Unit 1: SAP Business One Standard Financial Processes Contents: Standard financial processes Sales and purchasing processes and their consequences on book keeping

SAP Business One Standard Financial Processes: Unit Objectives After completing this unit, you will be able to: Discuss some general accounting conventions Describe the steps in the standard financial processes in SAP Business One Give examples of the automatic journal entries created during the sales, purchasing and inventory processes Discuss the financial consequences of the processes on the general ledger

SAP Business One Standard Financial Processes: Course Overview Diagram Topic 1: Standard Financial Processes Topic 2: Sales and Purchasing Processes

SAP Business One Standard Financial Processes: Business Example You are implementing SAP Business One at a new customer, OEC Computers: Your main contact in the customer site is Maria the accountant. Maria asks about the way SAP Business One handles the financial accounting processes. She wants to make sure she understands the big picture so she can report to the company owners the business results periodically.

Standard Financial Processes SAP Business One Standard Financial Processes Topic 1: Standard Financial Processes Topic 2: Sales and Purchasing Processes System Configuration Master data Purchasing Inbound logistics Warehouse management Outbound logistics Marketing & Sales Service Production Financial controlling

Standard Financial Processes: Topic Purpose After completing this topic, you will be able to: Discuss some general accounting conventions

Finance Basics Every business transaction is recorded in the company's books. This allows you: To manage your company effectively with the option of producing financial reports To report the business transactions to the authorities. Every business transaction results with a value exchange: A certain account increases value and another decreases value, resulting in the recording of balancing debit side and credit side postings.

Value Exchange: Question In a current sales process what happens to the accounts involved in the A/R Invoice? (Let us assume that this is a non-perpetual inventory system) A/R Invoice

Value Exchange: Answer A/R Invoice Debit Credit Customer account 105 Tax account 5 Revenue account 100

Some General Accounting Conventions (1) Each journal entry represents one posted business transaction. Each line in the journal entry represents one posting to an account (which could represent a customer, vendor or a regular general ledger account). Each line in the journal entry represents a posting of either a debit or a credit amount (but never both together). Deposit no. 500070 Debit Credit Cash clearing account 105 Bank account In this example, when we deposit cash amounts to the company bank account, the cash clearing account decreases value and is credited and the bank account increases value and is debited. This corresponds with the Double Entry bookkeeping system, wherein every transaction or event impacts at least two different accounts. In modern accounting this is done using debits and credits.

Some General Accounting Conventions (2) Each journal entry must include debit and credit amounts; therefore, a journal entry must include at least two lines. There is no limit on lines in a single journal entry. A journal entry must be balanced. That is, the total credit and debit amounts in a journal entry must be equal Deposit no. 500071 Debit Credit Check clearing account 105 300 205 155 Bank account 765 Total In this example, the check clearing account is credited 4 times because the deposit includes 4 checks (the business received from different customers). The bank account is debited in the total value of those 4 checks. The debit and credit amounts are equal and the journal entry is balanced.

The Account Balance (1) The account balance represents the difference between the total debit transactions and the total credit transactions recorded for that account. The transaction summary or the balance of a certain G/L account or business partner is the initial information the accounting system can provide about the business. Customer XXXX7 Debit Credit Origin 105 Debit A/R Invoice 600 Debit 400 Debit 705 Credit Incoming Payment 200 Debit 100 Debit Account Balance 700 Debit

The Account Balance (2) Previously, we mentioned that in each journal entry a certain account increases value and another decreases value, resulting in the recording of balancing debit side and credit side postings. The effect on the account balance: Assets, Expenses, and Drawings accounts are generally in debit. Liability, Revenue, and Capital (Equity) accounts are generally in credit.

The Account Balance and the Account Type Debit Accounts Credit Accounts ▲= increase ▼ = decrease Typical Balance Assets ▲ Bank Account, Accounts Receivable ▼ Liabilities Accounts Payable Equity/ Capital Reserves Expenses Rent, Electricity Revenues Sales Revenue Balance Sheet Accounts Profit and Loss Accounts For assets: Debit transactions always increase the asset value. Credit transactions always decrease the asset value For liabilities: Credit transactions always increase the liability. Debit transactions always decrease the liability.

