Mentors Unlocked is starting a small series on different modules of ERPs. The objective of this series is to provide an understanding of the module. We shall start with overview of each of the module.

Most enterprise level ERPs, allow ERPs to be configured for the enterprise with multiple companies under it. This would apply to all modules including Finance and Accounts module. Hence ERPs can be used to maintain books of records of an enterprise or a company depending on the need.

The finance and accounts module is central to an ERP System as all activities in an organization have financial implications. Unlike, accounting software like Tally, QuickBooks etc. Finance and Accounts module consists of three sub-modules. These are

  1. General Ledger – Contains all Finance and Accounts transactions.
  2. Accounts Receivable – Used to record all transactions related to customers and debtors
  3. Accounts Payable – Used to record all transactions related to Vendors and creditors

The General ledger contains records of all the financial transactions. Transactions, from other modules also flow into General Ledger. For example, if material is issued for production in the inventory module, the financial transaction will flow in General Ledger whether it is written manually or automatically.  Similarly, transactions from the two sub-modules in Finance and Accounts, Accounts receivables and Accounts payable flow into General Ledger.

Accounts Receivable –  All transactions related to sales are recorded in this module. Irrespective of the nature of sale, for example, if the company is selling old equipment to its employees, then even the employees would have to be registered as customers. The module can be used to generate invoices, record sales and incomes ( accrued but not receivable), receipts and create receivable balances.

Accounts Payables –  As the name suggests, this module is used to record all payment liabilities irrespective of nature of payments and payments. For examples, salary payments, advances to employees, employee reimbursements or payments to vendors are recorded in this module. For the same reason, besides vendors of goods and services, consultants and sub-contractors, all employees and creditors are setup as vendors in this module.

All companies have to follow accounting standards applicable in the country/ they operate in. Besides this, one of the main functions of Finance and Accounts department is that it should be able to provide us with reports or information without going back to vouchers. ERPs provide us multiple Accounting Segments that includes Charts of Accounts. Most ERPs would allow for a numerical chart of accounts that are scalable and expandable. If used creatively, the charts of accounts can also be used to record transactions that may affect costing, such as opportunity costs, but are not recognised as financial transactions as per accounting standards. The other accounting segments would come from reporting requirements and may include

  • Business divisions
  • Geographic segments or locations
  • Item codes
  • Special codes to track specific initiatives or costs

Each company designs and structures accounting segments and chart of accounts based on its requirements. The accounting segments can be used selectively in multiple combinations.

There are multiple levels and categorizations of records possible in ERP which can provide reports and segregation and aggregation at each level on company / division / sub-division / cost-centre / profit-centers / departments. This provides better visibility and control as well as automates most of the compliance and audit requirements.

ERPs also allow us to digitize processes in accounting. For example, 3-way checking before generating a payment proposal/ liability can be conducted electronically. Some companies also like to add on manual processes to improve internal controls and prevent frauds or reduce risks. For example, 3 way checking of invoices, material receipt notes and purchase order in the ERP can be complemented with hardcopies of the documents ( also referred to as 4 way checking) . ERPs also have utilities that automate some processes and generate transactions on their own. For example, apportionment of costs or recognizing foreign currency gains and losses can be automated and the system can generate transactions that can be reviewed and posted. Similarly cash book can be maintained within the system and the books of accounts can be soft closed (that is, books of accounts for prior periods are locked so that no fresh entries can be written).

The biggest advantage of ERPs are better controls and checks and balances. Roles and access rights can be defined to limit unauthorized transactions, ensure that all transactions are approved as per delegation of authority by building business rules and developing roles with defined access (read, edit/approve and view) rights.

Setting up of Finance & Accounts module requires understanding on functional level as well as ERP design. The configuration should be geared for future needs of the organization so as to ensure consistency of data or prevent need to regular redesign and reconciliations. An external agent may provide fresh eyes and can help company by sharing best practices from other companies and industries.