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Home Work:

Foundation for BPC - Financial Accounting Terminology

 SAP FICO (or Financial Accounting)


Terminology/Building Block has been explained in
this presentation
Sushma Kulkarni , CA , CPA
Financial /Business Intelligence Expert
sushma_klkrn@yahoo.com

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1 Journal Entry
 All accounting transactions are recorded in the form of a
journal entry
 Accounting journal is a collection of all journal entries
 All accounting journal entries have two sides, debit and
credit
 For each accounting journal entry, the total of debit sides is
equal to the total of credit sides
 i.e. debit side total = credit side total
 If debit side total is not same as the credit side total, the
journal entry does not balance and it is not accurate
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2 Journal Posting
 Posting is the process of moving the balances of
journal entries to appropriated accounts in the ledger
 An example of journal entry
 (Debit) Cash 2,000 ($2,000 debit balance is
posted to the cash account in GL)
 (Credit) Sales 2,000 ($2,000 credit balance is
posted to the sales revenue account in GL)

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3 Journal Opening
 In BPC, You create and maintain journal entries using the
journal entry template that has been built by your
administrator.
 You can reopen one or more journal entries from a previous
year, and post them to another set of accounts for the
following year.
 When you reopen journal transactions, you define translation
information for the dimensions you want to reopen. The
translation table defines the source and destination accounts.
You typically do this for specific accounts, but you can do
translations for other detail dimensions.
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4 Cash Flow
 The cash flow statement reports activity in cash and
cash equivalents for a period of time
 The statement of cash flows has four main sections:
Three are used to classify the types of cash inflows and
outflows during the period and the fourth reconciles
the total cash balance from the beginning to the end of
the period.

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5 Account Transformation
 You define data transformations so that you can map
external data to internal BPC data structures using the
following files
 Transformation file – This file allows you to set up the rules
for reading data from an external source and put it in the
proper form for your BPC database.
 Conversion file – This file allows you to map member
names from external to internal dimension structures.
 Examples: The source application is converted as follows
 Category as Cat, Account as Acc, Entity as Ent, Time as
Tim, Rptcurrency as Currency, Intco as Int, Datasrc as Dat
6 Account Validation
 Validations exist to help control integrity of data, for
example, the test whether the account and cost center
is a valid combination

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7 Income Statement
 Reports the results of operations for the period ending
on a particular date.
 It reports revenue and expenses during the fiscal
period
 It has 2 formats Single-step and multiple step
 net income = total revenue - total expense

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8 Balance Sheet
 Balance Sheet reports the financial position at the end
of the fiscal period i.e as of certain date
 Statement of financial position is another name of
balance sheet
 It reports assets, liabilities and stockholders' equity
 In SAP, one can get a balance sheet for a company code
or for a business area. Each account is either a Balance
sheet account or a P&L account.

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9 P&L: Profit and Loss Account
 This is same as Income Statement or Income and
Expenditure statement. Details are explained later.

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10 Opening Balance
 Profit and Loss accounts are not carried forward to
next year. Only balance sheet accounts are carried
forward to next year at closing balance of earlier year.
Next year this balance is called opening balance.

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11 Closing Balance
 Closing balances are cumulative balances after all
entries are posted to balance sheet accounts. They
refer to balances at the end of reporting period.

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12 Retained Earning
 Retained earnings represent the amount of the
company's past net income retained inside the
company (or not paid as dividend to stockholders).
If the amount of retained earnings is negative, it is
called as "accumulated deficit".

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13 Minority Interest
 Minority interest is the stockholders’ equity relating to
outside equity stake holders in the consolidated
financial statement

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GAAP
14 US GAAP, 15 UK GAAP, 16 EUR GAAP
 GAAP = Generally Accepted Accounting Principles
 These standards are prerequisites for preparing the
financial statements. Each country has its own GAAP
 There are differences among GAAP
 For example, treatment of accounting for goodwill on
acquisition
 US GAAP – Capitalize and amortize over 40 years
 UK GAAP – Direct write off to reserves
 German GAAP – Capitalize and amortize over 4 years
 Switzerland – Direct write off of capitalize
17 Equity
 Stockholders’ equity represents the interest of owners
in the organization
 Owners’ Equity = Total Assets – Total Liabilities
 Or
 Owners’ Equity = Par value of Equity Shares + reserves

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18 Assets
 Represent future economic benefits.
 Examples of types of assets: Cash, Bank, Accounts
Receivables, Marketable Securities, Inventories,
Property, Plant, and Equipment (PP&E), Intangible
Assets, Short term investments e.g. Stock and Mutual
Fund Accounts, Foreign Currency accounts

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19 Liabilities
 They represent future economic sacrifices.
 They are divided in Long Term and Short Term
Liabilities. Examples of current liabilities are Accounts
Payable, Notes Payable, Bonds Payable, Long Term
Borrowings, Credit Card Accounts
 Long-term liabilities include liabilities that are
expected to be paid after a year from the balance sheet
date.

