Accounting (FICO) Journal of MM Goods Receipt (GR) and Invoice Receipt (IR) Transactions

GR for initial entry for stock balance (movement type: 561).
 
T-Code used: MIGO or MB1C.

We must carry out an initial entry of stock balances when implementing the MM module of SAP R/3 System in order to transfer physical warehouse stocks or book inventories from an existing inventory accounting software into the SAP R/3 System as book inventories.

“Typically, a traditional accounting software program usually has an inventory sub module which records the inventories values in the balance sheet. But it’s not an online accounting software which record the inventory movement transaction in real-time basis like SAP does. Usually, this accounting software records the material movements transaction once in a certain period, e.g. once a month after get the information from other department.”

In the GR for initial entry for stock balance transaction, no physical movements actually take place.
The the typical accounting journal is:

Inventory account			Initial inventory clearing account
1000				1000

The initial inventory clearing account then will be cleared against other appropriate accounts by FI module.
GR for Purchase Order (PO) (movement type: 101).
T-Code used: MIGO or MB1C.
In a PO, the field that determines the accounting journal is “account assignment category” field. The account assignment in a PO is usually adopted from Purchase Requisition (PR).
The account assignment category determines:

• The nature of the account assignment (cost center, sales order, and so on) .
• Which accounts are to be charged when the incoming invoice or goods receipt is posted.
• Which account assignment data you must provide.

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The most used Account Assignment Categories (AAC).

AAC	Description	Required account assignment data
“A”	Asset	Main asset number and sub-number
“K”	Cost center	Cost center and G/L account number
“ ”	Inventory	Material number

For PO with account assignment “A” (Fixed Asset) the typical accounting journal is:

Fixed asset account			GR/IR Clearing Account
6000				6000

The first journal will increase the Asset and the second journal will increase the Liabilities (GR/IR is a liabilities account), and the Balance sheet stays balance (Asset = Liabilities + Equity).

The goods receipt/invoice receipt (GR/IR) clearing account is posted to whenever you receive goods that have not been invoiced yet or whenever you receive invoices for goods that have not been delivered yet.

For PO with account assignment “K” the typical accounting journal is:

Expense account			GR/IR Clearing Account
10				10

The first journal will decrease the Current year net profit (so it will decrease Equity) and the second journal will increase the Liabilities (GR/IR is a liabilities account), and the Balance sheet stays balance, since decrease in equity is balanced by increase in liabilities and asset stays the same (Asset = Liabilities + Equity).

For PO with account assignment “ ”(blank) the accounting journal depends on price control procedure of the material received. (see material valuation for detail on price control procedure).

• If price control is “S” (standard price), the typical accounting journal is:

Inventory account				GR/IR Clearing Account
550					500
assumption:				Revenue from price differences account
standard price= 550					50

The first journal will increase the Asset by 550 and the second journal will increase the Liabilities (GR/IR is a liabilities account) by 500. The third journal will increase the net profit (so it will increase Equity) by 50, and the Balance sheet stays balance (Asset = Liabilities + Equity).

• If price control is “V” (moving average price), the typical accounting journal is:
  

  Inventory account			GR/IR Clearing Account
  500				500

  The first journal will increase the Asset and the second journal will increase the Liabilities (GR/IR is a liabilities account), and the Balance sheet stays balance (Asset = Liabilities + Equity).

See material valuation to understand the effect of material’s price control procedure to the accounting journal on Goods Receipt transaction.

In the end, the accounting journal for price control procedure “S” and “V” will result the same to the Balance Sheet and Profit & Loss Statement. It is because as long as the business operation of the company runs, the material that received by this PO will be used, either for consumption or for sales. Let’s assume that there is no other transaction for this material.

The typical accounting journal for consumption for price control “S” is:

Inventory account			Material consumption expense account
	550		550

The first journal will decrease the Fixed Asset by 550 (same amount with the increase of the Asset when GR is done, so it will result 0 in Inventory account). The second journal will decrease the current year profit, so it will decrease Equity, by 550. It will result -550+50(from “revenue from price differences account” when GR is done) =-500 (decrease in Equity).

