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ADempiere|ERP

Module 9.1Accounting, Costing

and ERP

By Wipawii Jaraswarapan

Business Consultant, ecosoft™[email protected]

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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

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ADempiere|ERP

Module 9.1Accounting Concept

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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.

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Accounting Assumptions

Accounting Assumption (สมมตฐานทางบญช) is the preparation of accounting information, which is based on certain fundamental concept (GAAP).

1. Accounting Entity (หนวยงาน) : wherein the business entity considered as a separate and distinct entity apart from the owner.

2. Going concern Assumption (การด ารงอย) : 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, semi-annual basis and yearly or annual basis.

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Accounting Assumptions (continue)

4. Money Measurement Assumption (หนวยเงนตรา): 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 (ราคาทน): 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.

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Accounting Principles

Accounting Principles (หลกการบญช) 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.

Output-OrientedStakeholders

• Comparability (เปรยบเทยบได)

Preparation• Consistency (สม าเสมอ)• Unity (เปนหนงเดยว)

Input-OrientedOperating principles

• Recognition (การรบร)• Matching (การจบค)

Limitation principles• Conservative (ระมดระวง)• Disclosure (เปดเผย)• Materiality (นยส าคญ)

• Objectivity (หลกฐานเทยงธรรม)

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Accounting Principles (continue)

Recognition Principles (หลกการรบรรายได คาใชจาย)

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.

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Matching Principles (หลกการจบค)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. ทฤษฎการวดความพยายามกบความส าเรจ

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Matching Product cost

Wages paid => not recognised but capitalised to inventory (Asset)

Products are sold => recognised as Cost of Goods Sold (COGS – Expense).

Income StmtSales 100

COGS (90)

GP 10

Costing Method

Merchandise

Inventory

(Asset)

Product Cost

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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

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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.

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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: The company sold 80 Units of such inventory for $12,000 ($150 each)

June 10: Customer paid $12,000 to the company.

Question:

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.

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ADempiere|ERP

Module 9.2Inventory and Costing

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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

• Raw Materials inventory

• Work In Process inventory

• Finished Goods inventory

Manufacturer

Trading

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.

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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…

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Inventory Accounting Systems

• 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

• 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.

Perpetual inventory system

(บนทกแบบตอเนอง)Periodic inventory system

(บนทกตอนสนงวด)

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Inventory Accounting Systems

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

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.

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Inventory and Costing

Perpetual inventory system (บนทกแบบตอเนอง) Periodic inventory system (บนทกตอนสนงวด)

Capitalised

Merchandise

Inventory

Balance Sheet

(Asset)

SOLD

Expense

Cost of Goods Sold

Income statement

(Profit)

Available

for Sale

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Inventory and Costing

Why Inventory measurement is required?

Money Measurement Assumption (หนวยเงนตรา)

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

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Costing Method

First-in, first-out (FIFO)

Last-in, first-out (LIFO)

Average Cost

The same inventory items can have different costs, thus

The physical flow of goods are merely used to assign

unit costs to inventory.

Specific identification method

It does not relate with the flow of goods.

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Costing Method

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.

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 Low The High profit

Ending inventory balance The High

Effect: Cost of goods sold High The Low profit

Ending inventory balance The Low

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Costing Method

An average of all the costs; therefore the ending inventory balance is an

average of the purchase costs.

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.

Average Cost

Specific identification

Effect: Cost of goods sold and Profit in between FIFO and LIFO

Ending inventory balance in between FIFO and LIFO

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

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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.

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Inventory system + Costing method






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)

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)] 1.50Close to Actual cost

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COMPARING INVENTORY METHODS

Perpetual Perodic

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FIFO: PERPETUAL vs PERIODIC

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LIFO: PERPETUAL vs PERIODIC

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Moving average - PERPETUAL vsWeighted average - PERIODIC

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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.

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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”

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ADempiere|ERP

Module 9.4Set up new Client in AD

(Accounting view)

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Set Up new Company – Client set up

Set up

• Client

• Organization

• Warehouse

Accounting Assumption

‘Business entity’

Set up

• Roles

• Users

• Security

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Set up new Company

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Set Up new Company – Client 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.

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.

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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)

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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.

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Account Element

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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

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Chart of Account

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Account Element - Chart of Account

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Accounting Schema

A combination of

Accounting standard (GAAP)

Recognition => Accrual or Cash basis

A Costing Method

Posting

Default accounts

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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.

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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.

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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.

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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.

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.

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.

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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.

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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

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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.

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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.

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Accounting Schema - Account Default

Product type Document type

Type: Item

It is existing product

e.g. Plum tree

Shipment – MM Receipt

Type: Service

It is Expense

e.g. Plum tree

Shipment – MM Receipt

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Chart of Account

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WORKSHOP

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