What is Closing Procedures in SAP FI (Financial Accounting)?

SAP Modules has its own period-end and year-end closing procedures. FI (Financial Accounting) is one such module, which lets the user keep more than one period open at the same time. FI is an on-line system that continuously and completely integrates the general ledger with accounts receivable and accounts payable. At the beginning of a new period, the user has to keep the current period open for new transactions such as posting customer invoices, while the user also has the previous period open for adjustments.

In FI (Financial Accounting), the complicated, technical closing procedures to close the prior period, open the new period and carry forward account balances cease to exist. In fact, the user should have two posting periods open at the same time – to make adjustments in the prior period before reporting the results and to post customer/vendor invoices or other data to the new period. SAP being an integrated system, the user cannot simply hold all invoices and wait for the prior period to be closed before opening the new period and execute the transactions.

SAP Closing Procedures:

During the first few days of the new period, all adjustments are usually to be posted to the prior period. Before closing the prior period, user can run a transaction journal of adjustments and accruals depending on the “document” type of adjustment entries scan the journal and be sure that all of these closing entries were posted to the prior period only.

Fact of the matter lies that homosapiens are bound to make errors. Thus, if a user made a mistake and posted a closing entry to the new period instead of to the prior period, then SAP gives the flexibility to the user to reverse the transaction and post it again to the prior period.

1. Overview of the Closing Process
2. Overview of the Month-end Closing Process

 The above flowchart provides an overview of the integration of various modules in month-end closing process.

• Pre-Close activities, which begin in the old month, include:
  • Technical – Open new accounting period (FI).
  • FI – Enter accruals/deferrals, process recurring entries and bad debt expense in AR, post depreciation and interest expenses in Asset Accounting.
    • MM – Maintain GR/IR clearing account, post-material revaluations.
    • HR – Post payroll expenses.
    • SD – Record goods issues for deliveries and invoice customers.
      • Technical – Close old month in (MM), close sub-ledgers (FI), preliminary close of G/L (FI).

• Managerial Close activities include :
  • CO – Allocations and reposting, locking the previous period in CO.
  • FI – Re-opening the G/L for adjustment postings.

• Financial Close activities include:
  • CO – Reconciliation posting to FI (for cross-organizational-unit CO postings).
  • FI – Foreign currency revaluations and postings to correct business area, profit center, and profitability segment out-of-balance conditions.
  • Technical – Final close of the old period.
  • FI/CO – Create management and financial reports.

3. Overview of the Year-end Closing Process

The above flowchart provides an overview of the year-end closing process. These activities are performed in addition to the regular month-end closing process for the final period of the fiscal year.

• Pre-Close activities, which begin in the old month, include:
  • Technical – Open the first accounting period of the new fiscal year (FI).
  • MM – Perform physical inventory count (may be performed on a monthly basis).
  • PP/CO – Update product cost estimates (may be performed more frequently).
  • MM – Lowest value determination and LIFO/FIFO valuation.
  • AA – Asset revaluations and capital investment support.
  • FI – Balance confirmations for receivables/payables.
  • Technical – Fiscal year change (AA) and balance carry forward (FI).

• Financial Close activities include:
  • FI – GR/IR clearing account analysis, receivables/payables regrouping, reconciliation of prior year to new year, and other adjustment postings.
  • Technical – Final close of the old period (AR/AP and GL).
  • FI/CO – Create management and financial reports.

4. Closing the Period – Step-by-step procedure

Similar to the variety of Kabas we have in India, the closing procedure also varies with organization working on SAP. Opening the new period and closing the previous period are two parts of the closing procedure. A sample procedure to close the period is as follows:

1. Coordinate closing with the purchasing department (MM), the cost accounting and internal reporting department (CO), and with fixed assets accounting department (AA).
2. In MM, user can post inventory movements only in the current period and the previous period. When the user close the period in the purchasing department using MM, the user prevents posting of vendor invoices (invoice verification) and inventory movements in the closed period and permit posting of invoices in the new period.
3. It is usually advisable for the user to enter the new intercompany exchange rates with a validity date from the beginning of the new period. Best practice is to enter both exchange rates, in other words, the intercompany rate from transaction or group currency to local currency, such as from 1 USD to 1 EUR, and the reciprocal from local currency to the same transaction or group currency, such as from 1 EUR to 1 USD.
4. Post other accruals to be reversed automatically.
5. Post any management fees as G/L transactions.
6. Post reserves as G/L transactions.
7. If required, revalue open items and G/L accounts according to company policy or GAAP.
8. Optionally, revalue prepayments and accruals in local currency to group currency.
9. Post revaluation from previous step.
10. Run a transaction journal to verify that no adjustments or closing entries were posted at the beginning of the new period.
11. Close the previous period. FI automatically carries forward the account balances to the next period (during the fiscal year). At the end of the year, the user has to run two programs in FI. The first carries forward customer and vendor account balances. The second carries forward G/L account balances.
12. Prepare the VAT report based on the report supplied by SAP. Make the VAT adjustment, posting VAT payable/refundable either manually or with the supplied VAT report. This adjustment makes the account balances in the input and output VAT accounts zero, so that the calculation for the next month starts at zero.
13. If required (at year-end), revalue open items and G/L accounts according to the local regulations and revaluation methods. If required, post transaction gains/losses to separate G/L accounts.
14. With the local balance sheet format, prepare the balance sheet and profit & loss account.
15. Document briefly any changes to the procedure. Training should be imparted to everyone involved in the process.

5. Closing the Period – Major procedures in detail

            I.      Opening the new posting period in FI

To open the new posting period:

1. Menu Path: Financial Accounting – General Ledger – Environment – Current Settings – Open and Close Posting Periods
   1. T-Code: OB52 / S_ALR_87003642
   2. For each company code, specify at least + in the second column to specify two possible ranges of open posting periods. Optionally, for each company code, the user can specify by each type of account (A-assets; D-customers; K-vendors; S-G/L accounts) a range of accounts and two ranges of open posting periods. For example, the user could keep one range of posting periods open for the new period and a second range open for adjustment periods in the previous fiscal year.

        II.      Posting inventory movements in previous period

To post inventory movements in the previous period:

1. Menu Path: Logistics – Materials Management – Material Master – Other – Allow Posting to Previous Period
   1. T-Code: MMRV

    III.      Posting inventory movements in previous period

To prevent posting of vendor invoices and inventory movements in the closed period and permit posting of invoices in the new period:

1. Menu Path: Logistics – Materials Management – Material Master – Other – Close Period
   1. T-Code: MMPV

      IV.      Intercompany exchange rates for a new period

To enter the new intercompany exchange rates with a validity date from the beginning of the new period:

1. Menu Path: Treasury Management – Basic Functions – Market Data Management – Manual Market Data Entry – Currency
   1. T-Code: OB08

          V.      Posting Adjustments

To post an adjustment (a closing entry), post a G/L transaction like any other. Debit one G/L account and credit another.

1. Menu Path: Financial Accounting – General Ledger – Document Entry – General Posting
   1. T-Code: F-02

      VI.      Posting an Accrual for Automatic Reversal

At the end of the period, one can post an accrual for automatic reversal in the next period. To post an accrual for automatic reversal:

1. Menu Path: Financial Accounting – General Ledger – Periodic Processing – Closing – Valuate
   1. T-Code: FBS1

  VII.      Reporting Adjustments by Posting Date

Since both the previous posting period (for posting adjustments and accruals) and the new posting period (for posting customer invoices and payments) are open at the same time, it is possible that someone makes a mistake and posts an adjustment or accrual to the new posting period. In this case, one has to reverse the transaction and post it to the proper posting date and posting period.

To make sure that all adjustments were posted to the proper date (in the previous period), the user can report all adjustments (by one or more “document types”) by the posting dates as follows:

1. Menu Path: Financial Accounting – General Ledger – Information System – General Ledger Reports – Document – General – Compact Document Journal
   1. T-Code: S_ALR_87012289

The user would scan the Report and make sure that the posting date of all adjustments and accruals was in the prior period. If any were posted to the new period by mistake, print the report, reverse the transaction by the number, and then post the transaction again with the proper posting date.