The typical accounting journal for consumption for price control “V” is:

Inventory account			Material consumption expense account
	500		500

The first journal will decrease the Asset by 500 (same amount with the increase of the Asset when GR is done, so it will result 0 in Inventory account). The second journal will decrease the current year profit, so it will decrease Equity, by 500.

GR Subcontract PO.
T-Code used: MIGO or MB1C.

In subcontract order processing, the vendor receives materials (components) with which it produces the finished-product. The following are involved:

• We order the finished-product using a subcontract order (subcontract PO). The components that the vendor needs to manufacture the finished-product are specified in the purchase order, and we provide them to vendor.
• When we send the component to vendor, in Inventory Management, we transfer those components from unrestricted-stock to special stock (“stock of material provided to vendor”). These special stocks are still shown as our stock in MMBE (T-code for stock overview). This transaction will not post the accounting journal.
• The vendor performs its service and delivers the ordered material (the finished-product). GR is done for the finished-product, and automatically the consumption of the components is posted.

The typical accounting journal when GR is done is:

Inventory account (fin.-product)						Inventory account (comp. mat)
1000							800
	GR/IR clearing account
			200

Assumption: The vendor’s fee (PO value) =200; the component value=800.

The first journal will increase the Asset by 1000, and the second journal will decrease the Asset by 800. The third journal will increase the Liabilities (GR/IR is a liabilities account) by 200, so the Balance sheet stays balance, Asset (1000-800) = Liabilities (200) + Equity (0).

Invoice Receipt (IR)
T-Code used: MIRO or MIR6 and MIR7.
The typical invoice accounting journal is:

GR/IR Clearing account			Vendor account (Account Payable)
1000				1000

The goods receipt/invoice receipt (GR/IR) clearing account is posted to whenever you receive goods that have not been invoiced yet or whenever you receive invoices for goods that have not been delivered yet.

See material valuation to understand the effect of material’s price control procedure to the accounting journal on Invoice Receipt transaction.

The vendor account (account payable) will be followed up by finance department using FI module to payment processing. The typical accounting journal of the payment processing is:

Vendor account (Account Payable)			Cash / Bank account
1000				1000

GR other/without PO (movement type: 501)
T-Code used: MIGO or MB1C.
The the typical accounting journal is:

Inventory account			Other revenue account
1000				1000

Accounting (FICO) Journal of MM Goods Issue, Transfer Posting, and Physical Inventory Difference Transactions

Goods Issue(GI)

T-Code used: MIGO or MB1A.
The Goods Issue transaction will trigger cost accounting process. Cost accounting will record the expense occurred from the goods issue transaction whether it will be charged to cost center, cost of goods sold, or other objects.
The required field that must be filled in all Goods Issue process:

• Material number which will be issued
• Quantity issued
• Plant from where the material issued
• Storage location from where the material issued

A goods issue leads to a reduction in inventories stock.

• GI to cost center (movement type: 201)
  The additional required field: Cost center number.
  The typical accounting journal is:

Inventory account			Material consumption expense account
	1000		1000

• GI to Sales Order (movement type: 231)
  The additional required field: Sales Order number.
  The typical accounting journal is:

  Inventory account			Cost of Goods Sold account
  	1000		1000

  After the sales processed, usually the finance department will bill (invoice) the customer (using SD Module T-Code: VF01), the typical accounting journal for this billing process is:
  

  Customer account (Account Receivable)			Revenue from sales
  1000				1000

• GI to Order (movement type: 261)
  The additional required field: Order number.
  The typical accounting journal is:

  Inventory account			Material consumption expense account
  	1000		1000

• GI for sales (movement type: 251)
  The additional required field: Cost Center.
  The typical accounting journal is:

  Inventory account			Material consumption expense account
  	1000		1000

• GI to asset (movement type: 241)
  The additional required field: Asset number.
  The typical accounting journal is:

  Inventory account			Fixed asset account
  	1000		1000

• GI for scrapping (movement type: 551)
  The typical accounting journal is:

  Inventory account			Material scrapping expense account
  	1000		1000

Transfer material to material (movement type: 309)
T-Code used: MB1B
The receiving and supplying materials might be had same valuation class, that is, same inventory G/L account, or different valuation class, that is, different inventory G/L account.
The typical accounting journal is:

