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KIRLOSKAR BROTHERS LIMITED

MM - FI Integration

Training document

[This training document contains the details of integration between MM & FI Modules of SAP at various points of transaction. The user should be familiar with the Materials transactions before proceeding to read this document. This is internal training document of Kirloskar Brothers Limited]

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Index

Sr. No.

Subject

Page Number

1.

Basics of Accounting

3

2.

Introduction to Material Valuation

11

3.

Overview of Material Valuation transactions

15

4.

Automatic FI postings at Goods Receipt

20

5.

Excise Entries at GRN

36

6.

FI Entries at Material Issue

38

7.

FI Entries at Invoice booking

40

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Objective

 After studying the document, you will be able to understand –  Basics of Financial Management

 How finance links to Material Management

 Effects of actions by Materials Management on Finance.  The target audience for this document is –

 Buyers in Purchasing department  Stores In-Charge

 Senior Managers in Materials department  Pre-requisites for target audience –

 Thorough knowledge of Purchase transactions  Thorough knowledge of Inventory transactions  Basic knowledge of Excise

Hint

:

Example

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Basics of Accounting

A] Fundamentals of Accounting

– 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 record all economic transactions (usually, but not always, involves money) in a systematic & generally accepted way. The transaction records are organized & presented in certain form of reports. The most used reports are Balance Sheet and Profit & Loss Account.

Following are the fundamentals of Accounting: –

1) Accrual basis – Effects of transactions takes place when they occur and not when cash is paid.

2) Going concern – Accounts are prepared based on the assumption that an enterprise will continue its operations in the foreseeable future. The value of assets and liabilities is stated at historical cost and not on the assumption that the enterprise will be liquidated.

3) Consistency – Accounting policies are followed consistently from year to year, so that accounts are comparable. Change in accounting polices are made only in exceptional circumstances.

B] Rules of accounting

– Business Transactions having monetary implications: Every debit has an equal corresponding credit.

Following are the three types of accounts –

1) Personal Account – This is the account of persons. For example – Accounts of Vendor, Customer are personal accounts. Rule applied for this type of account are „Debit the receiver & credit the giver‟.

For example – When a payment is made to a Vendor for supplying material, the entry is made as below –

Debit – Vendor INR 1, 00,000 / -

Credit – Bank Account INR 1, 00,000 / - 2) Real Account – These are the accounts of properties. For example – Cash,

Inventory, Machinery. Rule applied for this type of account is „Debit what comes in & Credit what goes out‟.

For example – When a material is received to inventory after GRN against Purchase Order, following entries are posted –

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Debit – Inventory Raw Material INR 1, 00,000 / -

Credit – GR / IR Clearing Account INR 1, 00,000 / - 3) Nominal Account – These are the accounts of income & expenditure. For example – Travelling expenses, Colony Expenses, Rent received from land. Rule applied for this type of account is „Debit Expenses & Credit Incomes‟.

For example – When Travel expenses for an employee are booked, following are the FI postings –

Debit – Travel expenses INR 250 / -

Credit – Bank Account INR 250 / -

These rules can be applied interchangeably between the different types of accounts depending on the business transaction.

C] Terminology used in Accounting

1) Financial Statements –

At the end of every period, a business entity prepares Balance Sheet and Profit & Loss Account. Balance sheet shows the financial position of the entity on a given date in the terms of its Assets & Liabilities. Balance sheet is prepared as on date (For example – Balance sheet as on 31–March–2008). Income statement (Profit and Loss Account) shows the results in terms of excess of Income over Expenditure. Profit & Loss statement is for the period „From (for example 01.04.2007) To (for example 31.03.2008)‟. It consists accounting for Real & nominal accounts. Funds flow statement (or Cash Flow statement as it is popularly called) shows the movement of funds during a given period i.e. where FUNDS came from and How they were applied. Cash flow statement is for the year ended (For example – Year ended on 31–March–2008). For example – Net cash flows from operating activities / investing activities / financing activities. 2) Assets – Assets are valuable resources that a firm owns or controls, such as

Cash, Bank Account, Inventory, Account Receivable, Fixed Asset and Intangible Asset.

Assets are of two types – Fixed Assets & Current Assets

a.) Fixed Assets: Assets which are held for a long period of time usually for production of the goods sold by the company

E.g.: Plant and Machinery, Building, Land, Furniture, Equipment

b.) Current Assets: These are short term assets which get converted into cash during the operating cycle of the firm

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3) Depreciation – Depreciation is the amount of wear and tear of an asset due to use, efflux of time and obsolescence. Companies are required to provide depreciation as per the requirements of Companies Act, 1956. It is provided to reflect the true value of assets. Depreciation also creates a fund for replacement as it prevents distribution of profits. It is an expense charged to Profit and Loss Account. There are two widely used methods of depreciation:

– Straight Line method – Written down value Method

4) Liabilities – Liability is what company owes. These are the obligations of the business to convey something of value in the future such as – Account Payable, Notes Payable. Liabilities are of types – Long Term Liabilities, Current Liabilities, Equity capital.

a.) Long term liabilities are the liabilities maturing beyond a year. E.g.: Term loans, Debentures, Bonds.

b.) Current Liabilities are the liabilities maturing within a year. E.g.: Creditors, Cash credit, bills discounted.

c.) Equity Capital is grouped under Liabilities because it is repayable to Shareholders, the owners of the Company. This is because a business and its owners are TWO separate legal entities independent of each other.

5) Profit & Loss Statement – A Profit and Loss statement shows the results of operations of the business concern for the year. It summarises the earnings generated by an enterprise during a specific period of time. It also comprises of a statement of all expenses during a period of time (financial year). It contains at least two major sections: Revenue & expenses.

Revenues are inflows of assets from providing Goods & Services to Customers such as Sales to Customer / Gain from foreign currency transactions. Income includes sales, income on investments, miscellaneous income, etc.

