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Accounting (FICO) Journals of SAP Material Management (MM) Transactions

SAP R/3 is Enterprise Resource Planning (ERP) software that makes an enterprise able to integrate all of its business processes so it can be run more efficient. It can reduce the duplication of data and process. Data recorded by one department can be used by other departments in a real-time process. As an example we will explain the typical business process in an enterprise.

Typical business processes in an enterprise

Demand for finished products from customer will be recorded by Sales department in a sales order document. Sales order data can be analyzed by Inventory department. If there are not enough finished products in current stock, the sales order can trigger a production order that request the Production department to start producing the finished products. In order to produce the finished products maybe it requires some raw materials that have to be bought from vendors. The production order can trigger a purchase requisition for the raw materials. The purchase requisition will be processed by Procurement department to be a purchase order that is sent to vendor. Vendor will deliver the raw materials and Inventory department will receive them. Accounting department will record the vendor’s invoice and Finance department will process the payment. Once the raw materials are available, the Production process begins. Then the finished products will be delivered to the customer, and Finance department will send invoice to the customer.All of the above processes need man powers that are managed by HR department and paid by Payroll Accounting department.

All of the above processes can be recorded by SAP R/3 in:

Sales and Distribution (SD) module. Production Planning (PP) Material Management (MM) module. Finance & Controlling (FICO) module HR Module

Certain transactions in the above example also trigger accounting business process. FICO module posts accounting documents for some transactions that have an accounting effect in SD, PP, and MM module, such as finished products issue for sale to customer, raw materials receipt from vendor, etc. These processes will affect the financial reports such as Balance Sheet and Profit & Lost Statement.

In this blog-post, we will explain the way MM transactions affect the FICO module. First, we will explain basic accounting business process principle that used in FICO module.

Accounting Business Process Basic Principle

Accounting is the systematic process of measuring the economic activity of a business to provide useful information to those who make economic decisions (internal or external parties of an enterprise). It records all economic transactions (usually, but not always, involves money) in a systematic and generally accepted way. The transaction records are organized and presented in certain forms of reports. The most used reports in financial accounting business process are Balance Sheet and Profit & Lost Statement.

Balance Sheet

The balance sheet shows an enterprise’s Assets, Liabilities, and Equity at a specific time (such as Balance Sheet on December 31, 2007). It is sometimes described as a snapshot of the business in financial terms.

Asset = Liabilities + Equity

Assets are valuable resources that a firm owns or controls, such as:

Cash Bank account Inventory Account Receivable Fixed Asset Intangible Asset etc

Liabilities are obligations of the business to convey something of value in the future, such as:

Account Payable Notes Payable etc

Equity refers to the owner's interest in the business, such as:

Capital stock Retained earning Current year net profit/loss (in traditional accounting that is without a real-

time software such as SAP, there is no current year net profit/loss account. The Balance Sheet is usually prepared at the end of fiscal period, such as December 31 every year. All of the profit/loss in that year from Profit & Loss Statement, after deducted by dividend that given to shareholders, will be recorded as an addition to Retained earning account. But, in SAP system, the current year net profit/loss from Profit & Loss Statement is directly recorded in balance sheet under equity, without

waiting transferred to retained earning account, so it is possible to have a snapshot of enterprise balance sheet at any time along the year, not have to wait until the end of year.)

Profit & Loss Statement

The Profit & Loss Statement summarizes the earnings generated by an enterprise during a specified period of time (such as Profit & Loss Statement in year 2007).

It contains at least two major sections: revenues and expenses.

Revenues are inflows of assets from providing goods and services to customers, such as:

Sales to customers. Gain from foreign currency exchange transaction etc

Expenses are the costs incurred to generate revenues, such as:

Cost of goods sold (COGS) include raw material consumption, etc General and administrative expenses include salaries, rent, and other

items Tax expense etc

The difference between revenues and expenses is net profit (or net loss if expenses are greater than revenues).

Relationship between Balance Sheet and Profit & Loss Statement

Balance Sheet and Profit & Loss Statement are all based on the same underlying transaction information, but they present different “views” of an enterprise. They should not be thought of as alternatives to each other but as a complement.

The balance sheet represents an expansion of the accounting equation and explains the various categories of assets, liabilities, and equity. The profit & loss statement explains changes in financial position (that is, assets and liabilities) that result from profit generating transactions in terms of revenue and expense transactions. The resulting number, net profit, represents an addition to the equity in the enterprise. This relationship is called articulation.

