Explaining Financial Accounting (FI)

Financials can be subdivided in two major parts: Financial Accounting (FI) and Management Accounting (CO).

Financial Accounting has the task to meet legal requirements. The main tasks are as follows:

• Post all financial transactions, revenues, and expenses.

• Keep them unchanged in the system for reporting purposes.

• Allow the setting up of a profit and loss statement and a balance sheet to fulfill the legal requirements of a country or of a financial reporting standard.

Financial Accounting is subject to legal requirements of a country, and, in addition, to requirements of certain financial reporting standards, such as US Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), and Handelsgesetzbuch (HGB). The stakeholders of such financial reportings are outside the companies, for example, suppliers, banks, tax government, and so on.

The central task of General Ledger Accounting is to provide a comprehensive picture of external accounting and financial records. The General Ledger (G/L) serves as a complete record of all business transactions. The G/L is managed at the company code level. All accounting-relevant transactions made in other components, e.g. Logistics (LO) or Human Resources (HR), are posted in real time to FI by means of automatic account determination. The aim of recording business transactions is to create a balance sheet and profit and loss (P&L) statement.

The General Ledger (G/L) is the core of Financial Accounting (FI). The FI application component fulfills all the international requirements that must be met by the FI department of an organization. FI focuses on General Ledger Accounting and the processing of receivables (FI-AR), payables (FI-AP), and Asset Accounting (FI-AA). Important tasks of FI include the recording of monetary and value flows as well as the evaluation of the inventories.

It is important to compare companies or better to say their (annual) financial statements on the basis of international accepted accounting standards. It is not enough any more to publish financial statements only on basis of local accounting principles (for example US-GAAP or German HGB). Also in many European companies (or countries), international standards have taken the lead.

In General Ledger Accounting, you have in principle two options:

• The Accounts Solution (Parallel accounts)

• The Ledger Solution

The accounts approach was formerly used in this context often. Different valuation approaches post to different accounts (only in cases of differences between the principles for topics like valuation, depreciation, or accruals). When financial statements are created, the financial statement version is used to evaluate the relevant accounts. For example, financial statements according to U.S. GAAP only take into account those accounts that follow this accounting principle.

The ledger solution in SAP S/4HANA allows you (within General Ledger Accounting) to manage multiple "general ledgers" in parallel and in this way create different financial statements. Ledger solution is strongly recommended for new SAP S/4HANA systems (Greenfield Approach) these days.

General Ledger Accounting has one leading ledger in each client. However, other ledgers can also exist within the G/L, for example, to provide different ledgers for different accounting reporting standards. In G/L Accounting, one ledger has the role of a leading ledger.

However, as in older systems, you can still deal with different reporting standards by using additional (parallel) accounts.