Expenses are costs incurred to generate revenues. Expenditure includes cost of material consumed or sold, general, administrative and selling expenses, employee costs, depreciation, tax expenses etc. Following are the types of expenditures – Revenue Expenditure / Capital Expenditure.

a.) Revenue expenditure: Expenditure incurred for manufacture/sale of the products and for carrying out the day to day activities is Revenue expenditure. The examples of capital expenditure are – Purchase of materials, payment of salaries, administrative expenses are Revenue in nature

b.) Capital expenditure: Expenditure incurred to acquire a long term benefit; through the acquisition of assets. The examples of capital expenditure are – Acquisition of assets, development of SAP system, is capital expenditure The difference between revenue & expense is profit (or loss if the expenses are greater than revenues).

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6) Cash Flow – Cash Flow statement shows how funds came into the company and how they were applied. Broadly it shows Cash Flow from operating activities, cash flow from financing activities and cash flow from Investing activities.

7) Balance Sheet – The balance sheet shows an enterprise‟s assets, liabilities & equity at a specific time (such as balance sheet as on 31st March). It is described sometimes as a snapshot of a business in financial terms.

8) Equity – Equity refers to owners‟ interest in business such as Capital Stock, Retained Earning, Current year net profit / loss.

9) Relationship between balance sheet & profit & loss account – Balance sheet & Profit & Loss statement are based on same underlying transaction information, but they present different views of an enterprise. They are not alternative to each other but are complement to each other.

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D] Formats for financial documents –

1) Cash Flow Statement

1) BALANCE SHEET as on 31st March

LIABILITIES (Rs.) ASSETS (Rs.) SHARE CAPITAL Authorized ... Shares of Rs... each Issued ... Shares of Rs... each Subscribed ... Shares of Rs... each Rs. .... per share called up Less: Unpaid calls

Add: Forfeited shares

RESERVES AND SURPLUS

1.

Capital Reserves

2.

Capital Redemption

Reserve

3.

Share Premium Account

4.

Other Reserves

Less: Debit balance in profit and loss account, if any

5.

Balance in the profit

and loss accounts after providing for proposed

FIXED ASSETS

1.

Goodwill

2.

Land

3.

Buildings

4.

Leaseholds

5.

Railway Sidings

6.

Plant and Machinery

7.

Furniture and Fittings

8.

Development of Property

9.

Patents, trademarks and designs

10.

Livestock

11.

Vehicles etc. INVESTMENTS

1.

Investments in Govt. or Trust Securities

2.

Investments in shares, debentures or bonds

3.

Immovable properties

4.

Investments in the

Cash flow statement Amount (in Rs)

A Cash flow from operating activities

Net Profit Depreciation Inventory Increase in Payables Increase in Receivables Current Liability

Net cash flow from operating activities

B Cash flow from investing activities

Purchase of assets

Net Cash flow from investing activities

C Cash flow from financing activities

Equity

Net Cash flow from financing activities Net cash flow during the period

Cash and cash equivalents at the beginning of the year

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allocation namely Dividend Bonus or Reserves

6.

Proposed additions to Reserves SECURED LOANS

1.

Debentures

2.

Loans and Advances

from Banks

3.

Loans and Advances

from Subsidiaries

4.

Other Loans and

Advances

UNSECURED LOANS

1.

Fixed Deposits

2.

Loans and Advances from Subsidiaries

3.

Short-term Loans and

Advances:

a.

from Banks

b.

from others

4.

Other Loans and

Advances

a.

from Banks

b.

from others CURRENT LIABILITIES & PROVISIONS

A.

Current Liabilities

1.

Acceptances

2.

Sundry Creditors

i.

Total outstanding dues of small scale industrial undertaking(s) .

ii.

Total outstanding dues of creditors other than small scale industrial undertaking(s) . capital of partnership firms

5.

Balance of unutilized

monies raised by Issue

CURRENT ASSETS, LOANS & ADVANCES

A.

Current Assets

1.

Interest accrued

on investments

2.

Stores and spare

parts

3.

Loose tools

4.

Stock-in-trade

5.

Works-in-progress

6.

Sundry debtors :

a.

Debts outstanding for a period exceeding 6 months

b.

Other debts Less: Provision

7.

a.

Cash balance on hand

b.

Bank balances

B.

Loans and Advances

8.

Advances and Loans

a.

To subsidiaries

b.

To partnership firms in which the co./its subsidiary is a partner

9.

Bills of Exchange

10.

Advances recoverable in cash or in kind or for value to be

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3.

Subsidiary companies

4.

Advance payments and unexpired discounts

5.

Unclaimed Dividends

6.

Other Liabilities (if any)

7.

Interest accrued

but not due on loans

B.

Provisions

8.

Provision for Taxation

9.

Proposed Dividends

10.

For contingencies

11.

For Provident Fund Scheme

12.

For Insurance, pension and similar staff benefit schemes

13.

Other provisions

received; e.g., Rates, Taxes, Insurance, etc.

11.

Balances with Customs, Port Trust, etc. (where payable on

demand).

MISCELLANEOUS EXPENDITURE

(to the extent not written off or adjusted)

1.

Preliminary Expenses

2.

Expenses including commission/ brokerage on underwriting or subscription of shares or debentures

3.

Discount allowed on issue of shares or debentures

4.

Interest paid out of capital during construction

5.

Development

expenditure not adjusted

6.

Other items (Specifying nature)

PROFIT AND LOSS ACCOUNT

(Debit Balance)

Total Total

2) PROFIT & LOSS ACCOUNT For the period ending 01st April to 31st March Expenditure Particulars Rs. Income Particulars Rs.

1.

Consumption of stores and

spare parts

2.

Power and fuel

3.

Rent

4.

Repairs to building

5.

Repairs to machinery

6.

Commission paid

7.

Depreciation 1. Sales

2. Income from investments 3. Other income

4. Miscellaneous income 5. Net Loss

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8.

Interest on debentures

9.

Income tax

10.

Net income

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Introduction to Material Valuation

The valuation area is the organizational level at which the material is valuated. Plant and company code are two possible valuation areas in the SAP system. When stock is valuated at plant level, you can valuate a material in different plants at different prices. When you valuate stock at company code level, the valuation price of a material is the same in all of a company's plants (that is, in a company code). Valuation at plant level is mandatory if you want to use either of the Production Planning or Product Cost Accounting components. In our case, we have valuated all the materials at plant level. Hence, we can maintain the different valuation for the material at different plants. We have maintained the valuation of material at plant level.

