COST OF SALES ACCOUNTING : A COMPARISION WITH PERIOD ACCOUNTING: The Profit and loss statement of a Company can be calculated

according to two different procedures : Cost of Sales accounting and period accounting. Applying either method to a given set of business transactions under a given set of laws yields the same bottom line result (profit/loss) in concept. In Period accounting, the profit and loss statement is structured according the individual revenue and expense types. Due to this structure, it becomes apparent which production factors caused expenses. Period accounting compares these expenses incurred in an accounting period with the total result for this period which have not yet been sold (increase in stock) and adds them to the sales revenue. In addition, it deducts goods produced in the previous accounting periods that have been sold in the current accounting period from the sales revenue. Together with other operating revenues, the total of these items represent the total result of the accounting period. In contrast to period accounting, cost of sales accounting does not differentiate between various types of expenses. With this method, the emphasis is on matching the revenues for goods and/or services provided (the value that a Company gains as a result of sales) against the related expenses for those items (the value that is lost when products are transferred out of the company). It compares the Sales revenues with expenses incurred by the goods produced without other revenues or expenses being added or deducted. Operating expenses that cannot be directly attributed to sales are allocated to Function areas such as Sales and distribution, administration etc. Due to the function structure consisting of production, sales and distribution, administration, Cost of sales accounting shows the different items in the Company for which costs incurred. This accounting method displays profit and loss information in a manner optimized for conducting margin analysis, and as such it is optimal for the Sales, marketing and product management areas. Typical Profit and loss statement derived from Period accounting and Function areas: he Operating result remains the same in Period Accounting and Cost of Sales Accounting . USE OF FUNCTIONAL AREAS FOR REPORTING : Function areas classify operating expenses according to the requirements of Cost of Sales accounting by production, administration, sales and distribution, marketing, research and development etc. Some examples of how you can use substitution or a user exit to

identify the functional area : - Cost centers : via the Cost center type and/or combination of cost center and cost element. - Orders : via the Order type. WBS element : via the Project type profile. Profitability

segment : function area Sales. G/L account.

Functional areas can also be derived based on specific relative position values in the G/L account and cost center/internal order. If CO assessments/distribution causes costs to be allocated across functional areas, then the reconciliation ledger must pass the interfunctional area transaction to FI. Functional areas can also be entered manually. The manual entry has priority over the substitution rules defined for deriving functional areas. The following tables can be utilized for defining the substitution rules for Functional areas : ACCHD fields = FI document header. ACCIT fields = FI document item. AUFKV fields = order infos eg order type ( AUFKV-AUART ) CSKSV fields = cost center info, eg cost center type ( CSKV-KOSAR ) In addition to inter-company activity and inter business area activity, inter functional area activity must be posted back to

the FI module from CO in order to meet external reporting requirements. In addition to the FI General Ledger, there is the option of keeping a further ledger ( Cost of Sales accounting ledger 0F ). In this Ledger, you can update all FI relevant business transactions. In contrast to the General Ledger, the transaction figures are additionally administered according to function areas. The Ledger is based on the table GLFUNCT. When FI relevant account assignments such as company code and business areas are changed, the reconciliation ledger principally logs clearing postings within CO. It also shows variance of function area balances between FI and CO that occurred due to internal changes. It is therefore recommended that the reconciliation ledger should also be configured and activated. SOME BASIC STEPS FOR SETTING UP COST OF SALES ACCOUNTING : 1. Maintain functional areas through Financial Accounting

configuration. 2. Define the derivation rules for Functional

areas. 3. rule. 4. Activate the Special purpose ledger if it was not activated earlier. ( Activate the Function area derivation

Global or local ledger ) 5. Activate the Reconciliation ledger.

When a CO internal clearing leads to a change of function area, this results in a shifting between the concerned P & L items. This

is why this transaction has to be transferred back to FI in the form of a correction posting ( reconciliation ledger ). The definition of substitution rules for secondary cost elements provides the basis for adjustment postings that are generated later. 6. Allocate your Company code to the Ledger. Define the activity

groups. 7. Define the field movements that will populate your

ledger. 8. Set up reporting requirements.

REPORTING PROFIT AND LOSS STATEMENT ACCORDING TO COST OF SALES ACCOUNTING : The Profit and loss statement based on Cost of sales accounting is generated from the new Cost of sales accounting ledger ( ledger 0F ). SAP delivers a sample report as a model for your own reports : To look at the report ; Accounting > Financial Accounting > Special Purpose Ledger > Tools > Report Painter > Report writer > Report group > Display. Enter report group 0F01, enter the following : Ledger : 0F Fiscal Year Period : 2005

from Period To Company

: 01

: 12

code : As relevant. Plan version relevant To drill down a particular line item, place cursor on the amount field and go to Edit > Select block. A message will appear Cell is marked . The blocked that is marked is displayed in a different color. Click the button Call up report . ( first button from the right hand side ). A selection screen will pop up displaying options such as Actual like items for table GLFUNCT, Plan lime items for table GLFUNCT and Period breakdown. The Functional area is kept in the Cost of Sales accounting Ledger and in the total tables of the reconciliation ledger and in Profit Center accounting. The standard system contains two sample forms for Cost of Sales accounting : 0SAPBLNCE -01 Balance using C/S ( : As

German Trade Law ) 0SAPPRALO01 Profit and loss

w/C/S ( German Trade Law ) These forms are based on the financial statement version INT ( Chart of accounts international ) and display actual data. The columns show a comparison of the current fiscal year and past

fiscal year, along with a variance between the two years. You can copy these forms to create your own forms. Give your own reports a name that lies within the naming range for customer defined reports. As with the forms, there are also two standard reports for Cost of Sales accounting with exactly the same naming convention. You can copy these sample reports to create your own reports. Again, give your reports a name that lies within the naming range for customer defined reports. SOME DRAWBACKS OF USING COST OF SALES ACCOUNTING APPROACH : It is worth noting that Profit center accounting transfers data according to the principle of Period accounting. The pre-defined standard reports in Profit center accounting in PCA information system are based on a division according to the Period accounting approach. SAP delivers no standard reports using the Cost of Sales by using the function area. Since you can define these functional areas and the rules by which they are used, you need to define your own reports if you want to use the Cost of Sales approach. ( you can use the standard system delivered forms and reports to get your desired reporting requirements ). You can only use the Cost of Sales approach in Profit center accounting if it is also active in Financial accounting. The System performance may get affected because of addition of an extra Ledger 0F depending on the volume of data handled in the system.