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20 Subsidiary
 Subsidiary means an acquired or investee company
where the investment is 50% or more of that
company’s share capital.

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21 Cash account
 Cash account represents cash on hand. However, cash
accounts typically represent cash and cash equivalents
e.g. money market funds, bank balances in a
summarized balance sheet.

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22 Bank account
 Bank accounts are cash balances available in the bank.
Sometimes clearing accounts are used to include
different types of bank accounts. The firm can decide
to use dedicated bank accounts for a particular
purpose e.g. payroll account, expense account for
better control.

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23 Credit Card account
 Credit Card accounts are current liabilities for the
holder and are represented so in the balance sheet.

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24 Asset and Liability accounts
 In addition to the earlier explanation, keep in mind
that in the balance sheet total assets must be equal to
total liabilities. In other words, Total Assets =
Liabilities + Equity.

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25 Stock and Mutual Fund accounts
 These are short term investments parked in short term
maturity financial instruments e.g. CD’s or a mutual
fund that invests in them. They are used to earn
interest that would be lost if the money is kept in a
checking account.

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26 Income and Expense account
 Income statement (or P&L or I&E Account) reports the
results of operations for a period. It summarizes the
profit or loss relating to that period. It is not
cumulative and relates to that particular period only.
 Examples of components of Income Statement
 Revenues: Sales
 Expenses: Rent, Salaries, Travelling Expenses, Interest
Expense
 Net Income = Revenues - Expenses
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27 Equity accounts
 Stockholders’ equity represents the interest of owners in the organization.
 Components of equity
 Equity capital or common stock. It represents the owners' equity. Equity is a
residual concept. Hence, equity is what's left after subtracting liabilities from
assets. Equity = Assets - Liabilities
 Preference capital. It has preferences in returns e.g. in receiving dividends or in
liquidation but they may lack voting rights to control day to day operations
 Additional paid in capital: Paid in capital is the par value of shares in exchange
of the shares of common stock or preferred stock. While, additional paid in
capital represents premium paid for acquisition of shares in the public offering.
 Retained earnings: It is sum of net income for the current year plus
accumulated in retained earnings. Dividends are paid from retained earnings
 Equity accounts have normal balances on the credit side. Increases in equity
accounts are recorded on the credit side. Decrease in equity accounts are
recorded on the debit side.

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28 Currency Accounts
 Foreign currency accounts are maintained in the
respective currencies and are translated to the
reporting currency on the balance sheet date.
 In SAP the foreign currency tracking should be
enabled without which amounts cannot be tracked in
foreign currency.

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29 Capital Gains
 Capital gains represent sums (gains) received over and
above the cost of acquisition. For example, land
acquired at $100,000 is sold for $150,000 will result in
capital gain of $50,000. Any asset that is sold can lead
to a capital gain or loss

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30 Asset Appreciation
 Asset appreciation represents unrealized gains as of a
particular point of time. They do not represent
earnings and are ignored for P&L account. The reason
behind this treatment is the values do change over
time. Thus, assets appreciation is normally not
considered as income unless sold

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31 Acquisition
 There are many forms of acquisitions – whole
company, departments, vertical, horizontal, etc. For
BPC, we are concerned with investment in equity of
other companies.

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32 Depreciation of Assets
 Depreciation is the process of allocating the cost of long-lived assets
over the useful life of the asset.
Depreciation base = cost of the asset - residual value.
Amount to be depreciated each period is determined by the
depreciation method applied. For example, Entity A purchased an
equipment at the cost of $650,000
Useful life = 10 years
Residual value = $50,000
Using the straight line depreciation method for equipment
Annual depreciation = (cost - residual value) / useful life
= ($650,000 - $50,000) / 10
= $600,000 / 10 = $60,000
Monthly depreciation = annual depreciation / 12
= $60,000 / 12 = $5,000
 Land is not depreciated

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33 Net income
 Net income = Revenue – Expenses

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34 Dividends
 Dividends are allocation of reserves to shareholders.
These can be in cash or in kind (although rare in
practice). These are paid to shareholders on the record
as of the record date for dividends that is decided by
the board.

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35 Shareholders' equity
 Already covered under equity

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36 Statement of retained earnings
 An enterprise needs to (a) classify items of other
comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of
other comprehensive income separately from retained
earnings and additional paid-in capital in the equity
section of a statement of financial position. Statement
of retained earnings essentially displays additions to
and appropriations from retained earnings.

