Accounting in ERP Systems
Objectives
You will be able to:
• Describe the differences between financial and
managerial accounting
• Identify and describe problems associated with
accounting and financial reporting in unintegrated
information systems
• Describe how ERP systems can help solve
accounting and financial reporting problems in an
unintegrated system
2
Objectives (cont’d.)
• Describe how the Enron scandal and the
Sarbanes-Oxley Act have affected accounting
information systems
• Explain accounting and management-reporting
benefits that accrue from having an ERP system
• Explain the importance of Extensible Business
Reporting Language (XBRL) in financial reporting
3
Introduction
• You will learn about the activities in the Accounting
functional area
• Accounting is tightly integrated with all other
functional areas
• Accounting activities are necessary for decision
making
4
Accounting Activities
• Areas of accounting:
– Financial accounting
– Managerial accounting
• Financial accounting
– Documenting all transactions of a company that
have an impact on the financial state of the firm
– Using documented transactions to create reports for
external parties and agencies
– Reports, or financial statements, must follow
prescribed rules and guidelines of various agencies
5
Accounting Activities (cont’d.)
• Common financial statements: balance sheets and
income statements
• Balance sheet
– Statement that shows account balances such as:
• Cash held
• Amounts owed to company by customers
• Cost of raw materials and finished-goods inventory
• Long-term assets such as buildings
• Amounts owed to vendors, banks, and other creditors
• Amounts owners have invested in company
6
Figure 5-1 Fitter Snacker sample balance sheet
7
Accounting Activities (cont’d.)
• Income statement
– Profit and loss (P&L) statement
– Shows company’s sales, cost of sales, and profit or
loss for a period of time (typically a quarter or year)
• Integrated information system simplifies the
process of closing the books and preparing
financial statements
• Managerial accounting: determining costs and
profitability of company’s activities
8
Figure 5-2 Fitter Snacker sample income statement
9
Difference between Managerial &
Financial Accounting
• Managerial accounting focuses on an
organization's internal financial processes, while
financial accounting focuses on an organization's
external financial processes
Concepts in Enterprise Resource Planning, Fourth Edition 10
Accounting Activities (cont’d.)
• Quarterly financial statement
– Close books
– Closing entries to nominal accounts
– Nominal accounts – zero balance to start next cycle
– Ensure accounts accurate and up-to-date
– “Adjusting” entries
• Integrated information system advantage
– Simplifies process of closing books and preparing
financial statements
11
Figure 5-3 Balance sheet and income statement for Fitter Snacker in SAP
ERP system
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Accounting Activities (cont’d.)
• Managerial accounting
– Determine costs and profitability of company’s
activities
– Provide managers with detailed information
• Informed decisions
• Create budgets
• Determine profitability
– Information that managers use to control day-to-day
activities, develop long-term plans
13
Using ERP for Accounting Information
• Problems associated with unintegrated systems
– Data sharing usually did not occur in real time
• Accounting’s data were often out of date
– Accounting personnel had to do significant research
• ERP system, with its centralized database, avoids
these problems
• In traditional accounting, company’s accounts are
kept in a record called a general ledger
14
Using ERP for Accounting Information
(cont’d.)
• In the SAP ERP system, input to general ledger
occurs simultaneously with business transactions
• Many SAP ERP modules cause transaction data to
be entered into general ledger, including:
– Sales and Distribution (SD)
– Materials Management (MM)
– Financial Accounting (FI)
– Controlling (CO)
– Human Resources (HR)
– Asset Management (AM)
15
Operational Decision-Making Problem:
Credit Management
• Unintegrated information system
– Out-of-date or inaccurate accounting data can cause
problems when a company is making operational
decisions
• Industrial credit management
• Fitter Snacker’s credit management procedures
• Credit management in SAP ERP
16
Industrial Credit Management
• Credit management requires a good balance
between:
– Granting sufficient credit to support sales and
– Making sure that the company does not lose too
much money
• Setting a limit on how much money a customer can
owe at any one time
– Monitoring that limit as orders come in and
payments are received
17
Industrial Credit Management (cont’d.)