Terminologies required to be known for FI / MM Integration & Inventory Management – 1) Chart of Accounts

This is a list of all G/L accounts used by one or several

company codes. For each G/L account, the chart of accounts contains the account number, account name, and the information that controls how an account functions and how a G/L account is created in a company code. The chart of account is assigned to the company code. This chart of account is the operating chart of accounts & is used for daily postings in this company code. The chart of account can be extended to other company codes.

The chart of account used for FI postings for our company is KBL.

2) Valuation Area – The valuation of the material can be done under one of the following areas – a) Company Level or b) Plant Level. When the Company code is set as the Valuation area, the valuation price of the material is same in all plants of the company code. We have set the Plant level as Valuation area for all the materials. This is because we are using Production Planning & Costing application components.

Same material if received at 1110 plant can be valuated differently (For example at different Value / different Valuation Class) than if it is received in plant 2510.

3) Valuation Class – It is the key for account determination that enables a differentiation for G/L account assignment depending upon material. The materials are assigned to valuation class for each valuation area (in our case plant) in the accounting view. The assignments of allowed valuation class to the material type (indirectly) are used to enter restrictions. That means the user can select only allowed valuation classes for a material type. The valuation class is a key for grouping materials that have the same account determination. If different accounts are to be posted according to the valuation class in a transaction, the account determination for this transaction is to be set dependent upon the valuation class. This means different G/L accounts can be posted for same material for different transactions. The allowed valuation class depends upon material type. More than one material type can be allowed for a valuation class. The reference between the valuation class & material type can be established by the account category

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reference. The account category reference is a compilation of valuation classes. A material type is assigned to only one account category reference. G/L account determination can be uniformly defined for all material type belonging to a material type.

The valuation class for BEARING can be selected as „DOM_RM‟ (Domestics Raw Material) if the same is procured from Domestic Market. The inventory will be maintained as Domestic Raw material inventory. The valuation class will be „IMP_RM‟ (Imported Raw Material) if the material is imported & the inventory will be maintained as Imported Raw material Inventory.

4) General Ledger (G/L) Account – The central task of G/L accounting is to provide a comprehensive picture for external & accounts.

The General Ledger for Domestic Inventory of Raw material is „230120‟ (Inventory – Other Raw Material).

5)

Cost Center – Organizational unit within a controlling area that represents a clearly delimited location where costs occur. You can make organizational divisions on the basis of functional, settlement-related, activity-related, spatial, and/or responsibility-related standpoints. Cost centers are grouped together into decision, control & responsibility unit. The activity types are assigned to the cost center.

The Cost Center for Foundry Maintenance department of SBG – IP is „11011710‟. The costs incurred for the department Foundry Maintenance will be posted to this cost center.

6)

Profit Center – A profit center is an organizational unit in accounting that reflects a management-oriented structure of the organization for the purpose of internal control. You can analyze operating results for profit centers using either the cost-of-sales or the period accounting approach. By calculating the fixed capital as well, you can use your profit centers as investment centers. Profit center Accounting at the profit center level is based on costs and revenues. These are assigned statistically by multiple parallel updating to all logistical activities and other allocations of relevance for a profit center

.

Transactions in inventory management that affect the accounting are –

i) Purchasing – Goods Receipt against Purchase Order / without PO, Stock transfer from one plant to other plant (against Stock Transfer Purchase Order), Invoice Receipt and GR for Subcontract PO.

ii) Production – Goods Issue to Production Order, Goods Receipt from Production Order.

iii) Other – Transfer material to material, Goods Issue to Cost Center, Sales Order, Asset, Scrapping, Physical Inventory Difference posting.

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These transactions can change the valuation price of material depending upon price control (For example – V for moving average price for externally procured material / S for Standard price for in-house produced material.).

Posting in Invoice Verification can also affect Material Valuation. Valuation of Goods Movement –

i) Initial Entry of Stock Balances – Receipts are valuated at current material price of using another material price specified externally.

ii) Goods Receipt for Purchase Order – Receipts are valuated at the Purchase order price (Goods Receipt before Invoice Receipt).

iii) Goods Issue – Issues are valuated at current material price.

For materials to be valuated the accounting data for each valuation area (which is plant in our case) is maintained in the accounting view of material master for every plant in which the material is maintained.

Material valuation depends upon the price control procedure set in the material master as below –

i) Moving Average price (V) – The moving average price procedure is used for externally procured material. The Goods Receipt from Purchase Order is posted at Purchase Order price (Quantity X Purchase Order Price). The system modifies the material price in the material master according to delivered price. The system automatically calculates the goods issue by dividing total value by total stock value (that means current price of material). Differences between purchase order price and the invoices are posted directly to the relevant stock account if there is sufficient stock coverage. If sufficient stock of material is not available, then the difference (for balance quantity which is not in stock) is posted to the “Expenses / revenue from price difference”. The data used for cost accounting / controlling purpose therefore contains fluctuations. The price can be changed if required, generally at the end of the period. This causes the system to revaluate the total stock for the valuation area.

In our company, „Bearings‟ are procured from Vendor. Hence the material master data of the bearings will have „Moving Average Price‟ control in accounting view.

ii) Standard Price (S) – The standard price procedure is used for in-house produced material. The system calculates all stock postings at price defined in the material master. Variances are posted to account “Expenses / revenue from price difference”. Exact values are available for cost accounting / controlling purpose. The material price can be changed if required at the end of period. This causes the system to revaluate the total stock in the valuation area. All goods issues (such as issue to production order) are valuated at same standard price. This allows better analysis of the cost of production orders. A receipt from Production Order is posted at standard price.

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Pumps are in-house manufactured in our company; hence the material master data of all pumps will have „Standard Price Control‟ in accounting view.

Valuation Area details –

Valuation Area

Company

Code

Plant

level

Plant

valuation

is set-up

in KBL

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Overview of transactions involved in Material Valuation

Following are the steps involved in Purchasing, which are important from material valuation / financial point of view –

Sr.

