BASIC SAP FI & CO Structure

User Guidance Notes

SAP Information Systems Faraz Ahmed Quddusi

BASIC SAP FI & CO Structure

Table of Contents S No
1 2 3 4 5 6 7 8 9 10 11

Particulars
Introduction to Financial Accounting and Controlling Financial Accounting Enterprise Structure Reconciliation Accounts Business Areas Financial Accounting Overview Controlling Organisational Structures FI & CO Integration CO Architecture CO Account Assignment Objects CO Standard Hierarchy Cost Center Planning

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BASIC SAP FI & CO Structure

Section 1 Introduction to Financial Accounting and Controlling
The Financial Accounting (FI) application component caters to the corporate accounting information needs. There are a range of internal and external users to this accounting information. Financial managers and other business managers can review the financial position of a company in real time. Controlling (CO) provides information for management decision-making. It facilitates coordination, monitoring, and optimization of all processes in an organization. This involves recording both the consumption of production factors, and the services provided by an organization. Users from within the company need information on the internal operations of the company. These information needs are catered by the application component CO.

Figure 1.1 FI produces the legal / statutory accounts, standard ledgers, and financial statements as per accounting standards. CO allows monitoring costs and revenues, applying managerial
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BASIC SAP FI & CO Structure

accounting parallel to financial accounting. CO also allows budgeting and managing expenditures via effective monitoring.

Section 2 Financial Accounting Enterprise Structure

Financial accounting enterprise structure is a key building block of an organization. Other modules in the system build upon the FI organizational elements.

2.1

2.2

2.3

Company
Independant Accounting Entity

Chart of Accounts
Structure of General Ledger Accounts

Account Groups
Types of Accounts
Asset Accounts

PSOC - Pakistan State Oil Co Ltd

Material Management Accounts General Balance Sheet Accounts Revenue Accounts Expense Accounts Liquid Fund Accounts

Address

Currency

PSOC - PSO's Chart of Accounts

Country Key

Language Key

Figure 2.1

BASIC SAP FI & CO Structure

2.1 Company Code A company code is an independent accounting entity (the smallest organizational element for which a complete self-contained set of accounts can be drawn up). It has a unique, four character key. In PSOs case: PSOC. A company code is the basic enterprise structure. While setting up a company code, the following structural settings are made: Address: Address data is required for correspondence. Currency: Accounting currency (= local currency). Business transactions in foreign currency are translated into local currency. Country Key: Specifies the country of the company code. Language Key: Texts are automatically displayed in the correct language. 2.2 Chart of Accounts Chart of accounts is a variant which contains structure and basic information about general ledger accounts. It contains all the general ledger accounts belonging to financial accounting. The general ledger is kept at the company code level and is used to create the legally required balance sheets and profit and loss statements. 2.3 Account Groups An account group bundles accounts with same tasks within the general ledger, e.g. cash accounts, material accounts, asset accounts, revenue and expense accounts etc.

Figure 2.2
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BASIC SAP FI & CO Structure

Section 3 Reconciliation Accounts
Reconciliation accounts are general ledger accounts used for recording all transactions in the sub-ledgers. Postings to the sub-ledger accounts automatically update balances of the assigned reconciliation accounts. In this way, the general ledger is always up-to-date. The following figure illustrates how the receivables and payables sub ledgers are maintained via reconciliation accounts.

Figure 3.1 Reconciliation accounts cannot be directly posted to. Financial accounting entries need to be made in the sub ledgers. Sub ledgers are used for asset accounts, accounts receivable, and accounts payable.

Section 4 Business Areas

A business area is an organizational unit within financial accounting that represents a separate area of operations (or responsibilities) in an organization. Business areas enable segmental reporting of different lines of operations of a company.

BASIC SAP FI & CO Structure

Figure 4.1

Section 5 FI Overview Diagram

The general ledger contains a record of all relevant accounting transactions from a business point of view. In order to retain a clear overview, the general ledger often contains collective postings. In such cases, the information posted is displayed in more detail in the subsidiary ledgers, which provide their information to the general ledger in summarized form:
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BASIC SAP FI & CO Structure

Accounts payable records all accounting transactions with suppliers. Much of its data is obtained from procurement - Materials Management (MM). Accounts receivable records all accounting transactions with customers. Much of its data is obtained from Sales and Distribution (SD). Asset accounting (AA) records all accounting transactions relating to the management of assets. Bank ledger (BL) supports the posting of cash flows.

All G/L account postings that post to business expense accounts automatically send the expenses as costs to Controlling. The balances of G/L accounts are used to calculate financial statements.

Figure 5.1

BASIC SAP FI & CO Structure

Section 6 Controlling Organizational Units
An operating concern is the highest reporting level for profitability, and sales and marketing controlling. It is a central organizational unit in Profitability Analysis (CO-PA). Controlling areas structure internal accounting operations of an organization within management accounting. They represent closed units that are used to calculate costs. All internal allocations relate solely to objects that belong to the same controlling area. The following diagram shows the structure of CO organizational units:

Figure 6.1 Profitability Analysis (CO-PA) analyses the profit or loss of an organization according to individual market segments. For each market segment, the system allocates the corresponding costs to the revenues. Profitability analysis provides a basis for decision-making, price determination, customer selection, conditioning, and for choosing the distribution channel. Overhead costs are costs that cannot be directly assigned to the manufacturing of a product, or the provision of a particular service. Overhead cost controlling assigns all overhead costs to the locations at which they were incurred, or to the activities from which they arose.