• Sales representative needs to be able to review an
up-to-date accounts receivable balance when an
order comes in
• Problems arise if Marketing and Accounting have
unintegrated information systems
– Less than full cooperation on updates
• Problems should not arise with an integrated
information system
– Accounts receivable is immediately updated
18
Fitter Snacker’s Credit Management
Procedures
• FS sales clerk refers to a weekly printout of a
customer’s current balance and credit limit to see if
credit should be granted
• Sales data are transferred to Accounting by disk
three times a week
• Accounting clerk can use sales input to prepare a
customer invoice
• Accounting must make any adjustments for partial
shipments before preparing the invoice
• Accounting clerks process customer payments
19
Credit Management in SAP ERP
• SAP ERP would allow FS to set a credit limit for
each customer
• Company can configure any number of credit-
check options in SAP ERP system
• Advantages of using SAP ERP to manage credit
– Process is automated
– Data are available in real time
20
Figure 5-5 Credit management configuration
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Credit management for Health Express
• Credit management for Health Express
Credit management for Health Express
22
Blocked sales order
Blocked sales order
23
Product Profitability Analysis
• Business managers use accounting data to
perform profitability analyses of a company and its
products
• When data are inaccurate or incomplete, the
analyses are flawed
• Main reasons for inaccurate or incomplete data
– Inconsistent recordkeeping
– Inaccurate inventory costing systems
– Problems consolidating data from subsidiaries
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Figure 5-6 Credit management for Health Express
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Figure 5-7 Blocked sales order
26
Inconsistent Recordkeeping
• Each of FS’s marketing divisions maintains its own
records and keeps track of sales data differently
• Paper records might be inaccurate or missing,
making validity of the final report questionable
• Without integrated information systems, accounting
and reporting to management requires:
– Working around limitations of information systems to
produce useful output
• ERP system minimizes or eliminates these
problems
27
Inaccurate Inventory Costing Systems
• Correctly calculating inventory costs
– One of the most important and challenging
accounting tasks in any manufacturing company
• Inventory cost accounting background
– Manufactured item’s cost has three elements:
• Cost of raw materials
• Cost of labor employed directly in production of item
• Overhead: all other costs
28
Inaccurate Inventory Costing Systems
(cont’d.)
• Inventory cost accounting background (cont’d.)
– Direct costs: materials and labor
• Can be estimated fairly accurately
– Indirect costs: overhead items
• Difficult to associate with specific product(s)
– Standard costs for a product are established by:
• Studying historical direct and indirect cost patterns
• Taking into account the effects of current
manufacturing changes
– Cost variances: differences between actual costs
and standard costs
29
Inaccurate Inventory Costing Systems
(cont’d.)
• ERP and inventory cost accounting
– Many companies with unintegrated accounting
systems analyze their cost variances infrequently
• Often, they do not know how much it actually costs to
produce a unit of a product
– If FS had an ERP system, employees throughout the
company would have recorded costs in a company-
wide database as they occurred
– ERP system configurations allow analysts to track
costs using many bases
30
Inaccurate Inventory Costing Systems
(cont’d.)
• Product costing example
– Suppose Fitter Snacker wishes to update standard
costs for NRG-A bars
– Product cost analysis for NRG-A bar
• Product cost analysis in SAP ERP
– Product cost variant: method for developing a
product cost in an ERP system
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Figure 5-8 Product cost analysis for NRG-A bar
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Figure 5-9 Product cost analysis result in SAP ERP
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Inaccurate Inventory Costing Systems
(cont’d.)
• Activity-based costing and ERP
– Activity-based costing (ABC)
• Accountants identify activities associated with
overhead cost generation and then keep records on
costs and on activities
– ABC requires more bookkeeping than traditional
costing methods
34
Companies with Subsidiaries
• Account balances for each entity must be compiled
and forwarded to the home office
• Consolidated statement for the company as a
whole must be created
• Currency translation
– Problems when currency translation is needed for
a subsidiary’s accounts
• Intercompany transactions
– Transactions that occur between companies and
their subsidiaries
35
Management Reporting with ERP
Systems
• Generating the right reports for the right situation is
often challenging
• Without an ERP system, the job of tracking all the
numbers that need to go into a report is a
monumental undertaking
• With ERP system, vast amount of information is
available for reporting purposes
36
Document Flow for Customer Service
• With an ERP system, all transactions in all areas of
a company get posted in a centralized database
• Each transaction posted in SAP ERP gets its own
unique document number
– Allows quick access to the data
• In SAP ERP, document numbers for related
transactions are associated in the database
– Provides an electronic audit trail
37
Document Flow for Customer Service
(cont’d.)
Figure 5-10 Document flow of a transaction in SAP ERP
38
Built-In Management-Reporting and
Analysis Tools
• Accounting records maintained in the common
database
• Advantage of using a database is the ability to
query the records to:
– Produce standard reports
– Answer ad hoc questions
• SAP provides a data warehouse within each major
module
– Data warehouse: repository for data from various
sources
39
The Enron Collapse
• October 16, 2001: Enron was one of the world’s
largest electricity and natural gas traders
– Reported a $618 million third-quarter loss and
disclosed a $1.2 billion reduction in shareholder
equity
• U.S. Securities and Exchange Commission (SEC)
inquiry into possible conflict of interest related to
company’s dealings with partnerships run by CFO
Fastow
40
The Enron Collapse (cont’d.)