No. Step Description

Effect on Materials Management

point Effect from Finance point

1 Purchase Order is created.

Vendor is ordered to supply material / provide service as per agreed terms & conditions

Commitment is done with the vendor to pay if he supplies material / provides service as per agreed terms

2 Purchase Order is approved

Management approval is given for agreed terms & conditions

Management approval is given for the financial commitment

3

Material is supplied by the vendor & GRN is posted for the same

Stock of material (Inventory) increases if material is Inventoried. Consumption to cost object is booked if the purchase order is account assigned.

Asset (Inventory) is increased. GR / IR clearing account is credited (which is ultimately the liability to pay money to the vendor as per agreed terms

Goods Receipt

Master Data

Material

Master

Vendor

G/L

Account

Storage

Location

Plant

Goods

Issue

Transfer

Posting

Requirement determined

through Material Requirement

Planning

External Procurement

Purchasing

Internal Procurement

Production

Invoice Receipt

Invoice Verification

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4

Service is provided by the vendor & service entry sheet is created

Consumption of service is booked to the respective cost object (For example – Cost Center)

GR / IR clearing account is credited (which is ultimately the liability to pay money to the vendor as per agreed terms.

5

Invoice of the vendor is booked in the system

Vendor‟s invoice is checked against the terms & conditions of the Purchase Order and booked in system so that the vendor can be paid on right time.

Vendor account is credited & GR / IR Clearing account is debited. (The effective entry is „Credit Vendor Account – Debit Inventory‟)

6 Payment is done to the vendor

Liability of the Purchasing organization ends.

Debit Vendor Account / Credit Bank Account.

Following are the steps involved in material movement, which are important from financial point of view –

Sr.

No. Transaction

Effect from Materials Management point

Effect from Financial point of view

1

Goods Receipt is posted for standard bought out material

Stock of material (Inventory) increases if material is Inventoried. Consumption to cost object is booked if the PO is account assigned.

Inventory (which is our asset) is increased. GR / IR clearing account is credited (which is ultimately the liability to pay money to the vendor as per agreed terms).

2

Goods Receipt posted for sub-contracting material

Stock of the semi-finished material (which was ordered on vendor) increases. Consumption of the BOM material (provided to vendor is booked)

Asset (Inventory) of semi-finished material ordered on vendor is increased. Asset (Inventory) of raw material provided to vendor is consumed to manufacture ordered material. GR / IR clearing account is credited (which is ultimately the liability to pay money to the vendor as per agreed terms. 3

Goods Receipt posted for Traded Material

Material delivered to customer directly from Vendor (Third Party Transaction)

Cost of Goods sold to customer is booked.

4

Goods Issue is posted to Production Order / Cost Center

Stock of the material decreases

Material value is booked against the respective cost object (Production Order or Cost Center) as consumption

5

Components

transferred to Sub-Contractor

Material provided to vendor for processing & supplying back the processed goods

No financial entry. The inventory is shown as „Stock provided to Vendor‟.

6 Material delivered to Customer

Finished Goods / Traded Goods delivered to customer. Own inventory is reduced

Cost of Goods sold to customer is booked.

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Automatic posting of material for Goods Movement

Goods Receipt at

manufacturing plant

Consumption

Storage

Valuation

Valuated

Inventory

posted in Store

Consumption

of material

posted

directly to

consumption

account

Goods Issue

To Production Order

/ Cost Center

Goods Receipt of Trading

Material against Third Party

Purchase Order

To SD

Delivery

Cost of

Goods Sold

Material cost

posted to

Cost of

Goods Sold

account

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MM transactions for which you can configure the automatic posting facility occur within the areas of Inventory Management, Invoice Verification, and Material Valuation. The company code is assigned to the chart of account in FI (Finance module). In transactions within the MM application, the valuation area is hidden, which is determined to same as plant through system settings. The General Ledger accounts are determined automatically depending upon the plant, material master data & the transaction of material posting (For example – Goods Receipt, Goods Issue, Transfer posting). If a material is subject to split valuation, you can valuate partial stocks of this material at different prices and manage those using separate accounts. For example – Imported Bearings can be accounted in separate account (IMP_RM – Imported Raw material) & Bearing procured from domestic vendor can be accounted in separate account

(DOM_RM – Domestic Raw Material). The posting transactions for the transactions

in Inventory Management & Invoice Management that are relevant for accounting are fixed. Posting records are assigned to event movement type in Inventory Management & each transaction in Invoice Posting. These postings are generalized in a value string (posting rule). Instead of fixed G/L account numbers, these contain keys for respective posting transaction (such as BSX for a stock posting). The G/L account numbers are determined from these keys & posting transactions.

In brief, following are the summarized data for influencing factors for account posting

Organizational

Structure

Company

Code

Plant

Chart of Account

Valuation Grouping

Code

Material

Accounting data

for valuation area

Valuation

Class

Material Type

Value /

Quantity update

Business

Transaction

Goods Movement /

Invoice

Verification

Value

String

Transaction

Key

Account

Grouping

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Material Price Change –

Material price can be changed for an individual material in a valuation area (plant) with immediate effect or activate the price changes for selected materials after maintaining the future prices in material master accounting view. Material credits / debits cause a price change in case of material subject to price control V or posting to price difference account in case of materials having price control S (Depending upon stock position). Changing the material price involves accounting transaction (& not the material master change) in which total stock of the plant is revaluated.

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Automatic FI postings at Goods Receipt

Following automatic postings are done in the system, when the Goods Receipt against Purchase Order are posted –

A] Accounting (FI) Entries posted at the time of GRN –

a) Raw Material posted to Inventory after posting of GRN –

A Purchase Order is raised on Vendor for a raw material which is to be used for production of an in-house manufactured material, depending upon the requirement generated from MRP. When you post a GRN for raw material against Purchase Order, the material is placed in a storage location in the plant. The inventory of the received material is increased by first entry. The second entry will increase the clearing account by equivalent amount. An accounting document is also posted along with the GRN. The inventory of imported raw material & raw material procured from domestic vendor is kept separate. The process flow is as below –

Without

account

assignment

Purchase

Order

Raw Material

GRN

Quantity

To Store

To

Inventory

GRN

Value

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The FI entries posted at GRN are as below –

