Record to Report process overview in SAP

Record to Report process overview in SAP

Introduction of Record to Report process (R2R).

Below are the major activities of Record to Report (R2R).

  • Financial Analysis
  • Audit of Financial transactions
  • Single source of truth for Financials
  • System of Records
  • Multiple Accounting Principles
  • Multi Currency reporting
  • Management Accounting
  • Period Close

Master data in finance

There are multiple master data which are used in record to report (R2R) processes in SAP S/4HANA. Most common master data elements are listed below and explained in subsequent sections:

  • General ledger account
  • Bank master
  • Asset master
  • Business partner
  • Material master
  • Profit center
  • Cost center
  • Internal order
  • Business process
  • Activity type
  • Statistical key figure

System of records

  • An enterprise is required to record all financial transactions in the books of accounts.
  • In earlier days, it was also known as book keeping and financial transactions were maintained by hand written books of accounts.
  • A system where financial transactions are recorded in known as ‘system of record’.
  • An ERP system can also be used as ‘system of record’ for financial transactions.
  • For a large enterprise, multiple systems could generate financial transactions. All transactions of a legal entity are replicated to a single system of record.
  • In today’s era of digitization, an ERP system such as SAP S/4HANA is the system of records for financial transactions.

Components in SAP S/4HANA

  • General Ledger
  • Accounts Receivables
  • Accounts Payables
  • Asset Accounting
  • Inventory Accounting
  • Bank Accounting
  • Receivables Management
  • Overhead Accounting
  • Product and cost accounting
  • Surplus or profitability Analysis

Multiple accounting principles

  1. An accounting principle is a rule which must be followed while reporting financial data.
  2. There are multiple rules for different types of transactions. Such a set of rules is known as generally accepted accounting principles (GAAP).
  3. One of the most common GAAP used is IFRS. IFRS rules are issued by the International Accounting Standards Board (IASB). For more information, go to link below:
  4. https://en.wikipedia.org/wiki/International_Financial_Reporting_Standards
  5. Each country has their own GAAP.
  6. Accounting principles provide common language for accounting data and makes it comparable from company to company, across various countries.
  7. A company is required to prepare books of accounts as per multiple GAAPs
  • Group reporting as per the GAAP of the county where it is headquartered
  • Country requirement or local GAAP
  • Country tax

Multiple currency reporting

  • Recording and reporting financial transactions in multiple currency is one of the most common requirement of global enterprises
    1. Currency of the transaction in which transaction is taking place. Especially, import and export transactions are recorded in foreign currency
    2. Currency of the country where it operates also known as company currency or local currency
    3. Currency of the country where it is headquartered for group reporting
    4. Currency of the country where shares of the enterprise is listed in stock exchange
  • A transaction with multiple currencies uses exchange rate as per the requirement the country, accounting policy of the company and as per guidelines provided by accounting principles

Management Accounting

Management accounting

  • Management accounting refers to the accounting policies which helps to provide financial data for the purpose of internal decision making.
  • Aim of management accounting is to provide stakeholders the information which helps them to
    • develop the business
    • place internal controls
    • monitor performance of the organizations and
    • monitor performance of internal area of responsibility such as business units, team etc.
  • Often, recording of financial transactions are done in accordance to GAAP for the purpose of legal accounting and is not very different from management accounting. However, the data may need a different way of representation or a different way of treating specific set of financial transactions
  • Sample of profit and loss statement as per legal accounting and as per management accounting is provided here

Period Close activities

Period close

  • Before reporting of financial data, additional processes are required to be executed to be able to report as per requirement of GAAP. It could be currency revaluation, provision for contingent liabilities, inventory revaluation or interest calculation
  • These processes start after recording of transactions is complete
  • Every month there is a cut-off date when recording of transactions stop. After the cut-off date, period close activities are initiated by finance department