• Volume of financial contracts was far greater than
volume of contracts to actually deliver commodities
• Some partnerships were faked to mask billions of
dollars in debt
• Enron’s financial statements had been audited by
Arthur Andersen, a highly regarded accounting firm
• Andersen employees on the Enron engagement
team were instructed to destroy documentation
relating to Enron
41
Outcome of the Enron Scandal
• Shareholders lost an estimated $40 billion dollars
• Thousands of workers lost their jobs
• 31 individuals were either charged or pled guilty to
criminal charges
• Jurors convicted accounting firm Arthur Andersen
for obstructing justice by destroying Enron
documents
• U.S. Congress passed Sarbanes-Oxley Act of 2002
– Act was designed to prevent the kind of fraud and
abuse that led to the Enron downfall
42
Key Features of the Sarbanes-Oxley
Act
• Designed to encourage top management
accountability in firms that are publicly traded in the
United States
• Title IX
– Financial statements filed with the Securities and
Exchange Commission must include a statement
signed by the chief executive officer and chief
financial officer, certifying that the financial
statement complies with SEC rules
43
Key Features of the Sarbanes-Oxley
Act (cont’d.)
• Title II
– Auditor independence
• Limits non-audit services that an auditor can provide
• Title IV
– More stringent requirements for financial reporting
44
Implications of the Sarbanes-Oxley Act
for ERP Systems
• To meet the internal control report requirement, a
company must:
– Document the controls that are in place
– Verify that the controls are not subject to error or
manipulation
• Companies with ERP systems in place will have an
easier time complying with the Sarbanes-Oxley Act
than will companies without ERP
45
Archiving
• SAP ERP software offers very few ways to delete
items
• Data are removed from SAP ERP system only after
they have been recorded to media (tape backup,
DVD-R) for permanent storage
• Archive: permanent storage
• SAP ERP systems keep track of when data are
created or changed
– Change Record
46
Figure 5-11 Transaction options for material master data
47
Archiving (cont’d.)
Figure 5-12 Change Record for material master
48
User Authorizations
• SAP ERP has sophisticated user administration
tools that allow different levels of authorization
management
– Ensure that employees can perform only the
transactions required for their jobs
• Profile Generator
– Provides a simple method for selecting functions that
a user should be allowed to perform
49
Figure 5-13 Display Roles screen in SAP
50
Tolerance Groups
• Setting limits on the size of transaction an
employee can process
– In an SAP ERP system, this is done using tolerance
groups
• Tolerance groups
– Preset limits on an employee’s ability to post
transactions
– Set limits on the dollar value for a single item in a
document as well as the total value of document
51
Figure 5-14 Default tolerance group
52
Financial Transparency
• ERP systems provide the ability to drill down from a
report to the source documents (transactions) that
created it
– Makes it easier for auditors to confirm the integrity of
reports
• With a properly configured and managed ERP
system, there are direct links between the
company’s financial statements and individual
transactions that make up the statements
– Fraud and abuse can be detected more easily
53
Figure 5-15 G/L (general ledger) account balance for raw material
consumption
54
Financial Transparency (cont’d.)
Figure 5-16 Documents that make up G/L account balance for raw material
consumption
55
Financial Transparency (cont’d.)
Figure 5-17 Details on $10.00 line item in G/L account for raw material
consumption
56
Trends in Financial Reporting (XBRL)
• Extensible Business Reporting Language (XBRL)
– Standards based language
– Extensible Markup Language (XML) coded data
directly from web page into database
– Reports processed faster and validated easier
– ERP systems accept data in XML and XBRL
57
Summary
• Companies need accounting systems to record
transactions and generate financial statements
• Unintegrated information systems
– Accounting data might not be current
• Can cause problems for sales representatives trying
to make operational decisions
– Data can be inaccurate
• Can affect decision making and therefore profitability
58
Summary (cont’d.)
• Closing the books at the end of an accounting
period can be difficult with an unintegrated IS, but
is relatively easy with an integrated IS
– Closing the books means zeroing out temporary
accounts
• Using an integrated IS and a common database to
record accounting data has important inventory
cost-accounting benefits
– Can lead to more accurate product cost calculations
– Can help managers determine which products are
profitable and which are not
59
Summary (cont’d.)
• Use of an integrated system and a common
database to record accounting data has important
management-reporting benefits
– Built-in drill-down and query tools available
• Sarbanes-Oxley Act, 2002 U.S. federal regulation
– Written and passed in the wake of Enron collapse
– Promoted management accountability by requiring
extra financial approval and reporting
– ERP systems can help companies meet the
requirements of this legislation
60
Summary (cont’d.)
• Trends in financial reporting
– XBRL
– XML
– ERP systems accept data in XML and XBRL into
database
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