Inventory account (receiving mat)			Inventory account (supplying mat)
1000				1000

Physical Inventory difference posting

• GR for gain on physical inventory count (movement type: 701)
  The typical accounting journal is:

Inventory account			Other revenue account
1000				1000

GI for loss on physical inventory count (movement type: 702)
The typical accounting journal is:

Inventory account			Other expense account
	1000		1000

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)

SAP MM Automatic Account Determination

There are many transactions in Material Management (MM) that relevant for Accounting. These transactions must be recorded in accounting documents that contain the postings made to the G/L accounts in Financial Accounting (FI). The mostly used MM transactions that relevant for FI can be seen at Accounting Journals of SAP Material Management (MM) Transactions.
For those transactions, as far as possible, the SAP R/3 System should determine automatically the G/L account numbers that are involved in the accounting journal. By doing so, we can minimize the inputs and error possibilities made by MM end-users who perform the transactions as they don’t determine the G/L account numbers.
We can do this by Automatic Account Determination process in MM configuration (T-code: SPRO). The automatic account determination process must be done together with Accounting Department.
The influencing factors that determine how SAP choose the G/L account numbers that are involved in the accounting journal for MM transactions are:

• Chart of accounts of the company code
  We must assign a chart of account to each company code. Several company codes can use the same chart of accounts. This process must be done in FICO configuration. You can learn how to configure FICO module in its relation with MM module at SAP FICO minimal configuration for MM posting.
  SAP R/3 determines the chart of account affected by MM transaction from the company code or plant entered by user when performs a transaction.We must define the automatic account determination individually for each chart of accounts.
• Valuation grouping code of the valuation area
  See Material Valuation to know more about valuation area. The Valuation grouping code is a key to differentiate account determination by valuation area within a chart of account. Valuation grouping code is also called Valuation modification.
  SAP screenshots of How to activate the valuation grouping code(T-code: SPRO / OMWM):
  SPRO menu:
  IMG – Materials Management-Valuation and Account Assignment – Account Determination – Account Determination Without Wizard-Define Valuation Control
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  A valuation grouping code consists of a group of valuation areas that can have same account determination in a specific chart of account. It is a tool that enables us to configure the automatic account determination with a minimum of effort.
  If we activate the valuation grouping code in configuration process, we have to assign a valuation grouping code to each valuation area.
  SAP Screenshots of How to define valuation grouping code (T-code: SPRO / OMWD):
  SPRO menu: IMG – Materials Management-Valuation and Account Assignment – Account Determination – Account Determination Without Wizard – Group Together Valuation Areas.
  The above image is © SAP AG 2010. All rights reserved
  By activating and using the valuation grouping code, we don’t have to configure account determination for each valuation area (that is a plant or company code) if we don’t want to differentiate it for each valuation area. If we want the automatic account determination within a chart of accounts runs differently for valuation areas, we can assign different valuation grouping codes to these valuation areas.
  We must define the automatic account determination individually for every valuation grouping code within a chart of accounts. It applies to all valuation areas which are assigned to this valuation grouping code.
  For example, if we want to differentiate the account determination for a group of two plants with another group of other three plants in a company code (where the valuation level is plant), we can assign a valuation grouping code for the group of two plants and another valuation grouping code for the group of other three plants. By doing so, we just have to configure the account determination for the two valuation grouping codes, no need for five valuation areas (plants).
  SAP R/3 determines the valuation area and the valuation grouping code affected by MM transaction from the company code or plant entered by user when performs a transaction.
• Valuation class of material
  The valuation class is a key to differentiate account determination by materials. For example, we can post a goods receipt of a raw material to a different inventory account than if the goods receipt were for finished-product.
  We can do this by assigning different valuation classes to the raw material and finished-product and by assigning different G/L accounts to the posting transaction for every valuation class. If we don’t want to differentiate account determination according to valuation classes we don’t have to maintain a valuation class for a transaction.
  The valuation class must be entered in the accounting data view of material master data for a valuated-material. The allowed valuation classes for a material depend on its material type. More than one valuation class can be allowed for a material type. More than one material type can be allowed for a valuation class. The relationship between valuation classes and material types is established by the account category reference. The account category reference is a compilation of valuation classes. A material type is assigned to only one account category reference.
  