Item Posting Key G/L Account Business Area Account Text Amount in INR Currency Text of Material 10 Debit Account of Raw material Inventory Respective Business Area, where the material is received Raw material Inventory (Quantity of material X Purchase Order Price) + Freight Charges INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text 20 Credit Account of GR / IR Clearing Respective Business Area, where the material is received GR / IR Clearing Account (Quantity of Material X Purchase Order Price) INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text 30 Credit Account of Freight Clearing Respective Business Area, where the material is received Freight Clearing Freight amount to be paid to vendor INR (for domestic Purchase) / Other Currency (For Imported material) Example of Accounting Entries for Raw material posted to inventory – Item Posting Key Account Business Area Account Short Text Amt. in

Local Curr. Curr. Text 1 Debit (89) 230120 BA01 Inventory – Other Raw Material 5100.00 INR BRG 6305 SKF OR EQ 2 Credit (96) 130100 BA01 GR / IR Clearing 5000.00 - INR BRG 6305 SKF OR EQ 3 Credit (50) 130110 BA01 Freight Clearing Inland 100.00 - INR BRG 6305 SKF OR EQ b) Material posted to consumption account after posting of GRN –

Following are main account assignment categories (AAC) – AAC Description Required Account Assignment Data

A Asset Main Asset Number & Sub-Number K Cost Center Cost Center & G/L Account Number Q Project WBS Element Number of the Project

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Account assignment field in the Purchase Order determines how the accounting general ledgers accounts will be posted in the case of goods receipt (if the GR Non-Valuated indicator was not set in the PO) or while Invoice booking (if GR Non-valuated indicator was set in PO). If the GR non-valuated indicator was maintained in PO, then no accounting entries are posted at GRN posting. It determines the G/L account for debit entry in the accounting journal for GR or IR transaction. Account assignment in the PO can be adopted from the PR from which it has been created. The process flow is as below –

i) Purchase Order with account assignment A (Asset) –

We use account assignment A to order a fixed asset item. A Fixed asset is a long lived asset which is not expected to be fully consumed within one year period or to be converted into cash within that period, such as: property, plant, equipment etc. For PO / PR with account assignment A, we need additional data to be entered as Asset Number. Asset number is a code to identify a single fixed asset. It must be generated first before we can create a PO or PR item with A as account assignment. Asset number is created in FI / CO module. Asset number is linked with a Fixed G/L Account in the company‟s balance sheet. The G/L account is a reconciliation account that means that it reconciles several asset numbers.

With account

assignment

Purchase

Order

Raw Material /

Non Valuated

Material

GRN

Quantity

To Store (Raw Material) or To Consumption (Non-valuated material)

Consumption

Account

GRN

Value

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For Purchase Order with account assignment A (Asset), the entry in FI G/L Account at the time of posting GRN is as below –

Item Posting Key G/L Account Business Area Account Text Amount in INR Currency Text of Material 10 Debit Account of Asset Respective Business Area, where the Asset is received Asset Number & Sub Number (Quantity of Asset X Purchase Order Price) + Freight Charges INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text 20 Credit Account of GR / IR Clearing Respective Business Area, where the asset is received GR / IR Clearing Account (Quantity of Asset X Purchase Order Price) INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text 30 Credit Account of Freight Clearing Respective Business Area, where the asset is received Freight Clearing Freight amount to be paid to vendor INR (for domestic Purchase) / Other Currency (For Imported material)

Example of accounting entries for asset posted – Item Posting Key Account Business Area Account Short Text Amt. in

Local Cur. Cur. Text 1 Debit (70) 211450 BA05 Asset Number 000021000780 Sub Number 0000 36500.00 INR IM-314/318/325 MOUNTING CASING 2 Credit (96) 130100 BA05 GR / IR Clearing 36050.00 - INR IM-314/318/325 MOUNTING CASING 3 Credit (50) 130110 BA05 Freight Clearing Inland 450.00 - INR IM-314/318/325 MOUNTING CASING ii) Purchase Order with account assignment K (Cost Center) –

We use account assignment K (Cost Center) to order an expense item (material or service). An expense item in PO is an item that is expected to be fully consumed immediately after Goods Receipt is posted such as consumable material & services. With account assignment K, we need to determine following two additional data to be entered in the PO –

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- General Ledger (G/L) Account Number: We have to determine the expense G/L account number that will be posted when we do Goods Receipt or Service Entry Sheet (if the GR Non-Valuated indicator was not set in the PO) or while Invoice booking (if GR Non-valuated indicator was set in PO).

- Cost Center: Cost center determines which department or group in the company that will be charged the expenses occurred when we do GR or Invoice

For Purchase Order with account assignment K, the entry in FI G/L Account at the time of posting GRN is as below – Item Posting Key G/L Account Business Area Account Text Amount in INR Currency Text of Material 10 Debit Account of cost center Respective Business Area, where the Material / Service is received Cost Center account (Quantity of Material X Purchase Order Price) + Freight Charges INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text / Service Text 20 Credit Account of GR / IR Clearing Respective Business Area, where the material / service is received GR / IR Clearing Account (Quantity of Material X Purchase Order Price) INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text / Service Text 30 Credit Account of Freight Clearing Respective Business Area, where the material is received Freight Clearing Freight amount to be paid to vendor INR (for domestic Purchase) / Other Currency (For Imported material)

Example of accounting entry for Account Assignment as Cost Center – Item Posting Key Account Business Area Account Short Text Amt. in Local

Cur. Cur. Text

1 Debit

(81) 416340 BA08

Legal Exp &

Consult Fees 42000.00 INR Visit Charges 2 Credit

(96) 130100 BA08

GR / IR

Clearing 42000.00 - INR Visit Charges iii) Purchase Order with account assignment as Q (Project) –

Purchase Order with account assignment Q are raised for material required for a Project being / to be executed by the enterprise. For this account assignment, we need to define the additional data WBS (Work Breakdown Structure) to be entered in the detailed account assignment screen. The WBS element is the small element in which the material / service to be procured is planned & budgeted. We can procure following type of materials against the Project account assignment – Raw / Semi Finished material (to be inventoried), Traded Material. When we procure a raw material (to be inventoried)