Financial analysis

  • Financial analysis refers to the process of analyzing financial data to monitor the performance of the organization
  • It is primarily used to take short term and longer term actions in accordance to business needs
  • Examples of financial analysis
    1. Profit per product line – a consistent reduction in profit for a specific product line would trigger the need to investigate the reasons of same
    2. Profit per customer industry – a customer industry with consistent increase in demand helps in deciding sales strategy
    3. Average collection days of receivables is used to calculated planned cash flow for future sales
  • With the support of technology, more focus is on getting real time and actionable insights from financial data

Audit

  • Financial records of an organization are required to be inspected and verified by an independent body
  • This process is known as ‘audit’ and is a legal requirement in every country to prevent frauds
  • Most of the organizations also have checks and internal controls to ensure the accuracy of financial data and to prevent fraud
  • A common requirement for any system of records is to have the capability of capturing an ‘audit trail’ so that there is transparency on data handling and is also easily available for verification
  • Some of the common requirements for audit
    1. Who created a transaction and authority to create
    2. Approval authority for a financial transaction
    3. Source of financial transaction such as customer contract for sales revenue

Single source of truth

  • Accuracy of financial data is of utmost importance with all of the financial regulations
  • Data is also analyzed by various stakeholders to make business decisions
  • Single source of truth is the practice adopted to ensue that financial data is stored in a single place, single data structure and in a structured information model
  • Single source of truth is one of the best practices adopted during design of system of records. However, complexity of processes and technical requirement of an ERP application often results in complex data model and data structure of the application

Key concepts for ‘Record to Report’ process

Understanding of record to report process requires knowledge of key concepts which are listed here:

  • Company
  • Financial document
  • Chart of accounts
  • Fiscal year & posting period
  • Ledger
  • Sub-ledger
  • Amount & currency
  • Debit & credit indicator
  • Document type
  • Document reference
  • Document date and posting date
  • Reporting dimension
  • Header text and item text
  • Quantity and unit of measurement

Company

  • Company is a registered entityin a country for the purpose of doing business.
  • Every company is required to report financial statementfor fiscal year
  • All financial transactions are carried out on behalf of a company. It means the expenses incurred and revenue generated belong to the company
  • Legal entity is represented by‘company code’ in SAP S/4HANA

Financial document

Financial document

  • Each financial transaction is represented via a finance document in SAP S/4HANA
  • Each document is created under a document type within a number range
  • A finance document contains a header and minimum of two line items
  • Financial document is also known as journal entry or journal voucher

A sample finance document is depicted in the picture here-

Chart of Accounts

  • Chart of accounts refer to set of general ledger accounts which is used for recording of financial transactions
  • Each general ledger account represents a unique asset, liabilities, income and expense
    • Liabilities: Short term advance, tax payable, foreign payables
    • Assets: Software, furniture, domestic receivables
    • Income: Domestic revenue, inter-company revenue, income from rent, interest income
    • Expense: Salary, depreciation, electricity, bad debt

Fiscal year and posting period

  • Fiscal year and fiscal period refers to the calendar for the purpose of recording and reporting accounting data.
  • Every organization defines the fiscal year and fiscal period for the purpose of financial reporting
  • Fiscal year and period may differ from calendar month and calendar year
    • Example 1: April to March, where April represents fiscal period ‘1’
    • Example 2: October to September, where October represents fiscal period ‘1’
    • Example 3: January to December, where December represents fiscal period ‘12’
    • Example 4: 4th January to 3rd February, where fiscal period ‘1’ falls in the month of February

Ledger

  • Ledger refer to set of financial transactions which is recorded in accordance with accounting principles
  • Incase of parallel ledger approach,one ledger represents one accounting principle
  • Incase of of parallel accounting approach, one ledger can represent multiple accounting principles.
  • A company normally maintains records in multiple accounting principles and uses multiple ledgers
  • It is possible to make postings in a single ledger only
  • A ledger can also be created for management reporting
  • Multiple ledgers can be created for various accounting requirements such as
    1. IFRS for group reporting
    2. Local GAAP
    3. Country tax
    4. Management accounting