Value Exchange and the Account Balance The two accounts increase their values: ▲ (Let us assume that the customer is tax exempt and that this is a non-perpetual inventory system) A/R Invoice Debit Credit Customer account 440 Revenue

Sales and Purchasing Processes SAP Business One Standard Financial Processes Topic 1: Standard Financial Processes Topic 2: Sales and Purchasing Processes System Configuration Master data Purchasing Inbound logistics Warehouse management Outbound logistics Marketing & Sales Service Production Financial controlling In this topic we review the sales and purchasing processes discussed in TB1000 and focus on their consequences on bookkeeping.

Sales and Purchasing Processes: Topic Purpose After completing this topic, you will be able to: Describe the steps in the standard financial processes in SAP Business One. Describe the automatic journal entries created during the sales and purchasing processes. Discuss the financial consequences of the processes on the general ledger.

Automatic Journal Entries: Reflection Question In a standard sales process which documents affect the accounting system? Standard Sales Quotation Sales Order Delivery A/R Invoice Incoming Payment Deposit

Automatic Journal Entries: Answer In a standard sales process which documents affect the accounting system? Standard Sales Quotation Sales Order Delivery A/R Invoice Incoming Payment Deposit When managing perpetual Inventory

Examples of Automatic Journal Entries: A/R Invoice In the sales process  A/R Invoice, which account is debited and which is credited? (Let us assume that this is a non-perpetual inventory system) Sales Quotation Sales Order Delivery A/R Invoice Debit Credit Customer account 105 Tax account 5 Revenue account 100 In SAP Business One, a journal entry is automatically posted from many documents during the sales, purchasing and inventory processes, such as A/R and A/P invoices.

Examples of Automatic Journal Entries – Incoming Payment In the sales process  Incoming Payment, which account is debited and which is credited? Sales Quotation Sales Order Delivery A/R Invoice Incoming Payment Possible Payment Means Check Credit card Cash Bank transfer *BOE Debit Credit Cash clearing account 105 Customer *BOE - Bill of Exchange. This option is relevant for Italy, Portugal, Spain and France and activated by default.

Examples of Automatic Journal Entries – A/P Invoice In the purchasing process  A/P Invoice, which account is debited and which is credited? (Let us assume that this is a non-perpetual inventory system) ) Purchase Order Good Receipt PO Outgoing Payment A/P Invoice Debit Credit Vendor 105 Tax account 5 Expense account 100

Financial Settings: Reflection Question How does the system “know” which accounts to use automatically? G/L Account Determination Control Accounts

G/L Account Determination G/L Account Determination – defines default G/L accounts related to a specific business process: Sales Purchasing General (for example, Period End Closing) Inventory – three available options to choose the default G/L method for an item: At the warehouse level At the item group level At the item level You need to make decisions about G/L Account Determination together with the client accountant. When you implement SAP Business One you define default G/L accounts to be used when transactions are created. Administration  Setup  Financials  G/L Account Determination. G/L Account Determination: the window is divided into four tabs. Each tab contains the definitions for G/L accounts related to a specific business process: Sales, Purchasing, General, and Inventory. When you choose a pre-defined Chart of Accounts template, most of the defaults are already defined. You can change them if required. When choosing a G/L account in the G/L Account Determination window it appears in green in the Chart of Accounts. Whenever you add a document that posts a journal entry, A/R Invoice for example, the system determines the G/L accounts to be used from the default accounts.

G/L Account Determination - Example The Revenue default G/L account is defined in the G/L Account Determination window, under the Sales tab. Revenue account A/R Invoice Debit Credit Customer account 105 Tax account 5 Revenue account 100

