Period End Closing Activities

CLOSING THE BOOKS IN FINANCIAL ACCOUNTING:

Closing operations recur periodically and can be subdivided as follows

• Period-End Closing (Month End & Quarter End)
• Year-End Closing

The closing operations component supports the preparation and carrying out of activities required for closing. For this purpose, the system provides various standard reports that you can use to generate evaluations and analyses directly from the posted account balance. All the three levels of closing operations are summarized below

Period-End Closing (Monthly & Quarterly Closing)

Following activities as part of month-end closing

• Open and close posting periods:  GAVL can close one or more posting periods in the past for posting, and permit posting to be made to one or more current or future posting periods.

•  Use different reports like:
  • Compact journal
  • Balance audit trail
  • Accounts reconciliation
  • Account balances
  • Open item list

In SAP period can be opened and closed at Company Code level,

Year-End Closing (Quarterly & Final Closing)

At the beginning of the new fiscal year, the user is required to open the posting periods in the new fiscal year and carry forward the balances from the previous year. You do not have to close the old fiscal year and make the closing postings before opening the new fiscal year.

Before the General Ledger begins the month-end closing activities, the sub-ledgers must have completed their closing activities under the respective processes as follows

• AP Month-end Closing
• AR Month-end Closing
• Fixed Assets Month-end Closing
• Process of Month-end closing

The General Ledger Month-end Closing is broadly comprises of the following sub-processes:

⇒ Foreign Currency Valuation for Open Items

⇒ Foreign Currency Valuation For Balance-managed Accounts

⇒GR/IR Regrouping

⇒Open Items Clearing

⇒Post/reverse accruals

⇒ Maintain Exchange Rate Table

⇒ Post Bad Debts

⇒Settlement of I/O to AUC

⇒Settlement of AUC to Fixed Assets

⇒Depreciation Run

⇒ Regrouping of Account balance

⇒Open/Close Posting Periods

⇒Creation of Financial Statements

The Closing or period end activities are generally carried out before generating important reports like Profit & Loss Account, Balance Sheet etc….

for e.g.: unless provisional entries are posted at the period end the Financial statements would not depict the true picture.

⇒Foreign Currency Valuation for Open Items:

In case of International Carrier Revenue/Expenses, all the open items should be analyses at period end and invariably at the Fiscal Year end for any revaluation on account of Foreign Exchange rate fluctuations.

In this procedure, we valuate items in foreign currency at the end of a period in order to post expenses or revenues from currency fluctuations. If the program for all open items in foreign currency is run, then all items posted to accounts that are open item managed would be valuated.

The individual valuation principle determines the way valuation is carried out: only individual items that are still open on the key date are considered for valuation.

The system will post any Gain / Loss on account of Foreign exchange rate fluctuation in a specified G/L P&L Account. For expense from currency valuation, the posting is:

Debit: Gain / Loss on A/c of Currency Valuation (in case of Loss)

Credit: Foreign Customer / Vendor Account

⇒Foreign Currency Valuation for Balance-managed Accounts:

Foreign Currency transactions with Foreign Vendors and Customers that are open as on Closing Date can be revalued for any foreign exchange fluctuations that have taken place after the transaction has been posted. Exchange rate differences resulting from the valuation of open items and foreign currency balance sheet accounts are automatically posted to specific accounts that will be configured in the system.

When valuating open items, the system posts to a balance sheet adjustment account and an account for currency exchange differences resulting from the valuation. This could be either a gain or a loss account. For the valuation of foreign currency balances and, to post the exchange rate differences arising on such valuation, a revenue and expense account would be defined.

⇒GR/IR Regrouping:

The GR/IR clearing account is an intermediate account between the warehouse stock sheet account and the vendor account. At Goods Receipt stage, the net invoice amount expected is posted from the stock account to the GR/IR clearing account. This posting is then cleared by an offsetting entry on the vendor account at Invoice Verification stage.

The accounting entry being passed is as follows:

At the Goods Receipt stage:

Stock A/c                      Dr

GR/IR A/c                     Cr

At Invoice Verification Stage:

GR/IR A/c                     Dr

Vendor A/c                    Cr

In case of GR/IR,  SR/IR account a standard transaction is required to be run which automatically clears the open items.

⇒Open Items Clearing:

In vendor accounts credit line item say invoices are to be set off against debit entry (payment entry). Similarly in customer accounts debit line item say invoices are to be set off against credit entry (payment entry). This process is known as clearing and it helps in analyzing the open items of a customer.

•  The clearing function is required for all accounts of vendors and customers so that transactions can be tracked by their status as “open” or “cleared”. This enables amongst other things analysis of outstanding from or to parties and linking payments /credit debit memos form or to parties with the relevant invoicing and billing transactions.

• For other GL accounts like bank receipt clearing and bank payments clearing accounts which would receive offsetting entries at the time the bank statement is being uploaded. In case of GR/IR,  SR/IR account a standard transaction is required to be run which automatically clears the open items.

The basic prerequisite for clearing is that the accounts must be kept on an open item basis. Customer and Vendor accounts are by default open item managed. This allows monitoring of outstanding receivables and payables at any time. The open item management option, however, must be defined for general ledger accounts.

Generally the inward or outward payments to vendor or customer are made with clearing but still there may be some situations where the items at vendor/customer may remain open e.g. due to advance payments or on account payments or debit/credit notes etc. If the payments are made without clearing the open items in debit and credit of the vendor may disturb the aging reports. The open debit and credit items are to be adjusted through auto clearing or manual clearing for each invoice.