Sub-Ledger

Sub-Ledger
Sub-Ledger
  • Subsidiary ledger is a sub-set of general ledger and stores detailed information for specific account type
  • Subsidiary ledger provides details of entry in the general ledger
  • Examples of sub-ledger in SAP S/4HANA are customers, vendors, materials, assets
  • Via a sub-ledger it is possible to find detailed statement and records of individual asset, customer, material, vendor

Amount and currency

  • Every financial transactions and documents has currency and a value of the transaction
  • A document can capture and calculate the amount in multiple currencies
  • It is mandatory to capture the amount in local currency and group currency
  • Exchange rates are used for currency conversion from one currency to other

Debit and credit indicator

  • Each line item of financial transaction has a debit and credit indicator
  • There are universal guidelines for debit and credit. These are known as golden rules of accountancy
    • First: Debit what comes in, Credit what goes out
    • Second: Debit all expenses and losses, Credit all incomes and gains
    • Third: Debit the receiver, Credit the giver
  • Debit and credit indicator in SAP is represented by posting key. Few examples
    • GL account debit – 40
    • GL account credit – 50
    • Customer debit – 01

Document type

  • Each document is created under a document type
  • Each document type is linked to a number range
  • Document number type can be used to categorize types of postings
  • Example of document type and number range
    • AB accounting document : 1900000000 – 1999999999
    • AA asset document : 2100000000 – 2199999999
    • KA vendor document : 1800000000 – 1899999999

Document reference

Document reference

  • In finance, a financial transaction is often recorded with reference to an event
  • A finance document refers to a preceding document number due to which financial posting is triggered
  • Preceding document is updated in reference field in an accounting document
  • Example of a reference document :

Document date and posting date

Document date and posting date

  • Accounting practices require recording of the date whenever a transaction is carried out
  • There are two types of date which is captured in SAP S/4HANA
    • Document date is the date on date of the physical document on the basis of which accounting document is being created. In case, no reference date exists, it can be entry date
    • Posting date is normally the current date on which posting is being made. However, if a posting is being made for a financial transaction of previous month, last date of the month is used. Fiscal year and period is derived from posting date
    • Entry date is the system date captured for audit trail. It is a non-modifiable date

Reporting dimensions

Reporting dimensions
  • Each financial document contains multiple reporting dimensions for reporting purpose
  • Different type of general ledger accounts have different reporting needs and hence dimensions are different
  • Reporting dimensions are used for two types of reporting requirement
    • Balance sheet analysis – assets, liabilities, income and expense
    • Profit & loss analysis – income and expense
  • Most commonly used dimensions are
    • Profit center – Internal responsibility area such as location, plant
    • Segment – Used for segmental reporting such as business unit, product group
    • Business area – Additional reporting dimension such as product, services
    • Profitability segment – used for product, customer, geographical, organization related characteristics for profit and loss analysis
  • Few more commonly used dimensions are
    • Account assignment objects for cost accounting
      • Cost center – represents a department, a common function such as finance, IT
      • Internal order – represents a specific activity such as marketing campaign
      • Business process – a process which cuts across various teams such as procurement process
      • Sales order – a customer contract which collects sales revenue and cost of goods sold
      • Manufacturing order – collects manufacturing cost and cost of goods manufactured
      • Plant maintenance order – collects maintenance expenses
      • Quality order – collects quality management costs
  • Usage of reporting dimension is depicted in the table

Header text and item text

  • It is a common practice to write the source and reason of journal entry in any financial document
  • Every financial document can capture text at header level and at line item level
  • Header text is applicable for entire document
  • Item text is applicable for specific line item

Quantity and unit of measurement

  • A financial document can contain quantity and unit of measurement for ratio analysis
  • Examples of financial documents where quantity is recorded :
Finance document type Quantity and UoM
Revenue Sales quantity with revenue amount
Consumption of raw material Raw material inventory value with quantity consumed
Internal cost allocation Time sheet cost with hours

Record to Report in SAP S/4HANA

  • ‘High level activities which are normally carried our during ‘Record to Report’ process are listed below:
    • General ledger accounting – It refers to all financial transactions of an organization which includes assets, liabilities, revenue and expenses
    • Receivables and payables for all business partners and employees
    • Bank accounting including processing of payment and receipts, bank reconciliation
    • Asset accounting to manage accounting of capital expense and fixed assets
    • Overhead costing for cost controlling and track performance of a department
    • Product costing to take cost of production and sales
    • Profitability management to get insight of profits and costs for customer, product, geography

