Module 9.1 Accounting, Costing and ERP

Module 9.1 Accounting, Costing and ERP By Wipawii Jaraswarapan Business Consultant, ecosoft wipawii@gmail.com ADempiere ERP 1

2 Module Objectives Business vs Accounting vs ERP Accounting and Costing fundamental Accounting Concept (GAAP), Assumption and Principles Inventory and Costing Types of Accounting and Accounting basic Setup new Company in ADempiere (Accounting view) Hands on

Module 9.1 Accounting Concept ADempiere ERP 3

4 Accounting Concept or GAAP GAAP : Generally Accepted Accounting Principles is the standard framework of guidelines for accounting, not the rules, because judgment must be used in order to apply the Accounting Assumption and Principles to the business. Framework Benchmark Guideline Why need GAAP? Be reliable Be equitable (fairly) Be comparable Be consolidate What are they, GAAP? International GAAP (IAS, IFRS) Local GAAP => US GAAP, Thai GAAP (TAS), etc.

5 Accounting Assumptions Accounting Assumption (สมมต ฐานทางบ ญช ) is the preparation of accounting information, which is based on certain fundamental concept (GAAP). 1. Accounting Entity (หน วยงาน) : wherein the business entity considered as a separate and distinct entity apart from the owner. 2. Going concern Assumption (การดารงอย ) : The business is assumed to have a continuous life of existence. 3. Time period Assumption (กรอบเวลา): The life of the business is divided into equal periods. It can be monthly basis, quarterly basis, semiannual basis and yearly or annual basis.

6 Accounting Assumptions (continue) 4. Money Measurement Assumption (หน วยเง นตรา): This is to assure that the unit of measure has a stable value. Usually use the country's standard monetary unit e.g. Thai Baht 5. Historical Cost Assumption (ราคาท น): Initially recorded by the amount paid for. As time passes, the measurements are not changed even if the current value is changing. Example: As an accountant you must always assume or suppose that every asset is going to be used in the future, weather it will or not. Therefore, those assets have to be depreciated.

7 Accounting Principles Accounting Principles (หล กการบ ญช ) is a ground rule or guideline to govern current accounting practice and that is used as a reference to determine the appropriate treatment of complex transactions. Input-Oriented Operating principles Recognition (การร บร ) Matching (การจ บค ) Limitation principles Conservative (ระม ดระว ง) Disclosure (เป ดเผย) Materiality (น ยสาค ญ) Objectivity (หล กฐานเท ยงธรรม) Output-Oriented Stakeholders Comparability (เปร ยบเท ยบได ) Preparation Consistency (สม าเสมอ) Unity (เป นหน งเด ยว)

8 Accounting Principles (continue) Recognition Principles (หล กการร บร รายได ค าใช จ าย) Accrual basis = Income and Expenses are recorded when they occur (are invoiced) => Profit organisation: Corporate Cash basis = Income and Expenses are not recorded until the payments have been made => Non-Profit organisation (Government and Charity). The cash basis does not work for most businesses because: The financial statements for any given period are not as accurate, since events are not recorded as they occur. Taxing authorities do not allow it on tax forms.

9 Accounting Principles (continue) Matching Principles (หล กการจ บค ) is to Determines the expenses associated with revenue are identified and measured. The expenses should be matched with revenues, they are not recognized until the associated revenue is also recognized. This principle allows greater evaluation of actual profitability and performance, it shows how much was spent to earn revenue. ทฤษฎ การว ดความพยายามก บความสาเร จ

10 Accounting Principles (continue) Matching Product cost Wages paid => not recognised but capitalised to inventory (Asset) Products are sold => recognised as Cost of Goods Sold (COGS Expense). Merchandise Inventory (Asset) Product Cost Income Stmt Sales 100 COGS (90) GP 10 Costing Method

11 Accounting Principles (continue) Matching Period Cost, which are expensed immediately. cost can be charged as expenses to the current period e.g. office salaries and other administrative expenses. The cost of purchasing a fixed asset is spread over the period in which it is expected to generate revenue (Depreciation) Matching - Period Cost

12 Get the Feeling and Understanding ILLUSTRATION NO.1 March 14: The company received inventory 100 Units ($10,000). April 13: Paid to Vendor in full amount $10,000 May 11: The company sold all 100 Units of such inventory for $ 15,000 June 10: Customer paid $15,000 to the company. Question: When should the inventory become an expense (Cost)? Answer: In the month of May as the inventory was sold. The income of $15,000, which we need to match it with The cost of $10,000.