Control Accounts Accounts Receivable Customer Accounts Receivable = A/R Invoice Control Account Debit Credit Accounts Receivable Customer 105 Tax account 5 Revenue account 100 In the G/L Account Determination window you also define the Control Accounts: Accounts Receivable for the Sales process, Accounts Payable for the Purchasing process. A control account links the business partner sub-ledger accounts to the general ledger. You need to define a G/L account as a Control Account in the Chart of Accounts. Whenever you post a document to a business partner, the system automatically register the journal entry to: The Business Partner Master Data account balance. The control account balance. (You cannot post journal entries directly to a control account). In an A/R Invoice, for example, when the customer is debited the Accounts Receivable account is also debited. This journal entry appears now in both accounts balances (the customer and the control account). Note, that the Business Partner Master Data balances do not appear in the Chart of Accounts. The receivable and payable control accounts accumulate the customers and vendors transactions in their balances. Hence, the Chart of Accounts presents the complete financial status of the company. As well as the Financial Reports (P&L, Balance Sheet). Some transactions, such as transactions with bills of exchange, must be posted to special control accounts. Therefore, you can assign these special accounts to predefined transaction types, such as Open Debts, Assets Account, Down Payments Receivable/Payable or other (country-dependent). In the G/L Account Determination window you can select if you want to assign different control accounts to different customers or vendors. Assigning control accounts to each customer or vendor is done in the Business Partner Master Data window. Choose Business Partners  Business Partner Master Data  Accounting tab  General tab  Accounts Receivable/Accounts Payable field. If this option is not selected, the control accounts defined in the G/L Account Determination window are used for all customers and vendors. You also have the ability to change the default control account in marketing documents. Choose the Accounting tab  Control Account field. If you are working with several control accounts, the system can display the business partner balances separately for every control account. Business Partners  Business Partners master Data  open the linking arrow in the Account Balance field and choose the View by Control Account button.

Exercise - Control Accounts Go to Reports  Financials  Financial  Balance Sheet. Run the report. Locate the Accounts Payable in level 5. Go to level 1 and check that the report is balanced. How is the report balanced?

The Automatic Journal Entry Value How does the system “know” the value to be credited and debited in an automatic journal entry created by an A/R Invoice? (Let us assume that the customer is tax exempt). A/R Invoice Debit Credit Customer account 440 Revenue

Value Calculation – Invoice – Sales Process Purchasing Price List = 100 Reseller Price List = 110 Retail Price List = 120 Star Trek Computers = Reseller Price List Reseller Price List = 110 Unit Price * Quantity = Total Value 110 * 4 = 440 Let us refresh our memory with some of the topics from the Logistics course TB1000. Here is a common scenario of how prices are set in SAP Business One during the sales process: Our customer Star Trek Computers asks for an offer on 4 portable media players. Jean creates a sales quotation. She chooses the customer and then the item. The price per unit appears in the quotation. How? The Item master data includes 3 optional prices for this item. Each one of them is represented in a different Price List. Star Trek Computers is a reseller customer and so his default price list as defined in his master data record is the Reseller Price List. Therefore, in the Sales Quotation, the unit price for a portable media player is 110, the Resellers Price List. Jean enters quantity of 4.The total value of the quotation is 440 (assuming there are no additional items in the quotation and that no discount or tax amounts are added). Star Trek Computers faxes us a Sales Order based on the Sales Quotation. In SAP Business One, jean copies the Sales Quotation to a Sales Order. 2 days later Joe, the warehouse manager, dispatch the company truck with the weekly devilries, including 4 portable media players for Star Trek Computers. Later on the day, the accountant copy the Delivery to an A/R Invoice. Since no change was done to the price during the Copy To process, the Invoice total value is 440 and these are the Credit and Debit amounts in the automatic journal entry created by the A/R Invoice. Sales Quotation Sales Order Delivery A/R Invoice

Value Calculation – A/P Invoice – Purchasing Process Purchasing Price List = 100 Reseller Price List = 110 Retail Price List = 120 Coconut Devices = Purchasing Price List Purchasing Price List = 100 Unit Price * Quantity = Total Value 100* 10 = 1000 Purchase Order Good Receipt PO A/P Invoice In the Purchasing process a common scenario of how prices are set would be: Joe, the warehouse manager, issues a Purchase order of 10 portable media players. He chooses the vendor Coconut Devices and then the item - portable media player. The price per unit appears in the Purchase Order. How? Since Coconut Devices is a vendor, his default price list as defined in his master data record is the Purchasing Price List. Therefore, in the Purchase Order, the unit price for portable media player is 100, the Purchasing Price List from the portable media player item master data. Joe enters a quantity of 10. The total value of the Purchase Order is 1000 (assuming there are no additional items in the Purchase Order and that no discount or tax amounts are added). Joe e-mails the Purchase Order to the vendor. Few days later Joe receives a delivery including 10 portable media players from Coconut Devices. In SAP Business One, he copies the Purchase Order to a Goods Receipt PO. A week later, the Invoice from Coconut Devices arrives via mail and the accountant copy the Goods Receipt PO to an A/P Invoice. Since no change was done to the price during the Copy To process, the A/P Invoice total value in 1000 and these are the Credit and Debit amounts in the automatic journal entry created by the A/P Invoice. Debit Credit Vendor 1000 Clearing acc.

