Maintaining Ledgers in Financial Accounting

Objective

After completing this lesson, you will be able to explain the basic settings for ledgers in general ledger accounting

Standard Ledgers

Paloma knows the Bike Company reports values in the IFRS accounting standards and also covers local accounting requirements for the country each company code belongs to. She knows this is achieved through the ledger concept in SAP S/4HANA, so she studies up on the concept.

A ledger is a central repository for accounting data, housing all the journal entries for all business transactions posted to it. Ledgers form the basis for reporting and financial statements in accounting as they store all relevant transaction data and journal entries.

Consequently, all configuration settings related to a company code, such as accounting principles, currency settings, fiscal year variants (FYVs), and posting periods, must be associated with a specific ledger.

The image illustrates an example of Standard Ledgers. It shows four distinct ledgers: IFRS (leading ledger), Local GAAP Ledger, Local Tax Ledger, and Ledger XYZ.

Standard ledgers: Leading and Non-Leading

A ledger that contains a full set of configuration settings and full posting information is called a standard ledger.

There are two types of standard ledgers:

  • Leading Ledger – Mandatory
  • Non-Leading (Parallel) Ledgers - Optional

Leading Ledger

Every SAP S/4HANA system must contain at least one standard ledger, often known as the leading ledger (by default, ledger 0L). This ledger holds all the critical information needed for accounting postings and forms a basis for any additional ledgers that may be established for supplementary purposes.

Only one ledger can be flagged as a Leading Ledger in a system. This leading ledger becomes mandatory for all the companies in that system, and it cannot be deactivated for a specific company.

In every company code, the leading ledger is configured with the exact same settings that are applied to that specific company code. These settings include the currencies, the fiscal year variant, and the variant of the posting periods.

Non-Leading (Parallel) Ledgers

In addition to the mandatory leading ledger, organizations can freely set up one or several optional, non-leading (parallel) ledgers designed to meet their specific needs. These non-leading ledgers run parallel to the leading ledger and can be based on a different accounting principle, for instance.

An example of a non-leading ledger could be ledger 2L, which defaults to International Financial Reporting Standards (IFRS), or ledger 3L, defaulting to the Generally Accepted Accounting Principles (GAAP) used in the United States. Remember, each non-leading ledger must be activated for each individual company code.

It's important to note that journal entries not specific to a certain ledger will be recorded simultaneously on each standard ledger. This means that the same accounting journal entry will be saved identically across all standard ledgers This is true for most journal entries entered in the system.

The advantage of this method is that each standard ledger has a complete set of accounting data. This starting point can then be reworked to any specific accounting standard by adding just a few adjustment journal entries limited to the relevant ledger. This procedure ensures total traceability.

However, a potential drawback of this method is that having multiple ledgers storing complete sets of data can significantly increase the size of the database.

Extension Ledgers

Outside the standard ledgers, SAP S/4HANA offers extension ledgers.

Simply put, the extension ledger is used as an adjustment ledger or for reorganizing standard ledger values. Its main characteristic is its ability to staple its own values on top of a standard ledger. The main advantage of this approach is no data redundancy as it automatically pulls all the data posted to its underlying standard ledger to give a complete accounting overview.

The figure shows the linking of extensions ledgers to their underlying ledgers. Extension ledger 0E is linked to the underlying extension ledger 0C, which in turn is linked to the standard ledger 0L. All external ledgers have a standard ledger as the underlying ledger.

Below are some business scenarios that utilize extension ledgers:

Adjustments

In addition to creating GAAP financial statements, many companies have complex management reporting requirements. Most of the required data comes from Standard Ledgers, but often, this data needs reorganization, expansion, or refinement. An Extension Ledger can efficiently handle this, for example, to manage:

  • Adjustments for internal management reporting.

  • Adjusting entries after the closure of books.

  • Topside adjustments.

  • Adjustments for tax purposes to calculate a tax-adjusted profit or loss.

Predictive Accounting

Predictive accounting is a functionality that facilitates the bottom-up projection of potential financial outcomes. Even though documents like sales or purchase orders might not yet have accounting relevance, they are likely to result in postings over time.

When a sales order is created, the system simulates subsequent documents, such as Goods Issues and Billing Documents. It then creates predictive journal entries in an extension ledger. These documents appear in the system as if they're real data. All ensuing financial processes, like document splitting, derivations, and cost of goods sold splitting, are also initiated.

The postings in the extension ledger, along with the current data from the underlying standard ledger, enable forecasting. For example, it allows for forecasting revenue for products. It is also possible to report on all line items of a product. The data analysis can be done in detail, but also at a higher level like in a financial statement.

Note

Besides creating the extension ledger, you must activate and configure predictive accounting to enable this functionality.

Statistical Sales Conditions

It is possible to post statistical sales conditions, such as warranties into an extension ledger during the billing of a sales order. This feature improves Selling, General & Administrative reporting in a Profit & Loss (P&L) statement, as it enables the anticipation and inclusion of prospective costs related to sales warranties.

Process diagram showing how warranties are posted to the standard ledger and to the extension ledger. The warranty is posted to the extension ledger as a statistical sales condition.

Purchase Commitments

In SAP S/4HANA, the commitments management functionality updates purchase commitments in an extension ledger. A purchase commitment signifies a future payment obligation to a supplier for the delivery of goods or services. Commitments arise when you create a purchase requisition or purchase order.

At this stage, no actual postings to accounting take place. However, a reservation (commitment) is made against the budget tracked by line items posted to a special extension ledger.

Note

Extension ledgers aren't intended to substitute standard parallel ledgers as unlike these, extension ledgers aren't integrated with subledgers, and crucial finance processes like asset accounting and open item management aren't fully supported.  

Extension Ledger Creation

On the first screenshot, the Settings for Ledgers and Currency Types activity is highlighted. In the second screenshot, Underlying Ledger is highlighted to indicate that an underlying ledger must be specified to create an extension ledger.

When you create an extension ledger, you also have to specify the underlying ledger as well as the extension ledger type. The extension ledger type indicates what type of journal entries is posted to this extension ledger:

  1. " " Standard Journal Entries: This type of ledger holds journal entries with actual document numbers. The entries are permanent and cannot be deleted, but they can be reversed if necessary. This is beneficial for parallel accounting adjustments, management adjustments, tax adjustments, realignments…
  2. "P" - Line Items with Technical Numbers (No Deletions Possible): This category maintains journal entries that only have technical numbers and lack accounting document numbers. They too cannot be deleted but can be reversed when needed. This is ideal for predictions, commitments, and statistical sales conditions.
  3. "S" - Line Items with Technical Numbers (Deletions Possible): Specifically for entries having technical numbers only, without document numbers. However, unlike the other two types, these entries can be deleted. It is typically used for simulations.
  4. "G" - Journal Entries for G/L Adjustment Postings. Designed specifically for adjustment postings related to the general ledger. You can input account assignments to subledgers like fixed assets, materials, or cost centers. However, the lack of consistency checks might result, in the assignments being incomplete from a sub-ledger perspective. Furthermore, this type of journal entry doesn't support any subledger-specific function or reporting. It is used for Cash Basis Accounting for postings to be made immediately when cash is received or disbursed, and Realignment between functional areas or profit centers.

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