DEBIT and CREDIT rules in accounting journalName of account

Debit Credit

Increases in Assets are recorded by debits.

Decreases in Assets are recorded by credits.

Increases in Liabilities and Equity are recorded by credits.

Decreases in Liabilities and Equity are recorded by debits.

Revenues increases equity, therefore revenue are recorded by a credits.

Expenses decreases equity, therefore expenses are recorded by a debits.

Accounting journals of MM Transactions

The MM transactions which have effect to accounting (FICO module) are transactions that involve valuated-materials (and also non-valuated-materials for GR for PO transaction), such as:

Goods Receipt (GR):

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o GR for initial entry for stock balance (movement type: 561)o GR for Purchase Order/PO (movement type: 101)o GR other/without PO (movement type: 501)

Goods Issue (GI):

o GI to cost center (movement type: 201)o GI to sales order (movement type: 231)o GI to asset (movement type: 241)o GI for sales (movement type: 251)o GI to order (movement type: 261)o GI for scrapping (movement type: 551)

Invoice Receipt

Transfer material to material (movement type: 309) if the receiving material has different valuation class with the supplying material

GR Subcontract POo GR for Subcontract PO material (movement type: 101) and GI for

component material provided to vendor (movement type: 543)

Physical Inventory difference posting

o GR for gain on physical inventory count (movement type: 701)o o GI for loss on physical inventory count (movement type: 702)

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GR for initial entry for stock balance (movement type: 561).

T-Code used: MIGO or MB1C.

We must carry out an initial entry of stock balances when implementing the MM module of SAP R/3 System in order to transfer physical warehouse stocks or book inventories from an existing inventory accounting software into the SAP R/3 System as book inventories.

“Typically, a traditional accounting software program usually has an inventory sub module which records the inventories values in the balance sheet. But it’s not an online accounting software which record the inventory movement transaction in real-time basis like SAP does. Usually, this accounting software records the material movements transaction once in a certain period, e.g. once a month after get the information from other department.”

In the GR for initial entry for stock balance transaction, no physical movements actually take place.

The the typical accounting journal is:

Inventory accountInitial inventory clearing account

1000 1000

The initial inventory clearing account then will be cleared against other appropriate accounts by FI module.

GR for Purchase Order (PO) (movement type: 101).


In a PO, the field that determines the accounting journal is “account assignment category” field. The account assignment in a PO is usually adopted from Purchase Requisition (PR).

The account assignment category determines: The nature of the account assignment (cost center, sales order, and so

on) . Which accounts are to be charged when the incoming invoice or goods

receipt is posted. Which account assignment data you must provide.

The above image is © SAP AG 2010. All rights reserved

The most used Account Assignment Categories (AAC).

AAC Description Required account assignment data

“A” Asset Main asset number and sub-number

“K” Cost center Cost center and G/L account number

“ ” Inventory Material number

For PO with account assignment “A” (Fixed Asset) the typical accounting journal is:

Fixed asset accountGR/IR Clearing

Account

6000 6000

The first journal will increase the Asset and the second journal will increase the Liabilities (GR/IR is a liabilities account), and the Balance sheet stays balance (Asset = Liabilities + Equity).

The goods receipt/invoice receipt (GR/IR) clearing account is posted to whenever you receive goods that have not been invoiced yet or whenever you receive invoices for goods that have not been delivered yet.

For PO with account assignment “K” the typical accounting journal is:

Expense accountGR/IR Clearing

Account

10 10

The first journal will decrease the Current year net profit (so it will decrease Equity) and the second journal will increase the Liabilities (GR/IR is a liabilities

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account), and the Balance sheet stays balance, since decrease in equity is balanced by increase in liabilities and asset stays the same (Asset = Liabilities + Equity).

For PO with account assignment “ ”(blank) the accounting journal depends on price control procedure of the material received. (see material valuation for detail on price control procedure).

If price control is “S” (standard price), the typical accounting journal is:

Inventory accountGR/IR Clearing

Account

550 500

assumption:Revenue from price differences account

standard price= 550 50

The first journal will increase the Asset by 550 and the second journal will increase the Liabilities (GR/IR is a liabilities account) by 500. The third journal will increase the net profit (so it will increase Equity) by 50, and the Balance sheet stays balance (Asset = Liabilities + Equity).