13 Get the Feeling and Understanding ILLUSTRATION NO.2 March 14: The company received inventory 100 Units ($10,000). April 13: Paid to Vendor in full amount $10,000 May 11: June 10: Question: The company sold 80 Units of such inventory for $12,000 ($150 each) Customer paid $12,000 to the company. 1. When and How much the inventory become an expense? and 2. How much Profit does the company make? Answer: In the month of May as the inventory was sold. The income of $12,000, which we need to match it with The cost of goods sold $ 8,000. The profit is $ 4,000 (80 units x ($150 - $100)) What about the remaining, 20 Units? It will be Merchandise Inventory presented in Balance sheet $2,000.

Module 9.2 Inventory and Costing ADempiere ERP 16

17 Inventory Inventory is tangible property that is held for resale or will be used in producing goods or services. Inventory is reported on the balance sheet as an asset. Types of Inventory: Merchandise inventory Trading Raw Materials inventory Work In Process inventory Manufacturer Finished Goods inventory Inventory Cost: The company has to accumulate costs of purchases until raw material is ready for use or until merchandise inventory is ready for shipment to customers.

18 Inventory Inventory cost consists of: Cost itself (Purchasing invoice price) net with Discount Returns Landed cost : The total cost of preparation readiness of inventory for use or shipment to customer. Transportation-in Freight Insurance Customs duties Taxes Inspection Etc

19 Inventory Accounting Systems Perpetual inventory system (บ นท กแบบต อเน อง) The Inventory account is affected every single transactions when inventory move (sale/purchase). Purchase goods Inventory increase Goods is sold Inventory decrease Sale is recognised Expense (Cost of good sold) Period ends Nothing with costing Periodic inventory system (บ นท กตอนส นงวด) The Inventory account is affected at the period end, but not affected during the period. Purchase goods Purchasing (Expense) Goods is sold Sale is recognised. Period ends A physical count is required. Close Purchasing and landed cost then record Inventory balance Cost of good sold A physical count of the inventory is still required at the end of the accounting period to assure accurate inventory records in case of errors or theft.

20 Inventory Accounting Systems Perpetual inventory system (บ นท กแบบต อเน อง) Advantages A high degree of control. Timely accurate report It aids in the management of proper inventory levels. Physical inventories can be easily compared. Whenever a shortage i.e. a missing or stolen is discovered. Disadvantages Time consuming Need experienced accountant Periodic inventory system (บ นท กตอนส นงวด) Advantages Simple to operate Cheaper cost in bookkeeping Disadvantages Information is not update/ready Decrease opportunity for business competition Unscientific - It does not take into consideration the quantities purchased at different prices. An advancements in technology (Software application) reduce time consuming of perpetual system => Simpler and Cheaper.

21 Inventory and Costing Perpetual inventory system (บ นท กแบบต อเน อง) Periodic inventory system (บ นท กตอนส นงวด) Available for Sale Capitalised Merchandise Inventory Balance Sheet (Asset) SOLD Expense Cost of Goods Sold Income statement (Profit)

22 Inventory and Costing Why Inventory measurement is required? Money Measurement Assumption (หน วยเง นตรา) Accounting principle Output oriented => Report If inventory is not measured Properly, o Balance sheet presents WRONG financial position of the company. o Expenses and Revenues cannot be properly matched and o The cost of merchandise sold is wrong => net income is wrong => the result of the company s operation is also WRONG Financial statements are NOT correct Mislead Wrong Decision

23 Costing Method The same inventory items can have different costs, thus The physical flow of goods are merely used to assign unit costs to inventory. First-in, first-out (FIFO) Last-in, first-out (LIFO) It does not relate with the flow of goods. Specific identification method Average Cost

24 Costing Method First-in, first-out (FIFO) The first unit purchased is the cost of the first unit sold; therefore the ending inventory will be made up of the most recently purchased units. Effect: Cost of goods sold Low The High profit Ending inventory balance The High Last-in, first-out (LIFO) The last unit purchased is the cost of the first unit sold; therefore the ending inventory with this method is made up of the earliest units purchased. Effect: Cost of goods sold High The Low profit Ending inventory balance The Low