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against the account assignment as Project (Q), then the accounting entries posted are as below – Item Posting Key G/L Account Business Area Account Text Amount in INR Currency Text of Material 10 Debit Account of Inventory Respective Business Area, where the Material / Service is received Inventory account (Quantity of Material X Purchase Order Price) + Freight Charges INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text / Service Text 20 Credit Account of GR / IR Clearing Respective Business Area, where the material / service is received GR / IR Clearing Account (Quantity of Material X Purchase Order Price) INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text / Service Text 30 Credit Account of Freight Clearing Respective Business Area, where the material is received Freight Clearing Freight amount to be paid to vendor INR (for domestic Purchase) / Other Currency (For Imported material)

Following is the example of the accounting entries – Item Posting Key Account Business Area Account Short Text Amt. in

Local Cur. Cur. Text 1 Debit

(81) 233040 BA02

Inventory –

Other Resale 610806.00 INR

MS Flange Dia. 1500 mm 2 Credit (96) 130100 BA02 GR / IR Clearing 610806.00 - INR MS Flange Dia. 1500 mm

When we post the GRN for traded material for the PO with Project account assignment, following accounting entries are posted –

Item Posting Key G/L Account Business Area Account Text Amount in INR Currency Text of Material 10 Debit Account of Cost of Goods Sold (COGS) Respective Business Area, where the Material / Service is received COGS account (Quantity of Material X Purchase Order Price) + Freight Charges INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text / Service Text 20 Credit Account of GR / IR Clearing Respective Business Area, where the material GR / IR Clearing Account (Quantity of Material X Purchase Order Price) INR (for domestic Purchase) / Other Currency Material master short text /

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/ service is received (For Imported material) Service Text 30 Credit Account of Freight Clearing Respective Business Area, where the material is received Freight Clearing Freight amount to be paid to vendor INR (for domestic Purchase) / Other Currency (For Imported material)

Example of the accounting entry is as below – Item Posting Key Account Business Area Account Short Text Amt. in

Local Cur. Cur. Text 1 Debit

(81) 410920 BA02

COGS – Other

Resale Article 183401.00 INR

LTAL PVC ArmPVCSH Cable 2 Credit (96) 130100 BA02 GR / IR Clearing 183401.00 - INR LTAL PVC ArmPVCSH Cable iv) Purchase Order with account assignment as E (Sale Order) –

Purchase Orders with account assignment E (Sale Order) are raised for a material required for Sale Order either for in-house manufactured material or Traded Goods. Depending upon the scenario the item category will change (Blank for Standard procured material) or S (Traded material). In this case after posting GRN, the accounting entries posted will be same as that indicated in scenario Purchase Order with account assignment as Q (Project).

Accounting Entries after GRN for Inventory Material – Item Posting Key G/L Account Business Area Account Text Amount in INR Currency Text of Material 10 Debit Account of Inventory Respective Business Area, where the Material / Service is received Inventory account (Quantity of Material X Purchase Order Price) + Freight Charges INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text / Service Text 20 Credit Account of GR / IR Clearing Respective Business Area, where the material / service is received GR / IR Clearing Account (Quantity of Material X Purchase Order Price) INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text / Service Text 30 Credit Account of Freight Clearing Respective Business Area, where the material is received Freight Clearing Freight amount to be paid to vendor INR (for domestic Purchase) / Other Currency (For Imported material)

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Following is the example of above point –

Item Posting Key Account Business Area Account Short Text Amt. in

Local Cur. Cur. Text 1 Debit

(81) 233070 BA01

Inventory – Traded Electric Motor

25830.00 INR Motor Alstom 22 KW / 4 Pole 2 Credit (96) 130100 BA01 GR / IR Clearing 25830.00 - INR Motor Alstom 22 KW / 4 Pole When we post GRN for traded goods, following accounting entries are posted –

Item Posting Key G/L Account Business Area Account Text Amount in INR Currency Text of Material 10 Debit Account of Cost of Goods Sold (COGS) / General Expenses Respective Business Area, where the Material / Service is received COGS account / General Expenses Account (Quantity of Material X Purchase Order Price) + Freight Charges INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text / Service Text 20 Credit Account of GR / IR Clearing Respective Business Area, where the material / service is received GR / IR Clearing Account (Quantity of Material X Purchase Order Price) INR (for domestic Purchase) / Other Currency (For Imported material) Material master short text / Service Text 30 Credit Account of Freight Clearing Respective Business Area, where the material is received Freight Clearing Freight amount to be paid to vendor INR (for domestic Purchase) / Other Currency (For Imported material)

Following is the example of above point – Item Posting Key Account Business Area Account Short Text Amt. in

Local Cur. Cur. Text 1 Debit (81) 416320 BA01 General Expenses 562580.00 INR KOEL 85 HP / 1800 RPM Engine 2 Credit (96) 130100 BA01 GR / IR Clearing 562580.00 - INR KOEL 85 HP / 1800 RPM Engine

c) Sub-Contracting Purchase Order – In the sub–Contracting Purchase Order, semi– finished material is ordered on the Sub-Contractor & the components are given to Sub–Contractor for processing. When the processed semi-finished material is received from the sub-contractor, the consumption of the components is booked against the received material. The process flow is as below –

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Page 29

Semi – Finished

Material

BOM of Semi–

Finished

Material

With / without

account

assignment

Sub –

Contracting

Purchase Order

Components in

BOM provided to

Vendor for

processing

Transfer of

material to Sub

– Contractor

No accounting

entry. Stock of

material

provided to

vendor is

updated

GRN of

processed

material

(Quantity)

