Outlining Financial and Management Accounting

As Trent is getting the hang of everyday logistics, he gets a feeling that this is just the beginning of the journey for his bike. He is now ready to dive into the complex world of the finance department. But first, he needs to get a basic understanding of Financial and Management Accounting. This will help him understand how business processes are set up.

With plenty of questions popping up in his mind and a desire to know more, Trent is heading forward to Steve, who is the Finance Manager of the Bike Company.

The primary goal of General Ledger Accounting is to accurately represent external accounting and related accounts by recording all business transactions. At the Bike Company, SAP S/4HANA is used, connecting all departments and ensuring the accuracy and completeness of accounting information.

A key feature of the solution includes Reconciliation Accounts, which allows for any update in subsidiary ledgers (smaller ledgers) to immediately reflect in the General Ledger (main ledger). This real-time link ensures the data is consistently accurate across all ledgers.

The subsidiary ledgers, which are connected to the General Ledger (G/L) via Reconciliation Accounts, are as follows:

	Accounts Payable	Tracks each supplier's accounting data, like incoming invoices or outgoing payments, and manages their accounting transactions. Any changes to a supplier account also update the general ledger simultaneously. So, when a supplier invoice is posted, it raises the liabilities G/L account and the Bike Company's Balance Sheet.
	Accounts Receivable	Monitors and clears a company's customer receivables. Each customer account is linked to G/L Accounting. So, for example, if we receive an incoming payment from a customer, the receivables on their customer account and the total receivables in the G/L and the balance sheet are reduced.

Steve has crafted a visual guide to help Trent gain a deeper comprehension of general ledger accounting and associated accounts.

Steve tells Trent that the General Ledger Accounting (G/L) is the core of Financial Accounting (FI). He explains that the FI application component is designed to meet all the international rules that the Finance department needs to follow.

Within G/L accounting, the G/L account is the most important master data. G/L accounts are structured in a Chart of Account to ensure that they are created uniformly in Financial Accounting. It also allows for effective cross-company code controlling. The use of an operational Chart of Accounts is mandatory when using SAP Financials.

The Bike Company has opted to use the SAP S/4HANA's provided standard Chart of Accounts, YCOA, for operational postings in each company code.

The YCOA chart of accounts is assigned to each Company Code in configuration and is called the Operating Chart of Accounts. The accounts in this Chart of Accounts are the ones the accountants use when posting documents.

Steve explains that creating a Financial Statement is the main function of the General Ledger. Therefore, to create a Financial Statement, he must know which accounts can be used for a specific Company Code and how these accounts are structured in the Financial Statement.

Let’s have a look at the Financial Statement versions that Steve was referring to.

Trent has understood the essence of Financial Accounting and its core operations in SAP. He is now looking forward to learning more about the next piece of the Core Finance puzzle - Management Accounting.

SAP S/4HANA doesn't just record financial data for reporting purposes; it also forms the base for all cost-and-revenue-related analyses. This means that both analysts and managers are working from the same starting point as the company's accountants.

The financial data interconnects tightly with business processes from SAP S/4HANA's logistics and HR applications, making it easy to understand cost structures and profit margins. Having this data readily accessible helps company management in achieving goals like boosting revenue, increasing customer profitability, lowering operational costs, enhancing efficiency, reducing the cost of goods sold, and improving inventory visibility.

SAP S/4HANA facilitates the valuation and recording of financial data not only for financial reporting, but also as the basis for all cost-and revenue-related reporting. As a result, analysts and managers can work with the same basic data as the company’s financial accountants.

Financial data is tightly integrated with the business processes of the SAP S/4HANA logistics and human resources applications; users can easily obtain detailed information about cost structures and profit margins. Easy access to this data helps to support and enable the management to achieve business goals, such as, increasing revenue, maximizing customer profitability, and reducing operating costs while increasing efficiency, reducing the cost of goods sold, and improving the visibility of inventory.

Management accounting primarily sources its data from Financial Accounting. Most expense or revenue postings in the general ledger result in a cost or revenue posting. In Management Accounting, these costs or revenues are considered primary costs or revenues.

There are also costs from activities within the company, like facility management services for production or administration. These internal costs are known as secondary costs and are recorded in special general ledger accounts called secondary cost accounts.

In SAP, various types of objects can be cost objects. A cost object could, for example, be an order to make ten bicycles or a production order for certain bike parts. Costs that come from these activities can be directly linked to these assignment objects.

Cost object controlling in product cost, controlling records, and monitoring all costs, allows you to compare it with planned costs.

This lets the Bike Company spot where differences occur and make necessary corrections.Planned costs are the outcome of product cost planning. Product cost controlling estimates production costs to be set a minimum sale price for breaking even. Overhead cost controlling collects all costs linked directly to a cost object, like the marketing expenses for an ad campaign.

Overhead costs are distributed to product cost controlling using different methods, providing a fuller picture of a product's actual costs.

It's essential to understand the company's earnings from product sales. Margin analysis gathers all cost and revenue data to assess the company's performance focusing on specific market segments. For instance, it can answer questions like, "What was our operating profit from selling bike parts to North American resellers last quarter?"