If price control is “V” (moving average price), the typical accounting journal is:


Account500 500

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See material valuation to understand the effect of material’s price control procedure to the accounting journal on Goods Receipt transaction.

In the end, the accounting journal for price control procedure “S” and “V” will result the same to the Balance Sheet and Profit & Loss Statement. It is because as long as the business operation of the company runs, the material that received by this PO will be used, either for consumption or for sales. Let’s assume that there is no other transaction for this material.The typical accounting journal for consumption for price control “S” is:

Inventory accountMaterial consumption

expense account

550 550

The first journal will decrease the Fixed Asset by 550 (same amount with the increase of the Asset when GR is done, so it will result 0 in Inventory account). The second journal will decrease the current year profit, so it will decrease Equity, by 550. It will result -550+50(from “revenue from price differences account” when GR is done) =-500 (decrease in Equity).The typical accounting journal for consumption for price control “V” is:


expense account

500 500


The first journal will decrease the Asset by 500 (same amount with the increase of the Asset when GR is done, so it will result 0 in Inventory account). The second journal will decrease the current year profit, so it will decrease Equity, by 500.

GR Subcontract PO.T-Code used: MIGO or MB1C.In subcontract order processing, the vendor receives materials (components) with which it produces the finished-product. The following are involved:

We order the finished-product using a subcontract order (subcontract PO). The components that the vendor needs to manufacture the finished-product are specified in the purchase order, and we provide them to vendor.

When we send the component to vendor, in Inventory Management, we transfer those components from unrestricted-stock to special stock (“stock of material provided to vendor”). These special stocks are still shown as our stock in MMBE (T-code for stock overview). This transaction will not post the accounting journal.

The vendor performs its service and delivers the ordered material (the finished-product). GR is done for the finished-product, and automatically the consumption of the components is posted.

The typical accounting journal when GR is done is:Inventory account

(fin.-product)Inventory account

(comp. mat)

1000 800

GR/IR clearing account

200

Assumption: The vendor’s fee (PO value) =200; the component value=800.The first journal will increase the Asset by 1000, and the second journal will decrease the Asset by 800. The third journal will increase the Liabilities (GR/IR is

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a liabilities account) by 200, so the Balance sheet stays balance, Asset (1000-800) = Liabilities (200) + Equity (0).

Invoice Receipt (IR)T-Code used: MIRO or MIR6 and MIR7.The typical invoice accounting journal is:

GR/IR Clearing account

Vendor account(Account Payable)

1000 1000

The goods receipt/invoice receipt (GR/IR) clearing account is posted to whenever you receive goods that have not been invoiced yet or whenever you receive invoices for goods that have not been delivered yet.See material valuation to understand the effect of material’s price control procedure to the accounting journal on Invoice Receipt transaction.

The vendor account (account payable) will be followed up by finance department using FI module to payment processing. The typical accounting journal of the payment processing is:

Vendor account (Account Payable)

Cash / Bank account

1000 1000

GR other/without PO (movement type: 501)T-Code used: MIGO or MB1C.The the typical accounting journal is:

Inventory accountOther revenue

account

1000 1000

See Accounting Journals of SAP Material Management (MM) Transactions

http://www.sapstudymaterials.com/2007/12/accounting-fico-journals-of-sap.html




GR for initial entry for stock balance (movement type: 561).







1000 1000
















Account

6000 6000










Account

10 10

The first journal will decrease the Current year net profit (so it will decrease Equity) and the second journal will increase the Liabilities (GR/IR is a liabilities account), and the Balance sheet stays balance, since decrease in equity is balanced by increase in liabilities and asset stays the same (Asset = Liabilities + Equity).




Account

550 500







Account

500 500





expense account

550 550

The first journal will decrease the Fixed Asset by 550 (same amount with the increase of the Asset when GR is done, so it will result 0 in Inventory account). The second journal will decrease the current year profit, so it will decrease


Equity, by 550. It will result -550+50(from “revenue from price differences account” when GR is done) =-500 (decrease in Equity).The typical accounting journal for consumption for price control “V” is:


expense account

500 500


GR Subcontract PO.T-Code used: MIGO or MB1C.In subcontract order processing, the vendor receives materials (components) with which it produces the finished-product. The following are involved:






(comp. mat)

1000 800



200

Assumption: The vendor’s fee (PO value) =200; the component value=800.The first journal will increase the Asset by 1000, and the second journal will decrease the Asset by 800. The third journal will increase the Liabilities (GR/IR is a liabilities account) by 200, so the Balance sheet stays balance, Asset (1000-800) = Liabilities (200) + Equity (0).