25 Costing Method Average Cost An average of all the costs; therefore the ending inventory balance is an average of the purchase costs. Effect: Cost of goods sold and Profit in between FIFO and LIFO Ending inventory balance in between FIFO and LIFO Specific identification Identify each unit of merchandise with the unit's cost and retain that identification until the inventory is sold. Once a specific inventory item is sold, the cost of the unit is assigned to cost of goods sold. Effect: Require tedious record keeping. Usually used for inventory of uniquely identifiable goods or Having a fairly high per-unit cost e.g. fine jewelry

26 Costing Method 1. If prices were constant during the period, all methods would produce the exact same result. 2. Since prices usually change, each method produce different results. Inflation period FIFO Higher gross profit and a higher ending inventory balance. LIFO Lower gross profit and a lower ending inventory balance. Deflation period, the effects are just the opposite.

Inventory system + Costing method Perpetual inventory system (บ นท กแบบต อเน อง) First-in, first-out (FIFO) Last-in, first-out (LIFO) Periodic inventory system (บ นท กตอนส นงวด) First-in, first-out (FIFO) Last-in, first-out (LIFO) Moving Average Weighted Average Example: a. buy 1 at $1.00 b. sell 1 at $4.00 c. buy 1 at $2.00 Sale (1 x $4.00) 4.00 Cost of goods sold (1 x $1.00) (1.00) Gross profit 3.00 Ending inventory (1 x $2.00) 2.00 (The last purchase inventory was at $2.00) Close to Actual cost Sale (1 x $4.00) 4.00 Beginning inventory 0.00 + Purchase ($1.00+$2.00) 3.00 Inventory available for sale 3.00 - Ending Inventory (1.50) Cost of goods sold (1.50) Gross profit 2.50 Ending inventory 1 x [($1.00+$2.00)/(1+1)] 1.50 27

28 COMPARING INVENTORY METHODS Perpetual Perodic

FIFO: PERPETUAL vs PERIODIC 29

LIFO: PERPETUAL vs PERIODIC 30

Moving average - PERPETUAL vs Weighted average - PERIODIC 31

32 The Choice of Inventory Method Survey 600 firms in US, FIFO is the most frequently used method, followed by LIFO, with the average cost method a distant third Also, LIFO is not widely used outside the United States. Taxes: LIFO offers substantial tax savings because of lower gross profit. Loan: LIFO results in a lower inventory figure, current assets will also be lower. This results in a lower current ratio and a greater likelihood of loan agreement violations. Management Compensation: If the company has bonuses based on reported income, FIFO and LIFO may effect it. Stock Prices: LIFO results in lower reported net income, stock market may react negatively to a lower income stream.

33 Who decides what method to use? If you have a great company, senior management will require the best method and be committed to its implementation. It is a fantastic company to work for if the management asks everyone in the company support the cost system and implementation. If you have a good company and good management, the accounting department will have a great influence in this area. Because...If the company wants to be profitable, management has to know its TRUE costs. Management is a key person who decides what Costing Method should be used

Module 9.4 Set up new Client in AD (Accounting view) ADempiere ERP 35

36 Set Up new Company Client set up Set up Client Organization Warehouse Accounting Assumption Business entity Set up Roles Users Security

Set up new Company 37

38 Set Up new Company Client Policy Material Policy: FIFO-LIFO Usually Material movement is tracked by using Product Attribute instances, however, if an instance is not specified, it will be automatically identified based on this Material Policy. Cost immediately => Checked If selected, costs are updated immediately when a Cost Detail record is created (by matching or shipping).otherwise the costs are updated by batch or when the costs are needed for posting.

39 Set Up new Company Client Policy Delivery Policy No hold: No items are held for a specific customer and orders Shipped as soon as they are fulfilled. The risk is some orders might never be fulfilled and starvation increases the bigger the more items there are on the order. Strict order: Material must be allocated to the order before it is shipped. Only material on hand can be allocated. Material is allocated in the order defined by the orders which are: Priority of the order Date of the order line (i.e. when it was created)

40 Calendar Year and Period The Standard Calendar Period is used for determining the period for posting and reporting. The system will edit to ensure there are no overlaps in the dates for Standard Calendar Periods. The Adjustment Period can be used only in Manual Journal Entries. The system will allow an Adjustment Period to overlap a Standard Calendar Period.

