Exploring the Chart of Accounts

Imagine that you are implementing SAP Business One at a new customer.

• You discuss with Maria, the accountant, the effect of the sales and purchasing processes on the chart of accounts, and as a result, on the financial reports.
• Maria says that this structure will help her in presenting the financial reports in a clear and structured way.

How are the Business Partner Master Data balances presented in the Chart of Accounts?

The Business Partner Master Data balances do not appear in the Chart of Accounts.

The receivable and payable control accounts accumulate the customer and vendor transactions in their balances.

For example, when you post an A/R invoice, the accounts receivable account related to the customer is used, in addition to the customer account.

Therefore, the Chart of Accounts presents the complete financial status of the company, as well as the Financial Reports (for example, Trial Balance and Balance Sheet).

The chart of accounts is an index of all G/L accounts used by your business.

Every G/L account has:

• An account code
• An account description, and
• Additional information that determines the functions of the G/L account.

When you implement SAP Business One you define (or import):

• The Chart of Accounts, and
• Default G/L accounts to be used when transactions are created in the regular business processes: Sales, Purchasing, Inventory and more.

The documents in the Sales and Purchasing processes create automatic journal entries that are registered in the Journal Entry file and affect the account balances.

The account balances are also affected by manual journal entries and other accounting transactions, such as the Period End Closing process that transfers the balances of the Profit and Loss accounts to a Balance Sheet account.

The Chart of Accounts is organized by drawers and levels.

Let us look at this example of a chart of accounts. The chart of accounts varies according to the company's localization.

The organization of the chart of accounts follows Generally Accepted Accounting Principles (GAAP).

The Chart of Accounts window organizes your accounts by drawers.

In the General Ledger, we distinguish between Balance Sheet drawers and Income Statement drawers, also called Profit and Loss.

Let us start with Balance Sheet Accounts:

• The first 3 drawers: Assets, Liabilities, and Equity (or Capital and Reserves) typically hold the Balance Sheet Accounts, such as the Sales Tax and the Accounts Payable Account.
• The bookkeeping balance of these accounts is kept from one fiscal year to the next.
• The Balance Sheet Accounts - reflect the monitory value of the company - stock, assets, debt, etc.

Then, we have the Profit and Loss accounts:

• The next 5 drawers: Revenues (or Turnover), Cost of Sales, Expenses (or Operating Costs), Financing (or Non-Operating Income and Expenditure), and Other Revenues and Expenses (or Taxation and Extraordinary Items) typically hold the Profit and Loss accounts, such as the income or expense accounts.
• The bookkeeping balance of these accounts has to be cleared at the end of each fiscal year during the Period End Closing process.
• The Profit and Loss accounts reflect the changes in the company value, such as: when you sell stock - the cost of goods sold account is affected and increases revenues.

Lastly we have two optional purpose profit and loss drawers.

• These drawers have no fixed predefined purpose and in most cases are empty, depended on localization and chart of account template.
• If needed, each company can designate the additional drawer to a certain accounting area.

Financial reporting requirements drive most of the initial settings and configuration decisions in the chart of accounts.

The different financial reports run on the account balances relevant to a selected date range and present them according to their drawer level:

• The Balance Sheet summarizes the value of the business' assets liabilities, and owner's equity accounts.
• The Trial Balance displays for each account: beginning balance for a particular period, all of the debits and credits, and the ending balance.
• The Profit and Loss Statement is determined after the end of the fiscal year. The balances of the expense accounts will be subtracted from the balances of the revenue accounts to come up with the profit or the loss for the fiscal year.

A chart of accounts arranges a company's general ledger accounts in a hierarchical structure. The top level in the structure (level 1) consists of sections or groups for different type of accounts (assets, liabilities, capital and reserves, turnover, and so on).

The system displays the section as a cabinet drawer. Each drawer has a section title. You can change the drawer title if required. The updated name will then appear in the financial reports.

You can define up to 10 levels. While level 1 is the drawer level, the following levels can be used as titles for grouping the accounts and for active accounts.

It is recommended to organize your accounts by level in a logical fashion appropriate to your localization's financial accounting and reporting processes.

The system displays titles in blue and active accounts in black. Accounts defined in the G/L Account Determination (default accounts) are displayed in green.

A title account summarizes all the balances of the active accounts underneath it.

Let us look at this specific example of Chart of Accounts that contains 5 levels:

Levels 2 through 4 can contain either active accounts or titles that combine several active accounts. Level 5, in this example, contains only active accounts.

Note that only active accounts can be posted to in SAP Business One.

Financial reports display both title and active account balances.

To have a clear and structured view of the company's financial status in the report, it is recommended to define all active accounts in the same level. In our example all active accounts are defined in level 5.

In the chart of accounts, there are many definitions related to the account. We will now cover some of them.

Maria, the accountant, has added a few new accounts to record various expenses and revenues related to a big summit they are about to attend. The image shows a travel expense account that Maria added.

• First Maria chose the account currency. Each account in the chart of account can have a different currency or can be set as relevant for all currencies. Refer to the course topic: Working with Currencies to learn more about account currencies.Maria confirmed that the new account currency is local.
• Then she linked it to a financial project. This enables Maria to generate financial reports filtered for this project.Maria entered a new financial project code that was created for this summit.