Open Account can be cleared manually & automatically based on certain predefined criteria e.g. assignment or reference number etc. The basis of clearance will be specifically decided during realization phase of the project

⇒Post/reverse accruals: (FBS1)

The Manual Accruals component enables you to calculate and post values in General Ledger Accounting and through a Transaction these can be reversed on the desired date.

⇒Maintain Exchange Rate Table:

SAP supports all kind of Foreign Currency postings to General Ledger and Sub Ledgers, these foreign currency amounts are converted into local currency based on exchange rates maintained in the Exchange rate table.

Exchange rates are predominantly used for the following:

• Translate foreign currency amounts when posting or clearing or to check exchange rate entered manually.
• Determine the Gain or Loss from exchange rate difference.
• Evaluate open items in foreign currency Balance Sheet Accounts.

The exchange rates are defined by period (“valid from”)

The system uses the type M exchange rates for foreign currency translation when posting and clearing documents. In this activity Central Finance department needs to enter the Exchange Rate. An entry must exist in the system for this exchange rate type. The exchange rates apply to all company codes.

⇒Post Bad Debt:

Adjustment of Accounts receivable is needed because of bad debt. This process contains of four steps:

Reclassify a customer claim from AR to bad debt.

• Post an expected loss for the customer in general ledger

• When the customer has paid or the loss is actual, then you have to reverse the preliminary loss. ((Debtors outstanding for more than two years are written off in consultation with the management.)

•  Post the incoming payment, or the actual loss

⇒Settlement of Order to Asset Under Construction (AUC):

Investment orders are generally used to collect and settle the costs of an investment project towards assets within Asset accounting. Investment orders are settled in two steps:

1) Settlement to Asset Under Construction (AUC)

2) Settlement from Asset Under Construction (AUC) to fixed asset.

⇒Settlement to Fixed Asset:

To be able to do settlement to fixed asset the

asset master data must have been created. This should have been done before the period end closing process starts. Also maintaining settlement rule and changing status for the order should have been done before the period end closing starts.

⇒Execute Depreciation Run:

Every asset transaction in the R/3 System FI-AA component immediately causes a change of the foretasted depreciation. However, it does not immediately cause an update of the depreciation and value adjustment accounts for the balance sheet and profit and loss statements. The planned depreciation is posted to the general ledger when you run the periodic depreciation posting run.

⇒Regrouping of Account balance:

A credit balance on a customer account should be displayed as a payable; conversely, a debit balance on a vendor account should be displayed as a receivable. If such a situation arises, the program makes the appropriate adjustment postings automatically.

At the year end, based on the selection made by the user the system will facilitate regrouping of debit balances as per payables to a separate account for re-classification.

The credit balance in customer accounts will be shown separately in the annual financial statements. Customer balances over six months and other balances will be shown separately.

⇒Open and Closed Posting period:

Carry forward g/l balances

This process involves carrying forward account balances into the new fiscal year. The balance to be carried forward is shown in the account balance display.

When you carry forward the balances for G/L accounts at the end of a fiscal year, the system automatically adjusts the balances when you post values to the previous year. The system uses an indicator to determine whether the balances have been carried forward. Once this has been done, the balance is automatically carried forward whenever a posting is made, even when a posting is made to the previous year. It is therefore not necessary to execute the balance carry forward again.

The balances on the balance sheet accounts are simply carried forward into the new fiscal year.

Profit and loss accounts are carried forward to Retained Earnings accounts. The balances of the profit and loss accounts are set to Zero.

Carry forward asset balances

From the point of view of the system, a fiscal year change is the opening of a new fiscal year for a company code. At the fiscal year change, the asset values from the previous fiscal year are carried forward cumulatively into the new fiscal year. Once the fiscal year change takes place, you can post to assets using value dates in the new fiscal year. At the same time, you can continue to post in the previous fiscal year.

Before you can close a fiscal year in Financial Accounting from a bookkeeping perspective, you have to carry out preparatory measures in Asset Accounting.

The fiscal year change can only be carried out (even in test mode) for the new fiscal year. The earliest that you can carry out a fiscal year change is in the last month of the old fiscal year. You can choose any point in the new fiscal year for carrying out the fiscal year change. Before you can change to fiscal year YYYY, you must have already closed fiscal year YYYY – 2. You can have a maximum of two fiscal years open for posting at one time.

No business transactions can be posted in a new fiscal year before the fiscal year change. You can continue to post in the old fiscal year, even after the fiscal year change. The system automatically corrects any values that are affected by postings in the past.

Carry forward customers & vendor balances

This program calculates the balance carried forward for customers and/or vendors.

The balances of the previous year are carried forward to the New Year.

When posting into a previous year, the system carries forward the balance automatically. This is independent of whether the program has already run or not. “Posting to a previous year” means that the posting date of the document has an earlier year than the entry date. This automatic carrying forward also occurs accumulatively over several years that mean a posting in January 2013 with the posting date December 2011 changes the balance carried forward for 2010 and 2011.

SAP recommends that the program is run at the beginning of the new fiscal year. If the program is already run at the end of the last fiscal year, postings which are posted after this to the last fiscal year, do not result in automatic adjustment of the balance carried forward because it is not a “posting to a previous year”. In such a case, it is necessary to let the program run again after these postings to carry forward the postings entered later.

⇒Creation of Financial Statements:

All the financial statements whether internal or external shall be prepared monthly / quarterly / half yearly and yearly basis or they can be created as & when required without further processing of data.

There shall be one Retained Earnings account defined & configured in SAP to take care of balance of retained earnings as per Indian Companies Act, 1956 and this will be displayed in Balance Sheet under Reserves & Surplus.