Module 9.1
Accounting, Costing
and ERP
By Wipawii Jaraswarapan
Business Consultant, ecosoft™
[email protected]
ADempiere|ERP
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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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Module 9.1
Accounting Concept
ADempiere|ERP
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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 (สมมติฐานทางบัญชี ) is the preparation of
accounting information, which is based on certain
fundamental concept (GAAP).
1. Accounting Entity (หน่วยงาน) : wherein the business entity considered
as a separate and distinct entity apart from the owner.
2. Going concern Assumption (การดารงอยู)่ : The business is assumed to
have a continuous life of existence.
3. Time period Assumption (กรอบเวลา): The life of the business is divided
into equal periods. It can be monthly basis, quarterly basis, semiannual basis and yearly or annual basis.
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Accounting Assumptions (continue)
4. Money Measurement Assumption (หน่วยเงินตรา): 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 (ราคาทุน): 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 (หลักการบัญชี ) is a ground rule or guideline to govern
current accounting practice and that is used as a reference to determine the
appropriate treatment of complex transactions.
Input-Oriented
Output-Oriented
Operating principles
Stakeholders
Limitation principles
Preparation
• Recognition (การรับรู้)
• Matching (การจับคู่)
•
•
•
•
Conservative (ระมัดระวัง)
Disclosure (เปิ ดเผย)
Materiality (นัยสาคัญ)
Objectivity (หลักฐานเที่ยงธรรม)
• Comparability (เปรี ยบเทียบได้)
• Consistency (สม่าเสมอ)
• Unity (เป็ นหนึ่งเดียว)
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Accounting Principles (continue)
Recognition Principles (หลักการรับรู้รายได้ ค่าใช้ จ่าย)
 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 (หลักการจับคู่)
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. ทฤษฎีการวัดความพยายามกับความสาเร็ จ
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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).
Product Cost
Merchandise
Inventory
(Asset)
Income Stmt
Sales
COGS
GP
100
(90)
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Costing Method
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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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Module 9.2
Inventory and Costing
ADempiere|ERP
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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 Trading
• Raw Materials inventory
Manufacturer
• Work In Process inventory
• Finished Goods inventory
Inventory Cost: The company has to accumulate costs of purchases until
raw material is ready for use or until merchandise inventory is ready for
shipment to customers.
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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
Perpetual inventory system
Periodic inventory system
• The Inventory account is affected
every single transactions when
inventory move (sale/purchase).
• Purchase goods
• The Inventory account is affected at
the period end, but not affected
during the period.
• Purchase goods
(บันทึกแบบต่อเนื่อง)
•
Inventory increase
• Goods is sold
•
•
•
Inventory decrease
Sale is recognised
Expense (Cost of good sold)
• Period ends
• Nothing with costing
(บันทึกตอนสิ้ นงวด)
• 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.
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Inventory Accounting Systems
Perpetual inventory system
(บันทึกแบบต่อเนื่อง)
Advantages
• A high degree of control.
• Timely accurate report
• It aids in the management of proper
inventory levels.
• Physical inventories can be easily
compared.
• Whenever a shortage i.e. a missing
or stolen is discovered.
Disadvantages
• Time consuming
• Need experienced accountant
Periodic inventory system
(บันทึกตอนสิ้ นงวด)
Advantages
• Simple to operate
• Cheaper cost in bookkeeping
Disadvantages
• Information is not update/ready
• Decrease opportunity for business
competition
• Unscientific - It does not take into
consideration the quantities
purchased at different prices.
An advancements in technology (Software application) reduce time consuming
of perpetual system => Simpler and Cheaper.
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Inventory and Costing
 Perpetual inventory system (บันทึกแบบต่อเนื่ อง)
 Periodic inventory system (บันทึกตอนสิ้นงวด)
Available
for Sale
SOLD
Capitalised
Expense
Merchandise
Inventory
Cost of Goods Sold
Balance Sheet
(Asset)
Income statement
(Profit)
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Inventory and Costing
Why Inventory measurement is required?
 Money Measurement Assumption (หน่วยเงินตรา)
 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
The same inventory items can have different costs, thus
 The physical flow of goods are merely used to assign
unit costs to inventory.
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Average Cost
 It does not relate with the flow of goods.
Specific identification method
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Costing Method
First-in, first-out (FIFO)
The first unit purchased is the cost of the first unit sold; therefore the ending
inventory will be made up of the most recently purchased units.
Effect: Cost of goods sold  Low  The High profit
Ending inventory balance  The High
Last-in, first-out (LIFO)
The last unit purchased is the cost of the first unit sold; therefore the ending
inventory with this method is made up of the earliest units purchased.
Effect: Cost of goods sold  High  The Low profit
Ending inventory balance  The Low
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Costing Method
Average Cost
An average of all the costs; therefore the ending inventory balance is an
average of the purchase costs.
Effect: Cost of goods sold and Profit  in between FIFO and LIFO
Ending inventory balance
 in between FIFO and LIFO
Specific identification
Identify each unit of merchandise with the unit's cost and retain that
identification until the inventory is sold. Once a specific inventory item is
sold, the cost of the unit is assigned to cost of goods sold.
Effect: Require tedious record keeping.
• Usually used for inventory of uniquely identifiable goods or
• Having a fairly high per-unit cost e.g. fine jewelry
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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
Periodic inventory system
First-in, first-out (FIFO)
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Last-in, first-out (LIFO)
Moving Average
Weighted Average
(บันทึกแบบต่อเนื่อง)
Example: a. buy 1 at $1.00
Sale (1 x $4.00)
Cost of goods sold (1 x $1.00)
Gross profit
b. sell 1 at $4.00
4.00
(1.00)
3.00
Ending inventory (1 x $2.00)
2.00
(The last purchase inventory was at $2.00)
Close to Actual cost
(บันทึกตอนสิ้ นงวด)
c. buy 1 at $2.00
Sale (1 x $4.00)
Beginning inventory
+ Purchase ($1.00+$2.00)
Inventory available for sale
- Ending Inventory
Cost of goods sold
Gross profit
4.00
0.00
3.00
3.00
(1.50)
Ending inventory 1 x [($1.00+$2.00)/(1+1)]
(1.50)
2.50
1.50
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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 vs
Weighted 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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Module 9.4
Set up new Client in AD
(Accounting view)
ADempiere|ERP
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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
Material Policy: FIFO-LIFO
Usually Material movement
is tracked by using Product
Attribute instances, however,
if an instance is not
specified, it will be
automatically identified
based on this Material
Policy.
Cost immediately => ‘Checked’
If selected, costs are updated immediately
when a Cost Detail record is created (by
matching or shipping).Otherwise the costs
are updated by batch or when the costs are
needed for posting.
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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.
Post Services Separately check box
• If checked, product type Service and
Resource will use a separate account
when posting documentL.
• If not, it will use the same account as
used for posting Item Product Types.
Explicit Cost Adjustment check box
• If checked, when posting Vendor
Invoices for Landed Costs, the selected
Debit-Credit to the Cost Element will be
displayed.
• If not, the transactions will include the
Cost Adjustment Account, Tax, and
Accounts Payable.
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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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