Types of transaction in ‘Record to Report’

Types of transaction in ‘Record to Report’

  • SAP S/4HANA provides capability to record different type of financial transactions, capture the relevant information for financial reporting
  • Financial period end closing is a process to perform accounting procedures as per general accepted account principles (GAAP). It enables a legal entity and a group of companies to report their financial statements as per legal requirements of the country
  • Record to report also includes accounting procedures related to management accounting

General ledger

  • General ledger module is the core module of finance in SAP S/4HANA to record and report all financial transactions
  • It is mandatory components in SAP S/4HANA if financial entries are recorded
  • In SAP S/4HANA, it is also known as Universal Journal or FI-GL
  • Sample processes managed
  • Recording of financial transactions as per multi GAAP, in required currency, with reporting dimensions
  • Period end closing such as provision, currency revaluation

Accounts receivables

  • Accounts receivable (FI-AR) module records all transactions related to customer
  • Sample processes managed
    • Customer invoice
    • Incoming payment from customer
    • Outgoing payment to customers
    • Customer down payment
    • Customer special transaction such as loans, advances, warranty, deposits
    • Noted items with accounting impact such as down payment request
    • Account clearing

Accounts payable

  • Accounts payable module (FI-AP) records all transactions related to vendor
  • Sample processes managed
    • Vendor invoice
    • Outgoing payment to vendor
    • Incoming payment from vendor
    • Vendor down payment
    • vendor special transaction such as loans, advances, warranty, deposits
    • Noted items with accounting impact such as down payment request

Asset accounting

  • Asset accounting module (FI-AA) records all transactions related to fixed assets
  • Sample processes managed
    • Asset acquisition
    • Depreciation
    • Asset sale
    • Asset retirement
    • Write-down of asset
    • All adjustment entries related to asset gross value and accumulated depreciation

Inventory accounting

  • Inventory accounting module records all transactions related to material valuation
  • Sample processes managed
    • Material valuation at moving average price or standard price
    • Actual costing and revaluation
    • Material price adjustment
    • Inventory revaluation as per legal requirement based on valuation method specified in GAAP

Bank accounting

  • Bank accounting module records all transactions related to bank
  • Sample processes managed
    • Bank account management
    • Incoming payment
    • Outgoing management
    • Bank statements
    • Bank reconciliation
    • Check management

Receivable management

  • Receivable management module (FSCM) provides extended functionality to manage receivables of the organization
  • Sample processes managed
    • Collection management
    • Dispute management
    • Bank communication management
    • Credit management

Overhead accounting

  • Overhead accounting (CO-OM) module records all transactions related to expenses and operating overheads
  • It is a extended dimension of profit & loss account with the objective to control and track overheads of the organization
  • It has three components
    • Cost center accounting
    • Internal order accounting
    • Activity based costing
  • Sample processes managed
    • Recording of overhead costs
    • Reposting of costs
    • Cost allocations from cost center, orders, business processes
    • Activity type rate maintenance
    • Overhead planning

Product cost accounting

  • Product cost accounting (CO-PC) module records all transactions related to costs and revenue of a product
  • It is a extended dimension of profit & loss account with the objective to control and track cost of sales (CoS) and cost of goods manufactured (COGM) of the organization
  • It has four components
    • Product cost planning
    • Production order costing
    • Sales order costing
    • Material ledger and actual costing
  • Sample processes managed
    • Standard cost estimate of manufactured materials
    • Revaluation of materials based on actual costs
    • Calculation of cost of goods manufactured at standard cost and at actual cost
    • Calculation of cost of sales
    • Calculation of manufacturing work in process
    • Manufacturing variances