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37 Joint Stock Company
 The term implies a company that has limited liability
whose controlling interest is divided in equity shares
of equal par value. For example, a company has equity
with 100,000 equity shares with par of $0.10 will have
equity capital of $10,000. A company can have different
series of shares with varying rights and varying par
value.

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38 Balance Sheet in Balance
 In all ERP systems, you cannot post any journal entry
that is not balanced. The system validation will not
allow this to happen. The system therefore will always
produce a balance sheet that is in balance i.e. total
assets = total liabilities + equity. However, in BPC, you
can post entries that are out of balance. This can also
happen while revaluing foreign currency for the
balance sheet.

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39 Balance Sheet Out of Balance
 In line with the above logic, This “out of balance”
Balance Sheet needs to be balanced out by making
entries. This task must be performed otherwise the
result is not acceptable for any accounting /
management analysis.

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40 Company Code
 "Company Code (for external purposes) A company code
represents an independent balancing/legal accounting entity. An
example would be a company with independent accounts within
a corporate group. Financial statements required by law can be
created at company code level. Therefore, a company code is the
minimum structure necessary in mySAP ERP Financials. In an
international business, operations are often scattered across
numerous countries. Since most government and tax authorities
require the registration of a legal entity for every company, a
separate company code is usually created per country. Defining a
company code involves 4-charachter company code key and the
company name."

 Chart of accounts are combined with CC


41 Cost Center
 Cost centers play important role in controlling costs
and analyzing profitability. They need to be defined in
SAP before using them. If cost center tracking is
enabled, cost center becomes a required field for all
journal entry postings both debit and credit.
 Allocation to cost center based on activity is common
practice in Activity Based Costing.

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42 Controlling Area
 "Controlling Area is the central organizational unit
within CO module. It is representative of a contained
Cost Accounting entity where costs and revenues can
be managed. A controlling area may include one or
more company codes which must use the same
operative chart of accounts as the controlling area. A
Controlling Area can contain multiple company code
assignments but a single company code can be
assigned to only one controlling area."

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43 Posting Period
 The Posting period variant controls which posting
periods, both normal and special, are open for each
company code. It is possible to have a different posting
period variant for each company code in the
organization. The posting period is independent of the
fiscal year variant.

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44 Fiscal Year
 In accounting terms fiscal year is a period of 12 months. It
need not be calendar year. In the first year of operation,
fiscal year can be shorter than 12 months.
 In SAP, fiscal year is divided in periods and every SAP
document is uniquely identified by fiscal year.
 You can also use the fiscal year variant to make the
following system settings:
 Beginning and end of your fiscal year
 Number of "normal" posting periods (01-16)
 Number of special periods (remaining periods up to 16 after
selection of normal periods)
 Posting period length
45 Transaction Currency
 A currency in which each transaction originates is
called transaction currency. The currency defined in
the company code is known in mySAP ERP Financials
as local currency. The transactions are effectively
posted in local currency. All other currencies are
treated as foreign currency. In SAP the foreign
currency tracking should be enabled without which
amounts cannot be tracked in foreign currency.

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46 Local Currency
 The currency defined in the company code is known in
mySAP ERP Financials as local currency.

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47 Group Currency
 Similar to group chart of accounts, you can define
group currency in SAP. It would need to be assigned to
a company code before making it either local currency
or foreign currency.

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48 Reporting Currency
 The currency used for preparing financial statements
is called reporting currency. In SAP this is defined as
the local currency while defining company code and
used for preparing financial statements. If original
transactions are entered in foreign currency, you can
run reports in foreign currency which will be reporting
currency for those reports.

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49 Month End Close Process
 Closing operations is a periodic task and involves
certain activities to be carried out. Usually check lists
are maintained to execute all the activities in a
systematic manner. The typical activities include
running depreciation on fixed assets, accrue expenses
and incomes, enter recurring entries, reconcile bank
balances, value AP for payables in foreign currency,
print financial statements etc.

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50 Quarter End Close Process
 This is similar to month end process. Additional SEC
filings like 10Q are required for listed companies.

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51 Opening Balance
 Balance Sheet accounts which have closing balances
are carried forward to next period. The closing balance
of last period becomes opening balance of next period.

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52 Balance Carry Forward
 After closing entries are journalized and posted, only
balance sheet accounts remain open. The balances are
carried forward to the subsequent period, these
become opening balances for the subsequent period

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53 Consolidation on Investment
 Consolidated FS are prepared when a parent-
subsidiary relationship has been formed. An investor is
considered to have parent status when more than 50%
of the voting stock of the investee has been acquired.
The subsidiary may be acquired for cash, stock, debt
securities etc.
 In consolidated FS, the “investment in subsidiary” in
the parent’s books are netted off against “Owner’s
Equity” in the subsidiary’s books.