Value Calculation – Inventory Process Purchase Order A/P Invoice Good Receipt PO Debit Credit Clearing acc. 1000 Inventory acc. 100 * 10 = 1000 Unit Price * Quantity = Total Value Item Cost Purchasing Price List = 100 Calculated Value = 90 Reseller Price List = 110 Retail Price List = 120 Sales Quotation Sales Order A/R Invoice Debit Credit Cost of Goods Sold acc. 360 Inventory acc. Delivery Let us go one step back, to the Goods Receipt PO that Joe entered based on the Delivery he got from the vendor. Assuming the company runs perpetual inventory, an item cost value is being calculated automatically in each stock transaction. More details on Perpetual Inventory will be provided in the last Unit of the course. When Joe entered the Goods Receipt PO to SAP Business One, the Purchasing Price List value (100 per unit) affected the unit price in the Goods Receipt PO and also the item cost value. The item cost value is calculated automatically, behind the scene, according to the valuation method chosen for the item (Moving Average, FIFO, Standard). The calculated item cost value after the Goods Receipt PO was 90. Joe entered a quantity of 10 portable media players. Therefore, the total value of the journal entry created by the Goods Receipt PO was 1000 and these are the Credit and Debit amounts registered to the inventory default accounts. The value of the journal entry linked to the Delivery sent to the customer is 360. That is, quantity of 4 items multiplied by the Item cost value at that moment (90). Remember that the total value of the Invoice based on that Delivery was 440. It was calculated according to the Reseller Price List (110) that is defined as the default price list in the customer master data record. 90 * 4 = 360 Item Cost * Quantity = Total Value

The Financial Process in SAP Business One Financial Settings Sales and Purchasing process Automatic Journal Entries Manual Journal Entries Reconciliations Period End Closing General Ledger, Chart of Accounts and Reports Chart of Accounts G/L Account Determination A/P Invoice Outgoing Payment Good Receipt PO A/R Invoice Payment Deposit Let us review the steps that occur regularly in the financial process in SAP Business One (most steps, except the financial settings, are recurring and could happen in a different order. This is an example of a common scenario): Financial Settings - when you implement SAP Business One you define: Chart of Accounts and default G/L accounts to be used when transactions are created in the different business process: Sales, Purchasing, Inventory and more. You need to make these decisions together with the client accountant. Sales and Purchasing processes - the financial consequences of the steps in the sales and purchasing processes are Automatic journal entries and system reconciliations. Automatic Journal Entries - are posted from many documents, such as A/R and A/P invoices. Manual Journal Entries – for business transactions that are not represented in forms or documents. The accountant enter transactions like loan, rent, or payroll using Manual Journal Entry. The Journal Entry file contains all the accounting transactions: automatic and manual. Reconciliations – Internal system reconciliations are created automatically: In a Business Partners Master Data - Invoice/ Payments, Invoice/ Credit Memo; In a G/L account - Payment/ Deposit. Internal user reconciliation – for example, when an advanced payment needs to be reconcile with the Invoice. Period End Closing – a process that transfer the balances of the Profit and Loss accounts to a Balance Sheet account – the retained earnings account when a fiscal year or posting period ends. In some localizations (Italy, Spain, France, and Portugal) you can also transfer the balance sheet account balances from one fiscal year or period to another. There is a list of tasks required while preparing for Period-End Closing. General Ledger, Chart of Accounts and Reports – all the previous steps affect the Journal Entry file, the account balances (refer to the next slides) and the financial reports. like in the examples we reviewed: When we discussed the control accounts that link the business partner accounts to the general ledger. The Business Partner Master Data balances do not appear in the Chart of Accounts. The receivable and payable control accounts accumulate the customers and vendors transactions in their balances. Hence, the Chart of Accounts presents the complete financial status of the company. As well as the Financial Reports (P&L, Balance Sheet). Another example, is the Period End Closing – that transfer the balances of the Profit and Loss accounts to a Balance Sheet account and hence affect the Profit and Loss and the Balance Sheet results.