  SAP screenshots of How to define valuation classes (T-code: SPRO / OMSK)
  SPRO menu: IMG – Materials Management-Valuation and Account Assignment – Account Determination – Account Determination Without Wizard-Define Valuation Classes.
  The above image is © SAP AG 2010. All rights reserved
  The above image is © SAP AG 2010. All rights reserved
  The above image is © SAP AG 2010. All rights reserved
  The above image is © SAP AG 2010. All rights reserved
  The above image is © SAP AG 2010. All rights reserved
  The above image is © SAP AG 2010. All rights reserved
• Transaction/event key (internal processing key)
  The Transaction/event key is a key to differentiate account determination by business transaction. For example, we must differentiate G/L account posted by goods receipt transaction and posted by invoice receipt transaction.
  Posting transactions are predefined for those inventory management and invoice verification transactions relevant to accounting. Posting records, which are generalized in the value string, are assigned to each relevant movement type in inventory management and each transaction in invoice verification. These contain keys for the relevant posting transaction (for example, inventory posting and consumption posting) instead of actual G/L account numbers.
  We do not have to define these transaction keys, they are determined automatically from the transaction (invoice verification) or the movement type (inventory management). All we have to do is assign the relevant G/L account to each posting transaction.
  
• Account grouping(only for transaction: offsetting entries, consignment liabilities, and price differences)
  Account grouping is a key that allows us to subdivide number assignments for each transaction key in account determination.
  Account grouping is also called general modification. Since the posting transaction “Offsetting entry for inventory posting” is used for different transactions (for example, goods issue, scrapping, physical inventory), which are assigned to different accounts (for example, consumption account, scrapping, expense/income from inventory differences), it is necessary to divide the posting transaction according to a further key: account grouping code.
  An account grouping is assigned to each movement type in inventory management which uses the posting transaction “Offsetting entry for inventory posting”. Under the posting transaction “Offsetting entry for inventory posting”, we must assign G/L accounts for every account grouping, that is, assign G/L accounts.
  If we wish to post price differences to different price difference accounts in the case of goods receipts for purchase orders, goods receipts for orders, or other movements, we can define different account grouping codes for the transaction key.
  Using the account grouping, we can also have different accounts for consignment liabilities and pipeline liabilities.
  You can see list of account grouping here.

Configure Automatic Postings

Automatic Postings are postings made to G/L accounts automatically in the case of Invoice Verification and Inventory Management transactions relevant to Financial and Cost Accounting.

When entering the goods movement, the user does not have to enter a G/L account, since the SAP R/3 System automatically finds the accounts to which postings are to be made using the influence factors as explain above.

SAP Screenshots of how to configure automatic posting (T-code: SPRO / OBYC):

• Posting made in the case of goods receipt (GR) to purchase order (PO):

Inventory account			GR/IR Clearing Account
500				500

We need to update the BSX transaction key (Inventory posting) with the GL code Inventory account.
SPRO menu:

IMG – Materials Management-Valuation and Account Assignment – Account Determination – Account Determination Without Wizard – Configure Automatic Posting.

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The above image is © SAP AG 2010. All rights reserved

Enter Chart of Account which we want to configure its account determination, then enter the G/L account affected by the transaction as below:

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We also need to update the WRX transaction key with the GL code GR/IR Clearing account.

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Enter Chart of Account which we want to configure its account determination, then enter the G/L account affected by the transaction as below:

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• posting made in the case of goods issue to cost center:

Inventory account			Material consumption expense account
	500		500

We have configured the inventory posting transaction in the previous section (GR to PO).

Now, we have to configure transaction key GBB. GBB key is used for various offsetting posting entries. Within GBB transaction there are various account grouping (general modification). In this case we need to update general modification VBR with the material consumption expense account.

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Enter Chart of Account which we want to configure its account determination, then enter the G/L account affected by the transaction as below: