finished Goods Inventory
Credit change in Semi finished consumption
Debit WIP Account (B/L)
Credit change in WIP (P/L) not an cost element
Accounting in the Sales Cycle
Debit Cost of goods sold (Nominal account- Debit expenses) + Debit cost element with appropriate cost center
Credit Stock Account (Real Account - Credit what goes out)
Invoicing the Customer
Debit the Customer (Personal Account- Debit the receiver)
Credit the Revenue (Nominal Account- Credit Revenue)
Debit the discounts to the expense account (Nominal account- Debit expenses) + hit the cost element with the right cost center
Credit the Tax account (Real Account- Credit what goes out)
Credit the customer account (Personal account- Credit the giver)
Debit the Bank (Real account- Debit what comes in)
Accounting in Expense booking
Debit Conveyance (Nominal Account- Debit expenses)
Credit Cash Account (Real account- credit what goes out)
Accounting in the service cycle
Debit Service Labor cost Account + Debit Labor cost element (Secondary) with service order as the cost object
Credit Labor cost Account + Credit Labor cost element (Primary) with cost center (service department as the cost object)