VIII.      Closing the Previous Posting Period

To close the previous posting period:

1. Menu Path: Financial Accounting – General Ledger – Environment – Current Settings – Open and Close Posting Periods
   1. T-Code: OB52 / S_ALR_87003642

The G/L account balances, customer account balances and vendor account balances are automatically carried forward to the next period. Only at the end of the fiscal year, the user has to run programs to carry forward account balances to the next fiscal year.

      IX.      Closing the Year & Carrying Forward Balances

SAP Modules such as AA (Asset Accounting) and MM (inventory management & purchasing) have specific procedures and programs required to close the fiscal year. In FI, at the end of the fiscal year, the user needs to run two programs to carry forward the balances to the next fiscal year. One program carries forward the G/L account balances while the other program carries forward the customer and vendor account balances.

When running any carryforward program, the user should make sure that nobody is posting any entries to accounts. Also, the user has to run the carryforward program in the new year. After running the carryforward program, when a transaction is posted to the previous year, the account balances in the current year are immediately updated.

To carry forward the G/L account balances to the next fiscal year:

1. Menu Path: Financial Accounting – General Ledger – Periodic Processing – Closing – Carrying Forward – Balance Carry Forward
   1. T-Code: F.16

To carry forward the customer & vendor account balances to the next fiscal year:

1. Menu Path: Financial Accounting – Accounts Receivable/Accounts Payable – Periodic Processing – Closing – Carrying Forward – Balance Carry Forward
2. T-Code: F.07

          X.      Revaluing Open Items & G/L Account Balances

One possible revaluation procedure using SAP is as follows:

1. At the end of the month or period, enter the intercompany exchange rates and the final day of the previous period as a validity date. The purpose is to revalue the previous period’s balances with the new exchange rate.
2. At the beginning of the next period, after closing the period but before preparing or transmitting P&L and closing balance sheet, run the program to revalue open items into both local currency and into group currency. The revaluation method has to be properly configured according to local requirements and the organisation’s financial policy. Enter the last day of the previous period as the Balance Sheet Key date, depending on the fiscal year. Mark Postings Requested. Enter the posting date as the first of the month of the new period and reversal date as first of the next month.

The program then calculates and posts at least four separate transactions. The first two transactions record the revaluation of the open items into local currency and then reverse this revaluation. The second two transactions record the revaluation of the open items into group currency and then reverse this revaluation.

1. At the beginning of the next period, after closing the period, run the program to revalue G/L account balances. This program revalues both account balances kept in local currency, such as prepayments and accruals, and account balances kept in foreign currency, such as bank accounts in foreign currency. Enter the revaluation method for both the company code currency and the group currency. Enter a key date of the last day of the previous period.

If the account is kept in local currency, such as prepayments and expense accruals in local currency, the program calculates and then posts in group currency if the group currency value has been changed, thereby offsetting these entries with the configured accounts for currency gains and losses.

Separately, if the account is kept in foreign currency, the program calculates and then posts each account in local currency and group currency, thereby offsetting these entries with the configured accounts for currency gains and losses.

1. When one closes open items, for example, when A/R posts a cash receipt and closes one or more customer invoices, then the program automatically calculates and posts the realized exchange gains or losses to the configured accounts – in both local currency and group currency. If both the invoice and the payment were in local currency, the program posts no exchange gain or loss in local currency, but does calculate and post an exchange gain or loss in group currency. This procedure requires a complete, error-free configuration.

To revalue open items, most of all customer invoices, vendor invoices and intercompany receivables and payables:

1. Menu Path: Financial Accounting – General Ledger – Periodic Processing – Closing – Valuate – Foreign Currency Valuation
   1. T-Code: F.05

6. Steps for the Closing Process in FI

7. Steps for the Closing Process in CO

Also See: What are the Month End Closing Activities in Finance