Inventory of

Semi-Finished material

is updated

Stock of material

provided to

Vendor is

consumed

GRN Value

Inventory of

Semi-Finished material

= Processing

Charges + Value

of BOM

Components

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Page 30

Following FI entries are posted during above process –

Item Posting Key G/L Account Business Area Account

Text Amount in INR Currency

Text of Material 10 Debit Inventory account of Semi-finished material Respective Business Area, where the Material is received Inventory – Semi-Finished Goods (Quantity of Semi-finished material X Processing Charges) + (Inventory Value of Components provided) INR (for domestic Purchase) Material master short text of received material 20 Credit Change of Stock from Sub-Contract Respective Business Area, where the Material is received Change of Stock from Sub-Contract (Quantity of Semi-finished material X Processing Charges) + (Value of Components provided) INR (for domestic Purchase) Material master short text of received material 30 Credit Inventory of Compone nts with Sub-Contractor Respective Business Area, where the Material is received Inventory of Compone nts with Sub-Contractor Inventory Value of Components INR (for domestic Purchase) Material master short text of componen ts 40 Debit Inventory of own Compone nts Respective Business Area, where the Material is received Inventory of own Compone nts Inventory Value of Components INR (for domestic Purchase) Material master short text of componen ts 50 Debit Processin g Charges Other Respective Business Area, where the Material is received Processin g Charges Other Inventory Value of Components INR (for domestic Purchase) Material master short text of received material 60 Credit GR / IR Clearing Respective Business Area, where the Material is received GR / IR Clearing Charges Processing Charges to be paid to Vendor (Quantity of Ordered material X Processing Charges Rate) INR (for domestic Purchase) Material master short text of received material

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Following is the example of the above transaction –

Item Posting Key Account Business Area Account Short Text Amt. in

Local Cur. Cur. Text 1 Debit

(81) 235010 BA01

Inventory

Semi-Finished Goods 3150.00 INR

BRG. Housing 25 / 13 2 Credit (91) 400040 BA01 Change Stock Semi-Finished from Sub-Contractor 3150.00 - INR BRG. Housing 25 / 13 3 Credit (99) 235040 BA01 Inventory of semi-finished CI Castings 2852.00 - INR Bearing Housing (Kanban 30 Qty / Bin) 4 Debit (81) 400040 BA01 Change Stock Castings for Sub-Contract 2852.00 INR Bearing Housing (Kanban 30 Qty / Bin) 5 Credit

(96) 130100 BA01 GR / IR Clearing 298.00 - INR

BRG. Housing 25 / 13

6 Debit

(86) 411450 BA01

Processing

Charges Other 298.00 INR

BRG. Housing 25 / 13

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d) Import Purchase Order –

If a raw material is to be imported, the material should have the relevant valuation class (Imported Raw Material). The PO consists of additional customs & delivery costs to be paid. The invoice of planned delivery cost (to be paid to clearing agent) is booked first when the material arrives in the Port (For example – Mumbai JNPT Port). After material is cleared from port & received in Plant, GRN is posted. Then the customs duty is also inventorised along with the basic price of material & freight charges. After the booking of this invoice, GRN is posted when the imported material actually arrives in the plant. The process flow is as below –

Raw

material

Valuation class

– Imported

Raw Material

With / without

account

assignment

Import

Purchase

Order on

Overseas

Vendor

Customs duties,

Freight Charges

etc. of Clearing

Agent are

invoiced

Planned

delivery cost

invoice of

Import PO is

booked when

the material

arrives at Port

Quantity of

Imported

Material is

updated

GRN is

posted when

material

arrives at

Plant

(Quantity)

Basic Value of

Material +

Planned Delivery

Costs + Customs

Duty

GRN Value

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Following are the FI entries posted, when the GRN is posted –

Item Posting

Key G/L Account Business Area Account Text

Amount in INR Currency 1 Debit (89) Inventory account of Imported Raw Material Business Area where the material has been received

Inventory – Imported Raw Material Quantity of Material X Basic Price of material INR 2 Credit (96) GR / IR Clearing Account Business Area where the material has been received

GR / IR Clearing Quantity of Material X Basic Price of material INR 3 Credit (96) Freight Clearing (Imported) Account Business Area where the material has been received

Freight Clearing – Import (Basic Customs Duty) Basic Customs Duty Amount INR 4 Credit (96) Freight Clearing (Imported) Account Business Area where the material has been received

Freight Clearing – Import (Ecess on Basic Customs Duty) Ecess amount on Basic Customs Duty INR 5 Credit (96) Freight Clearing (Imported) Account Business Area where the material has been received

Freight Clearing – Import (S&H Ecess on Basic Customs Duty) S&H Ecess amount on Basic Customs Duty INR 6 Credit (50) CVD Clearing Account Business Area where the material has been received

CVD Clearing CVD Amount INR 7 Credit (50) CVD Clearing Account Business Area where the material has been received

CVD Clearing Ecess on CVD INR 8 Credit (50) CVD Clearing Account Business Area where the material has been received

CVD Clearing

S&H Ecess

of CVD INR

Following is the example of the FI entries of imported material – Item Posting

Key G/L Account

Business

Area Account Text

Amount in

INR Currency 1 Debit

(89) 230110 BA01

Inventory – Imported

Raw Material 15518.00 INR

2 Credit (96) 130100 BA01 GR / IR Clearing 11515.00 - INR 3 Credit (96) 130120 BA01

Freight Clearing – Import

1744.00 - INR 4 Credit

(96) 130120 BA01

Freight Clearing – Import

34.00 - INR 5 Credit 130120 BA01 Freight Clearing – Import 17.00 - INR

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(96) 6 Credit (50) 130130 BA01 CVD Clearing 2145.00 - INR 7 Credit (50) 130130 BA01 CVD Clearing 42.00 - INR 8 Credit (50) 130130 BA01 CVD Clearing 21.00 - INR e) Stock Transport Purchase Order –

In a stock transport Purchase Order cycle, material is transferred from one plant of the same company code to another plant. A stock transport purchase order is raised by the receiving plant on supplying plant as vendor. When the material is ready, the supplying plant delivers the material to the receiving plant along with commercial proforma invoice & excise invoice and the receiving plant posts GRN when the material is received. In this case the FI entries are posted when Goods Issue is done against the delivery note as Inventory transfer from supplying plant to receiving plant. Following are the FI entries posted when Goods Issue is posted –

Item Posting Key G/L Account Business Area Account Text Amount

in INR Currency Plant

10 Credit Inventory Account Business Area from where material is issued Inventory of Material Inventory Amount INR Plant from where material is issued 20 Debit Inventory Account Business Area where material is received Inventory of material Inventory Amount INR Plant where material is received

Example of above transaction is as below – Item Posting

Key

G/L Account

Business

Area Account Text

Amount in

INR Curr. Plant 10 Credit (99) 232080 BA05 Inventory of Spares 4302.50 - INR 2530 20 Debit (89) 232080 BA05 Inventory of Spares 4302.50 INR 9010

f) Service Purchase Order –

When a Service Purchase Order (Item Category – D) is raised on a service providing vendor, the account assignment field becomes mandatory. This is because the service can not be stored in the way a material can be stored in inventory. Hence the consumption of service is to be posted to some account assignment, either to Cost Center or Sale Order or Project. When the service provider completes the required service, the service entry sheet is posted to indicate that the required service has been delivered by the vendor. When the Service Entry Sheet is accepted, a GRN is

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Page 35

automatically posted by the system (which is based on the accepted service entry sheet). Following is the flow chart for Service Purchase Order –

Service Required for

Project / Cost

Center / Sale Order

Account assignment

data such as Project

or WBS Definition /

Cost Center Number

/ Sale Order Number

is maintained.