GR/IR Clearing account

Vendor account(Account Payable)

1000 1000




Cash / Bank account

1000 1000

GR other/without PO (movement type: 501)




T-Code used: MIGO or MB1C.The the typical accounting journal is:


account

1000 1000


Goods Issue(GI)T-Code used: MIGO or MB1A.

The Goods Issue transaction will trigger cost accounting process. Cost accounting will record the expense occurred from the goods issue transaction whether it will be charged to cost center, cost of goods sold, or other objects.

The required field that must be filled in all Goods Issue process: Material number which will be issued Quantity issued Plant from where the material issued Storage location from where the material issued

A goods issue leads to a reduction in inventories stock.

GI to cost center (movement type: 201)The additional required field: Cost center number.The typical accounting journal is:


expense account

1000 1000



GI to Sales Order (movement type: 231)The additional required field: Sales Order number.The typical accounting journal is:

Inventory accountCost of Goods Sold

account

1000 1000

After the sales processed, usually the finance department will bill (invoice) the customer (using SD Module T-Code: VF01), the typical accounting journal for this billing process is:

Customer account (Account Receivable) Revenue from sales

1000 1000

GI to Order (movement type: 261)The additional required field: Order number.The typical accounting journal is:




expense account

1000 1000

GI for sales (movement type: 251)The additional required field: Cost Center.The typical accounting journal is:


expense account

1000 1000

GI to asset (movement type: 241)The additional required field: Asset number.The typical accounting journal is:

Inventory account Fixed asset account

1000 1000



GI for scrapping (movement type: 551)The typical accounting journal is:

Inventory accountMaterial scrappingexpense account

1000 1000

Transfer material to material (movement type: 309)T-Code used: MB1BThe receiving and supplying materials might be had same valuation class, that is, same inventory G/L account, or different valuation class, that is, different inventory G/L account. The typical accounting journal is:

Inventory account(receiving mat)

Inventory account(supplying mat)

1000 1000

Physical Inventory difference posting




GR for gain on physical inventory count (movement type: 701)The typical accounting journal is:

Inventory account Other revenue account

1000 1000

GI for loss on physical inventory count (movement type: 702)The typical accounting journal is:

Inventory account Other expense account

1000 1000

See Accounting Journals of SAP Material Management (MM) Transactions.

INVOICE RECEIPTGR for initial entry for stock balance (movement type: 561).








1000 1000

















Account

6000 6000





Account

10 10

The first journal will decrease the Current year net profit (so it will decrease Equity) and the second journal will increase the Liabilities (GR/IR is a liabilities account), and the Balance sheet stays balance, since decrease in equity is balanced by increase in liabilities and asset stays the same (Asset = Liabilities + Equity).








Account

550 500






Account

500 500






expense account

550 550

The first journal will decrease the Fixed Asset by 550 (same amount with the increase of the Asset when GR is done, so it will result 0 in Inventory account). The second journal will decrease the current year profit, so it will decrease Equity, by 550. It will result -550+50(from “revenue from price differences account” when GR is done) =-500 (decrease in Equity).The typical accounting journal for consumption for price control “V” is:


expense account

500 500


GR Subcontract PO.T-Code used: MIGO or MB1C.



In subcontract order processing, the vendor receives materials (components) with which it produces the finished-product. The following are involved:






(comp. mat)

1000 800


200

Assumption: The vendor’s fee (PO value) =200; the component value=800.The first journal will increase the Asset by 1000, and the second journal will decrease the Asset by 800. The third journal will increase the Liabilities (GR/IR is a liabilities account) by 200, so the Balance sheet stays balance, Asset (1000-800) = Liabilities (200) + Equity (0).


GR/IR Clearing Vendor account


account (Account Payable)

1000 1000




Cash / Bank account

1000 1000

GR other/without PO (movement type: 501)T-Code used: MIGO or MB1C.The the typical accounting journal is:


account

1000 1000





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