2 Basic FI & CO Structure

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BASIC SAP FI & CO StructureUser Guidance Notes

SAP Information Systems

Faraz Ahmed Quddusi


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BASIC SAP FI & CO Structure

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Table of Contents

S No Particulars Page No

1 Introduction to Financial Accounting and Controlling 2

2 Financial Accounting Enterprise Structure 3

3 Reconciliation Accounts 4

4 Business Areas 5

5 Financial Accounting Overview 6

6 Controlling Organisational Structures 8

7 FI & CO Integration 8

8 CO Architecture 11

9 CO Account Assignment Objects 12

10 CO Standard Hierarchy 12

11 Cost Center Planning 13


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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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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.

Figure 2.1

AccountGroups

Types ofAccounts

Chart ofAccounts

Structure ofGeneral Ledger

Accounts

Company

IndependantAccounting Entity

PSOC - PakistanState Oil Co Ltd

PSOC - PSO'sChart ofAccounts

Asset Accounts

MaterialManagement

Accounts

General BalanceSheet Accounts

RevenueAccounts

ExpenseAccounts

Liquid FundAccounts

Address

Currency

Country Key

Language Key

2.1 2.2 2.3


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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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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 followingfigure 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.


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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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Accounts payable records all accounting transactions with suppliers. Much of its data isobtained from procurement - Materials Management (MM).

Accounts receivable records all accounting transactions with customers. Much of its data isobtained from Sales and Distribution (SD).

Asset accounting (AA) records all accounting transactions relating to the management ofassets.

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


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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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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.


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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/3system records them as revenue elements. Revenue elements too are primary cost elements.


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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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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 atool 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 decision-

making 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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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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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 andquantities 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 timeperiod. Internal and external (market) factors affecting an organization must be

considered.

Control business methods within the current settlement period. This ensures keeping tothe 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 ortarget/actual comparisons.

Provide a basis for the valuation of organizational activities, independent of randomfluctuations.

Cost center planning is a

sub-area of the overallbusiness planning. For this

reason, the integration

and reconciliation of cost

center planning is of

particular importance.

Figure 11.1

Documents

2 Basic FI & CO Structure