Purchase Order with

Item Category D

(Service) & required

account assignment

(Q / K / E) is raised.

Service Entry sheet

is created &

accepted after

service is completed

by Vendor. GRN is

posted automatically

by system.

Consumption of the

service is posted to

the cost object

maintained in

account assignment

field.

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Following are the FI postings at the time of accepting Service Entry Sheet –

Item Posting Key G/L Account Business Area Account Text Amount

in INR Currency Text

10 Debit Consumption Account Business Area from where Service is delivered Process Charges Service Charges Amount

INR Service Text

20 Credit GR / IR Clearing Account Business Area where service is delivered GR / IR Clearing Service Charges Amount

INR Service Text

Following is the example of above transaction – Item Posting

Key

G/L Account

Business

Area Account Text

Amount in

INR Curr. Text

10 Debit (81) 411420 BA02 Process Charges - Foundry

3847.80

INR Service Charges 20 Debit (96) 130100 BA02 GR / IR Clearing 3847.80 - INR Service

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Excise entries at GRN

When we procure an excisable material the entries in the excise registers are updated when the GRN for the material is posted. The Modvat benefit of the excise paid to the vendor can be taken for payment of excise duty on finished material (when sold) which we manufacture by using the raw material which the vendor has supplied. For material not used in manufacturing of finished material or for traded material, the excise paid is inventoried (that means the excise amount is added to the material inventory value.) Following are the entries posted for excise registers when the excisable material is received against GRN –

a) Modvatable Excise Item – Item Posting Key Account Business Area Account Short Text Amount in

Loc Curr. Currency

1 Debit (40) Excise Cenvat Business Area where the material is received

Cenvat Input P F Basic Excise

Duty amount INR

2 Debit (40) ECS Cenvat Amount Business Area where the material is received

Cenvat ED Cess ECS Amount INR

3 Debit (40) S&H ECS Cenvat Account Business Area where the material is received Cenvat S&H Ces-1% S&H ECS Amount INR 4 Credit (50) Modvat Clearing Account Business Area where the material is received Modvat Clearing Account Amount equivalent to amount in 1 + 2 + 3 INR

Example of Modvatable excise entries is as below – Item Posting Key Account Business Area Account Short Text Amount in

Loc Curr. Currency 1 Debit (40) 244030 BA01 Cenvat Input P F 3629.00 INR 2 Debit (40) 244031 BA01 Cenvat ED Cess 73.00 INR 3 Debit (40) 244034 BA01 Cenvat S&H

Ces-1% 36.00 INR

4 Credit (50) 130150 BA01 Modvat Clearing

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b) Trading excisable material received against GRN –

Item Posting Key Account Business Area Account Short Text Amount in

Loc Curr. Currency

1 Debit (81) COGS – Trading Material Business Area where the material is

received COGS – Trading Material Basic Value of material + Basic Excise Duty + Ecess Value + S&H Ecess Value + VAT / CST (as applicable) INR 2 Credit (96) ECS Cenvat Amount Business Area where the material is received GR / IR Clearing Basic Value of material + Basic Excise Duty + Ecess Value + S&H Ecess Value + VAT / CST (as applicable) INR

Example of Excise duty inventorised - Item Posting Key Account Business Area Account Short Text Amount in Loc Curr. Currency 1 Debit (81) 410910 BA01 COGS – Trading

Motor 4,331,083.00 INR

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Page 39

FI entries at Material Consumption

When a material is issued to a consumption account (For example – Consumption to Production Order / Cost Center), the inventory reduces & consumption is booked for the cost object. Following are the FI entries posted when material consumption is posted. 1) Material consumption posted to cost center –

Item Posting

Key Account Business Area

Account Short Text Amount in Loc Curr. Curr. 1 Credit (99) Inventory Account Business Area where the material is stocked Inventory of Material Price of Material X Quantity posted INR 2 Debit (81) Consumption of Material Business Area where the material is consumed Inventory Consumption Price of Material X Quantity posted INR

Following is the example of material consumed to Cost Center – Item Posting Key Account Business Area Account Short Text Amount in

Loc Curr. Currency 1 Credit

(99) 231020 BA05

Inventory – Other

Raw material 155.00 - INR 2 Debit

(81) 400240 BA05

Consumption –

Other Raw Material 155.00 INR 2) Material consumption posted to Production Order –

Item Posting

Key Account Business Area

Account Short Text Amount in Loc Curr. Curr. 1 Credit (99) Inventory Account Business Area where the material is stocked Inventory of Material Price of Material X Quantity posted INR 2 Debit (81) Consumption of Material Business Area where the material is consumed Inventory Consumption Price of Material X Quantity posted INR

Following is the example of material consumed to Production Order – Item Posting

Key Account

Business

Area Account Short Text

Amount in

Loc Curr. Curr. 1 Credit

(99) 235010 BA01

Inventory – Semi

Finished Goods 3341.00 - INR 2 Debit

(81) 400290 BA01

Consumption – Semi

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3) Consumption of Stock provided to Sub – Contractor for processing of finished

material when GRN of processed material is posted –

In a sub – contracting purchase order, a semi finished material is ordered on the sub – contractor & components are provided to the sub – contractor for processing the ordered material. When the GRN for ordered material is posted, the consumption of ordered material is posted against the ordered material & the concerned FI entries are posted.

References

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