James is now reviewing the reporting requirements needed for his international enterprise. He understands that there are different Accounting Principles and that some require financial statements for divisions for the company. This is called segment reporting. James now needs to create financial statements for his company's segments. Let's explore the concept of segment reporting and the options that are available.
As an actual example of segment reporting, let's look at a vendor invoice that includes charges for three different parts of the enterprise. Acme Auto Maintenance has provided an invoice for the previous months service of the vehicle fleet. During the month, Acme serviced two cars from the Western Region, three cars from the Northern Region and five cars from the Southern Region. Each service has a cost of $150.00 bringing the bill to a total of $1500.00.
Accounts Payable receives the invoice and posts the charges to the appropriate Cost Center and adds a payable entry to the vendor. As you should be aware, each Cost Center is connected to a Profit Center and as such both objects are posted to.
It is now important to remember that the intent would be to create a financial statement per Profit Center.
If we just look at the Western Region, the expense amount (Debit) posted would be $300.00. In order to produce a balanced entry the general ledger would need to have a corresponding Credit of $300 in order to have a balanced financial statement. However, when the document is posted, the Credit amount which is posted to Vendor is at the total amount of the invoice, $1500.00.
Document Splitting will analyze this invoice, and based upon the rules in the system, will split the Credit amount appropriately, for example post $300.00 credit to Accounts Payable general ledger account for Western Region Profit Center, post $450.00 credit to Accounts Payable general ledger account for the Northern Region Profit Center, and finally post $750.00 credit to Accounts Payable general ledger account for the Southern Region Profit Center. Once this is posted, you can now view the financial statement for each individual Profit Center, in other words segment, that is balanced between Debits and Credit.
It is important to note that this adjustment only happens in the General Ledger and does not affect the Supplier Ledger. The following lessons will give you more details about Document Splitting
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