Account Element 41

42 Exploring Chart of Account Template Chart of Account is the Core of ERP System. It is necessary to consult with the Accountant and come out with the Chart of Account for your own company. See sample chart of Account from C:\Adempiere\data\import\AccountingUS.xls Once ready, convert to CSV file which can be uploaded into ADempiere

Chart of Account 43

Account Element - Chart of Account 44

45 Accounting Schema A combination of Accounting standard (GAAP) Recognition => Accrual or Cash basis A Costing Method Posting Default accounts

46 Accounting Schema Generally None will be selected unless you perform Encumbrance Accounting. If selected, the posting of certain documents (e.g. Purchase Orders) will generate transactions to the Commitment Posting Type.

47 Accounting Schema Automatic Period Control Accounting periods to be automatically opened. If it is selected, additional fields will display. History days Defines the number of days prior to the current date you can post to. Future days Defines the number of days following the current date that you can post to. Example: The current date, which is based on the system date, is May 10 and History days is set to 20 and future days is set to 30, posting can occur for transactions dated between April 20 and June 9. If left unselected, each period must be opened manually for the appropriate document types.

48 Accounting Schema Element Separator to be used when displaying an account combination. Use Account Alias check box To define aliases for the account combinations. Aliases provide an easy method to search for and select account combinations. Post Trade Discount check box If checked, Trade discounts will be posted to an explicit account. If not, trade discounts will be deducted from product revenue.

49 Accounting Schema Tax Correction To indicate if the tax should be adjusted if a Discount is taken or a Write Off is allowed for an Invoice where tax is imposed. Post Services Separately check box If checked, product type Service and Resource will use a separate account when posting documentl. If not, it will use the same account as used for posting Item Product Types. Explicit Cost Adjustment check box If checked, when posting Vendor Invoices for Landed Costs, the selected Debit-Credit to the Cost Element will be displayed. If not, the transactions will include the Cost Adjustment Account, Tax, and Accounts Payable.

50 Accounting Schema Only Organization field. Only transactions for this Organization will have GL postings created based on this Accounting Schema Similarly, you can use the Create GL / Defaults process to copy the GL and Default accounts from one Accounting Schema to another. This would be used if you had set up an alternate Accounting Schema that uses the same Account Elements but a different Currency or Costing Method for example.

51 Accounting Schema Example: If this client has 2 Organisations, one in Thailand and another one in US. For the second one, US organisation, it need to generate financial reports in USD, which this report is required for Thai organisation, which Primary Accounting Schema is in THB; therefore, define a second Accounting Schema in USD and select the US Organization in the Only Organization field. When a document posts for Thai Organizations, transactions for the Primary Accounting Schema in THB will be created. When a document posts for the US Organization, transactions will be created for both the Primary Accounting Schema in THB and the second Accounting Schema in USD. Note: Any elements used in a alternate accounting schema must be enabled on the primary accounting schema. For example, if you want to use Project as an element in an alternate accounting schema, it must be enabled in your primary accounting schema

52 Accounting Schema Element. Account Schema Element tab to use to comprise your Account Combinations. Balanced and Mandatory: To indicate that element should have these attributes. Balanced - Have a balanced set of books and Account have to be checked for balance. Account and Organization are mandatory elements. Sequence: Determine the order of the elements in the account combination.

53 Accounting Schema General ledger. Use Suspense Balancing check box: It is to force post out-of-balance conditions in a journal. The out-of-balance amount will post to the Suspense Balancing Acct entered. Note that the Suspense Balancing Acct appears only if the check box is selected. Use Suspense Error check box: It is to force post error conditions in a journal. The transaction amount of the line in error will post to the Suspense Error Acct entered. Use Currency Balancing check box It is to force post out of balance currency conditions. An out of balance condition can occur due to rounding in when converting currencies and it will be posted to the Currency Balancing Acct entered.

54 Accounting Schema - Account Default Product type Type: Item It is existing product e.g. Plum tree Type: Service It is Expense e.g. Plum tree Document type Shipment MM Receipt Shipment MM Receipt

Chart of Account 55

WORKSHOP 56