Section 7 FI & CO Integration

The integrated nature of the SAP R/3 system means that a company Code in financial accounting needs to have a corresponding controlling Area in Controlling. This allows more flexible cost reporting structures.
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BASIC SAP FI & CO Structure

Similarly, all expense & revenue GL accounts in FI need to have corresponding cost elements and revenue elements in CO. Transactions posted to GL accounts are automatically updated to their corresponding primary cost & revenue elements.

Figure 7.1 The chart of accounts (PSOC) contains all the general ledger (G/L) accounts belonging to financial accounting. Postings in FI are passed on in real-time to Cost and Revenue Element accounting (CO-OM-CEL) and vice versa. In addition, it is only in Controlling that secondary cost elements can be created. These are used to record internal cost flows: activity / overhead allocations, assessments and settlements. The integrated view of the FI and CO structures is presented in figure 5.2.

BASIC SAP FI & CO Structure

Figure 7.2 The integrated nature of the R/3 system means that expense accounts in Financial Accounting need to have corresponding primary costs elements in Controlling. This ensures reconciliation of expenses in FI with primary costs in CO. Before creating primary cost elements in CO, respective G/L accounts in FI need to be created first. To be able to post to a primary cost element, a cost-carrying object (such as a cost center) is required to identify the origin of the costs. Examples of primary cost elements are: material costs and salary costs. Secondary costs elements are used exclusively in CO to identify internal cost flows, such as assessments or settlements. They do not have corresponding general ledger accounts in FI and are defined only in CO. For analyzing revenues in cost controlling, the R/3 system records them as revenue elements. Revenue elements too are primary cost elements.

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BASIC SAP FI & CO Structure

Section 8 CO Architecture

Figure 8.1 This figure illustrates the essential features of the CO architecture. Arrows between different CO components display the typical cost and activity quantity flows (such as working hours) which occur between these components. Similarly, costs from Overhead Controlling (OM) and Product Cost Controlling (PC) can flow into Profitability Analysis (PA). In PA, costs combined with revenue data can be used to calculate operating results. This helps in conducting profitability analysis for each specific area. Other R/3 applications too can post costs or revenues to CO. The arrows between FI and CO illustrate the relationship between Financial Accounting (FI) and CO. Hence, for example, postings to expense account in FI can automatically post costs in the OM components in CO. In the same way FI can post revenues directly in component PA.

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BASIC SAP FI & CO Structure

Other R/3 components such as Human Resources (HR) and Logistics (materials management, sales and production planning) are integrated with CO, as can be seen in the logistics process flow (procurement, production, warehouse, and sales) in the above figure.

Section 9 CO Account Assignment Objects

All data relevant to costs flow automatically from financial accounting to controlling. As part of this process, the system assigns the costs and revenues to different CO account assignment objects like cost centres, projects, or orders. The relevant accounts in Financial Accounting are managed in Controlling as cost elements or revenue elements. Cost centre accounting is used for controlling purposes within an organization. It serves as a tool for monitoring overhead costs and assigning them to the location at which they occurred.

Note: Cost centres are organizational units within a controlling area that represents a defined location of cost incurrence. It defines the smallest area of responsibility within the company that causes and influences costs; the lowest level to which direct and indirect costs can be assigned meaningfully.

Section 10 CO Hierarchy
The standard hierarchy is a classification structure to which all cost centres within a controlling area must be assigned. Cost centres can be structured / grouped to meet the organisations internal reporting requirements. It is useful to structure them in the same way as the company is structured. These separate areas usually correspond to the functional areas represented in the enterprise organizational diagram. For overhead cost controlling, cost centres of similar types are combined, according to decisionmaking processes, supervisory (checking), or managerial functions. A cost centre standard hierarchy is created to represent these different types of cost centre in a structured form. Each level or node of the standard hierarchy represents a cost centre group. The structured form of PSOs cost centres has been displayed in figure 9.1:

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BASIC SAP FI & CO Structure

Figure 10.1

Section 11 Cost Center Planning

Cost center planning involves entering plan figures for costs, activities, prices or statistical key figures for a particular cost center and a particular planning period.

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BASIC SAP FI & CO Structure

This planning process helps in determining variances between planned and actual costs. These variances serve as a signal to make necessary business decisions. Cost center planning forms an integral part of the overall business planning process, and is a prerequisite for standard costing. The main characteristic of standard costing is that values and quantities are planned for specified timeframes, independent of the actual values. Plan costs and plan activity quantities may determine (activity) prices. These prices can be used to valuate internal activities during the ongoing period (that is, before the actual costs are realized). Cost center planning has the following objectives:

Plan the structure of the organizations future operations for a clearly defined time period. Internal and external (market) factors affecting an organization must be considered. Control business methods within the current settlement period. This ensures keeping to the plan as closely as possible. Iterative planning allows adapting the target performance to reflect any changes in the organizational environment. Monitor efficiency after completion of the settlement period using plan/actual or target/actual comparisons. Provide a basis for the valuation of organizational activities, independent of random fluctuations.

Cost center planning is a sub-area of the overall business planning. For this reason, the integration and reconciliation of cost center planning is of particular importance.

Figure 11.1

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