Accounting (FICO) Journals of SAP Material Management (MM) Transactions

Accounting (FICO) Journals of SAP Material Management (MM) Transactions

SAP R/3 is an Enterprise Resource Planning (ERP) software that makes an enterprise able to integrate all of its business processes so it can be run more efficient. It can reduce the duplication of data and process. Data recorded by one department can be used by other departments in a real-time process. As an example we will explain the typical business process in an enterprise.

 

Typical business processes in an enterprise

 

Demand for finished products from customer will be recorded by Sales department in a sales order document. Sales order data can be analyzed by Inventory department. If there are not enough finished products in current stock, the sales order can trigger a production order that request the Production department to start producing the finished products. In order to produce the finished products maybe it requires some raw materials that have to be bought from vendors. The production order can trigger a purchase requisition for the raw materials. The purchase requisition will be processed by Procurement department to be a purchase order that is sent to vendor. Vendor will deliver the raw materials and Inventory department will receive them. Accounting department will record the vendor’s invoice and Finance department will process the payment. Once the raw materials are available, the Production process begins. Then the finished products will be delivered to the customer, and Finance department will send invoice to the customer.All of the above processes need man powers that are managed by HR department and paid by Payroll Accounting department.
All of the above processes can be recorded by SAP R/3 in:

• Sales and Distribution (SD) module.
• Production Planning (PP)
• Material Management (MM) module.
• Finance & Controlling (FICO) module
• HR Module

Certain transactions in the above example also trigger accounting business process. FICO module posts accounting documents for some transactions that have an accounting effect in SD, PP, and MM module, such as finished products issue for sale to customer, raw materials receipt from vendor, etc. These processes will affect the financial reports such as Balance Sheet and Profit & Lost Statement.

In this blog-post, we will explain the way MM transactions affect the FICO module. First, we will explain basic accounting business process principle that used in FICO module.

Accounting Business Process Basic Principle
Accounting is the systematic process of measuring the economic activity of a business to provide useful information to those who make economic decisions (internal or external parties of an enterprise). It records all economic transactions (usually, but not always, involves money) in a systematic and generally accepted way. The transaction records are organized and presented in certain forms of reports. The most used reports in financial accounting business process are Balance Sheet and Profit & Lost Statement.
Balance Sheet
The balance sheet shows an enterprise’s Assets, Liabilities, and Equity at a specific time (such as Balance Sheet on December 31, 2007). It is sometimes described as a snapshot of the business in financial terms.
Asset = Liabilities + Equity
Assets are valuable resources that a firm owns or controls, such as:

• Cash
• Bank account
• Inventory
• Account Receivable
• Fixed Asset
• Intangible Asset
• etc

Liabilities are obligations of the business to convey something of value in the future, such as:

• Account Payable
• Notes Payable
• etc

Equity refers to the owner’s interest in the business, such as:

• Capital stock
• Retained earning
• Current year net profit/loss (in traditional accounting that is without a real-time software such as SAP, there is no current year net profit/loss account. The Balance Sheet is usually prepared at the end of fiscal period, such as December 31 every year. All of the profit/loss in that year from Profit & Loss Statement, after deducted by dividend that given to shareholders, will be recorded as an addition to Retained earning account. But, in SAP system, the current year net profit/loss from Profit & Loss Statement is directly recorded in balance sheet under equity, without waiting transferred to retained earning account, so it is possible to have a snapshot of enterprise balance sheet at any time along the year, not have to wait until the end of year.)

Profit & Loss StatementThe Profit & Loss Statement summarizes the earnings generated by an enterprise during a specified period of time (such as Profit & Loss Statement in year 2007).It contains at least two major sections: revenues and expenses. Revenues are inflows of assets from providing goods and services to customers, such as:

• Sales to customers.
• Gain from foreign currency exchange transaction
• etc

Expenses are the costs incurred to generate revenues, such as:

• Cost of goods sold (COGS) include raw material consumption, etc
• General and administrative expenses include salaries, rent, and other items
• Tax expense
• etc

The difference between revenues and expenses is net profit (or net loss if expenses are greater than revenues).Relationship between Balance Sheet and Profit & Loss StatementBalance Sheet and Profit & Loss Statement are all based on the same underlying transaction information, but they present different “views” of an enterprise. They should not be thought of as alternatives to each other but as a complement.

The balance sheet represents an expansion of the accounting equation and explains the various categories of assets, liabilities, and equity. The profit & loss statement explains changes in financial position (that is, assets and liabilities) that result from profit generating transactions in terms of revenue and expense transactions. The resulting number, net profit, represents an addition to the equity in the enterprise. This relationship is called articulation.

DEBIT and CREDIT rules in accounting journal

Name of account
Debit	Credit

Increases in Assets are recorded by debits.
Decreases in Assets are recorded by credits.
Increases in Liabilities and Equity are recorded by credits.
Decreases in Liabilities and Equity are recorded by debits.
Revenues increases equity, therefore revenue are recorded by a credits.
Expenses decreases equity, therefore expenses are recorded by a debits.
Accounting journals of MM Transactions
The MM transactions which have effect to accounting (FICO module) are transactions that involve valuated-materials (and also non-valuated-materials for GR for PO transaction), such as:

• Goods Receipt (GR):

• GR for initial entry for stock balance (movement type: 561)
• GR for Purchase Order/PO (movement type: 101)
• GR other/without PO (movement type: 501)

• Goods Issue (GI):

• GI to cost center (movement type: 201)
• GI to sales order (movement type: 231)
• GI to asset (movement type: 241)
• GI for sales (movement type: 251)
• GI to order (movement type: 261)
• GI for scrapping (movement type: 551)

• Invoice Receipt

• Transfer material to material (movement type: 309) if the receiving material has different valuation class with the supplying material

• GR Subcontract PO

• GR for Subcontract PO material (movement type: 101) and GI for component material provided to vendor (movement type: 543)

• Physical Inventory difference posting
  • GR for gain on physical inventory count (movement type: 701)
  • o GI for loss on physical inventory count (movement type: 702)