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ADempiere|ERP
Module 9.1Accounting, Costing
and ERP
By Wipawii Jaraswarapan
Business Consultant, ecosoft™wipawii@gmail.com
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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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Accounting Principles (continue)
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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Accounting Principles (continue)
Matching Product cost
Wages paid => not recognised but capitalised to inventory (Asset)
Products are sold => recognised as Cost of Goods Sold (COGS – Expense).
Income StmtSales 100
COGS (90)
GP 10
Costing Method
Merchandise
Inventory
(Asset)
Product Cost
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Accounting Principles (continue)
Matching – Period Cost, which are expensed immediately.
• cost can be charged as expenses to the current period e.g. office salaries and other administrative expenses.
• The cost of purchasing a fixed asset is spread over the period in which it is expected to generate revenue (Depreciation)
Matching - Period Cost
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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.
Perpetual inventory system
(บนทกแบบตอเนอง)Periodic inventory system
(บนทกตอนสนงวด)
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.
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
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
Perpetual inventory system
(บนทกแบบตอเนอง)Periodic inventory system
(บนทกตอนสนงวด)
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Moving Average
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
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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