Profitability analysis

  • Profitability analysis (CO-PA) module is used to analyze profitability of the organization on various dimensions
  • This module provides contribution margin report based on costing based accounting
  • CO-PA provides information on various dimensions such as revenue per customer, product, COGS per material group
  • It has two variants
    • Account based profitability analysis
    • Costing based profitability analysis
  • Sample processes managed
    • Overhead allocation to CO-PA
    • Re-alignment to update historic data with master data changes
    • top-down distribution to allocated costs from one dimension to another. For example, R&D cost of a product line can be distributed to product level for analysis purpose

Enterprise structure for finance

Enterprise structure for finance

  • Enterprise structure of finance is needed for recording of all financial transactions for legal and management accounting
  • Finance processes requires following organizational units:
    • Company code
    • Controlling area
    • Operating concern
    • Credit control area
  • It is also required to design reporting dimensions while designing organizational units of finance

Company code

Company code

  • Company code is the smallest organizational unit of external accounting for which a complete financial statements can be generated.
  • All financial and logistics transactions are done within a legal entity. It means that all organizational units will be directly or indirectly assigned to a legal entity or a company code.
  • Company code represents a registered legal entity within a company. When a transaction is carried out between legal entities, financial records are captured in both of entities as a cross company transaction.
  • Company code is assigned to controlling area
  • Multiple logistics related organizational units are assigned to company code such as plant, sales organization, purchasing organization.
  • Definition of company code includes name, address, currency.

Controlling area

Controlling area

  • Controlling Area is an organizational unit where cost accounting is carried out.
  • A controlling area may contain one or more company codes, which can operate in different currencies, if required.
  • The company codes within a controlling area must use the same operational chart of accounts and fiscal year variant.
  • Account assignment objects where cost and revenue is collected are assigned to controlling area such as cost center which normally represents a department, a sales order which represents a customer contract or an manufacturing orders which depicts a specific manufacturing lot.

Operating Concern

Operating Concern

  • Operating concern represents the entity for which profitability management is required to be done.
  • It is a cross client object which means that any changes done in any one client will be visible in other clients too.
  • Multiple controlling areas can be assigned to the operating concern.
  • Definition of operating concern includes characteristics, GL accounts, value fields, currency definition

Credit control area

Credit control area

  • Credit Control Area is an organizational unit that represents the area where customer credit is awarded and monitored.
  • This organizational unit contains either a single or several company codes, if credit control is performed across several company codes.
  • One credit control area contains credit control information for each customer.
  • Customers can be created in different company codes – the credit control area responsible for a given customer depends on which credit control area the company code is assigned. Customers that are created in company codes with a common credit control area are controlled by this one control area for all company codes.
  • If the same customer needs a different credit limit if they are assigned to multiple company codes then multiple credit control areas are required.

Reporting dimension for finance

Reporting dimension for finance

  • Reporting dimensions are required for external and internal financial reporting
  • There are certain requirements which are legal in nature and driven by IFRS, IAS, local GAAP and are standard in nature such as legal entity financial statements.
  • There are certain requirements which are driven by industry requirements such as revenue generated by a specific retail store or revenue generated in a tax exempt facility.
  • Many of the reporting requirements are required for internal controls, internal responsibility areas and for management accounting. These are company specific and may be unique to a company.
  • Consideration of these requirements are important while designing enterprise structure of finance and logistics. Also, it is good to know what are the elements which can be used for such reporting requirement. Though it may not a part of enterprise structure necessarily. However, while designing enterprise structure for an organization, these elements must be defined too. These elements are –
    • Profit center
    • Segment
    • Business area
    • Functional area.

Business process

  • A business process in SAP ERP depicts the process performed in the organization by multiple teams.
  • Business process have responsibility for controlling costs for specific process.
  • Business process normally receives via cost allocation from other cost centers. An employee is not assigned to a business process. Cost center will receive the salary cost and allocate to business process performed by the employee
  • Business process is a master data element used for the activity based overhead controlling. This is defined to have detailed explanation of cost according to business process for the ease of decision making.
  • One of the example of business process is procurement process. A procurement process is a collaborative effort of various teams and performed by procurement team, finance team, technical team. A procurement process will receive costs from all the teams via some allocation method.
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