Lastly, Maria chooses Account Details to open the G/L Account Details window of the Summit 17 - travel expense account. In the Active field, she sets a period in which the account should be active, starting in March and ending by the end of the year. With this approach, she makes sure no further transactions can be recorded for the account next year.Note that by default, all accounts are active without period restriction.

Another useful definition on the G/L Account Details window is the Account Balance Allowed. Maria opened the G/L Account Details window to enter minimum and maximum balances allowed for the petty cash account. Maria would like to make sure the account does not fall below a balance of 100 and therefore enters the value 100 in the From field. In addition, once the petty cash balance reaches 5000, she wants to transfer the cash to the company's bank account. Therefore, she sets the maximum balance to be 5000.

Maria already defined a blockage validation in the Document Settings window, as shown in the image.

Here are some key points to take away:

• The chart of accounts is structured of two types of drawers:
• Balance Sheet drawers that typically contain balance sheet accounts .
• And Profit and Loss drawers (Income Statement) that typically contains profit and loss accounts.
• The different financial reports run on:
  • the account balances relevant to a selected date range
  • and present them according to their drawer, level and type.
• A chart of accounts arranges a company's general ledger accounts in a hierarchical structure:
  • the top level in the structure (level 1) consists of sections or groups for different type of accounts. The system displays the section as a cabinet drawer.
  • The following levels can be used as titles for grouping the accounts and for active accounts.
  • Only active accounts can be posted to in SAP Business One.
• The chart of accounts contain many definitions related the account like:
• Account currency
• Related project
• Limited activity period
• Minimum and maximum account balance

Imagine that you are implementing SAP Business One at a new customer.

• James, the CEO, tells you that in the Profit and Loss report, he wants to see what are the profits for each item group (for example, Printers).
• He wants the system to automatically post journal entries to the relevant profit and loss accounts.

When you first implement SAP Business One you define default G/L accounts to be used when transactions are created during the different business processes, such as sales, purchasing and inventory. This is done in the G/L Account Determination window in the Financials Setup area of the Administration module.

When choosing a pre-defined Chart of Accounts template, most of the default G/L accounts are already defined. You can change them if required.

When items are used in the transactions, there are 2 options for account determination: the traditional solution and the advanced solution.

Note! It is very important to ensure you make decisions about G/L Account Determination together with the client accountant.

Both options are based on the accounts defined in the G/L Account Determination window.

The first option is the traditional solution that was available prior to version 9.0.

• According to the traditional solution there are three options to define a default G/L method for an item: warehouse level, item group level, and item level. Each item will have one method defined for it. You can set the method in advance for all new items.
• If your company uses the traditional solution, choose the default G/L method for new items in the General Settings on the Inventory tab. On the sub-tab for items, you will find the Set G/L Accounts By field.
• You can then change the method per item.
• The values that you define under the tabs in the G/L Account Determination window are defaulted into all 3 levels. You can then change the default accounts for any of the levels. For example, you can manage different inventory accounts for each warehouse the company owns.

Whenever you add a document that posts a journal entry, an A/R Invoice for example, the system looks at each item in the document to determine the level set for that item and then finds the associated G/L accounts to use from the default accounts.

Each item can have one method defined for it.

Note that although you specify one default G/L method for new items, you can manage different items with different methods if this scenario is necessary in your company. In the presented example you can see that 3 items in the A/R invoice have the item group level defined as the default G/L method. One item has the item level method defined for it and you can assign different G/L Accounts to be used in the monetary transaction created for this item.

With the advanced solution, the G/L Account Determination window is used to define G/L accounts in the company level.

In addition, the advanced solution provides centralized matrix to determine rules for assigning G/L accounts in journal entries according to a predefined (closed) list of criteria.

Therefore, the solution is more flexible and consistent with accounting.

For a new company and for an upgraded company, the advanced solution is not the default option. This is due to compatibility considerations.

• To activate the advanced solution go to the Basic Initialization tab in the Company Details window. Select the Enable Advanced G/L Account Determination checkbox.
• Once the box is checked and transactions exist, it can be un-checked again, however in this case no accounts will be assigned and the G/L Account Determination form will be used to define G/L accounts in all levels: warehouse, item group and item level.

So, you use the G/L Account Determination window for defining the company level accounts in one place.

Many companies will find the company level accounts sufficient.

For tailored business scenarios you have the option to define rules for assigning G/L accounts in journal entries.

Those rules support:

• G/L Account determination for Item Code, Item Group, Warehouse Code, Ship-to Country, Ship-to State, Business Partner Group, user defined fields and more.
• As well as multi determination criteria. That is, a combination of the criteria.

Any rule you define in the advanced form will have a higher priority (than the G/L Account Determination window) in determining which account is assigned in journal entries.

So, in our example, OEC Computers can define a separate revenue account for each item group per country (for example, revenues from printers in Canada, Brazil and US).

When they choose an item in a marketing document, for example an A/R Invoice, the system checks the accounts required for the transaction. In our example, the system checks the inventory and the revenue accounts.

Then, the system checks if there are any rules defined for these accounts.

If there are rules defined for the necessary accounts, the system looks for the appropriate rule and picks the rule with the highest priority.

Here are some key points:

In the G/L Account Determination window, you define the default G/L accounts to be used in transactions.

There are 2 options for account determination in transactions involving items: the traditional solution of setting a default G/L method for an item or the advanced G/L account determination solution. Both options are based on the accounts defined in the G/L Account Determination window.