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54 Trial Balance
 After posting all transactions from an accounting
period, accountants prepare a trial balance to verify
that the total of all accounts with debit balances equals
the total of all accounts with credit balances. The trial
balance lists every open general ledger account by
account number and provides separate debit and
credit columns for entering account balances.

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55 Flows
 Workflow management is providing employees with
right task, right information at the right time.
 In SAP, workflows are usually initiated by a triggering
event. Events are used to display the changes in status
of objects within the system. Like methods, they are
defined in the object repository for each object type.
Events are initiated in the respective applications.
 Example: The workflow for account assignment
approval (WS0100000) is started by triggering the
marking for organizational change event when saving
a parked document with the specification of a measure
56 Transaction Types
Following are standard business transaction categories and their
postings:
 Expense (E) Expense/Cash desk
 Revenue (R) Cash desk/Revenue
 Cash transfer:
 From cash journal to bank (B) Bank/Cash desk
 From bank to cash journal (C) Cash desk/Bank
 Accounts receivable (D) Customer payment receipt
Cash office / customer
 Customer outgoing payment Customer / cash office
 Accounts payable (K) Vendor payment issue
Vendor / cash office
 Vendor incoming payment Cash journal/Vendor
57 Fiscal Year Variant
 "The fiscal year variant contains the number of posting periods
in the fiscal year and the number of special periods. You can
define a maximum of 16 posting periods in the Controlling
component (CO). You define the fiscal year variant during
customizing of the Financial Accounting component (FI) in the
Implementation Guide (IMG). You must also define which fiscal
year variant is used in the company code.

 When you create a controlling area, you must also specify the
fiscal year variant. The fiscal year variants used by the controlling
area and the corresponding company codes can only differ in the
number of special periods used. You must ensure that the fiscal
year variants use the same number of equally-defined standard
periods. "
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58 Payables
 Accounts payable represent the amounts to be paid to
vendors from whom the company purchased
merchandise. In SAP, payable transactions (both bills
and payments) are posted to sub ledger and summarily
to Accounts Payable Control Account to reconciliation
accounts (account type K). You can also create onetime
vendors.

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59 Receivables
 Accounts receivables represent the amounts to be
collected from the customers who purchased the
company's products on credit. In SAP, receivable
transactions (both bills and payments) are posted to
sub ledger and summarily to Accounts Receivable
Control Account to reconciliation accounts (account
type D).

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60 Ledger
 General ledger is collection of accounts used in the
chart of accounts. These represent master records. By
assigning a number range to an account group, you can
ensure that accounts of the same type are within the
same number range. Number intervals for G/L account
master records can overlap.

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61 Cash
 In financial terminology cash includes cash
equivalents. In SAP separate reconciliation accounts
are created for each type of cash or bank account /
journal.

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62 Cash Management
 Cash management services covers very vast array of services including:
 Account Reconcilement Services
 Advanced Web Services
 Armored Car Services
 Automated Clearing House
 Balance Reporting Services including all forms of payment activity, including
deposits, checks, wire transfers in and out, ACH (automated clearinghouse
debits and credits), investments, etc.
 Cash Concentration Services to electronically "pull" the money into a single
interest-bearing bank account
 Lockbox services for collecting checks
 Positive Pay using electronically shared check register of all written checks
 Sweep accounts move excess funds from a company's bank accounts into a
money market mutual fund overnight, and then moved back the next morning.
This allows them to earn interest overnight. This is the primary use of money
market mutual funds
 Wire Transfer
63 Inventory
 Inventory represents company's merchandise, raw
materials, finished and unfinished products which have
not yet been sold. These are considered liquid assets, since
they can be converted into cash quite easily.
 Management is responsible for determining and
maintaining the proper level of goods in inventory. If
inventory contains too few items, sales may be missed. If
inventory contains too many items, the business pays
unnecessary amounts to warehouse, secure, and insure the
items, and the company's cash flow becomes one sided-
cash flows out to purchase inventory but cash does not
flow in from sales.
64 Invoice
 Invoices are raised while recording each sale made.
Sometimes, orders are met locally but invoices are
prepared for central processing with the vendor.
Invoices are entered per customer or vendor using
relevant master data. The invoices have line items
which typically include items purchased, rate,
currency, extended amounts, sub-total, tax etc.
 In SAP the two document types used are DR for
Customer Invoice and KR for Vendor Invoice.

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65 Credit Memo
 Credit Memos are issued for goods or services not
accepted or returned by customers.
 In SAP the two document types used are DG for
Customer Credit Memo and KG for Vendor Credit
Memo.

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66 Debit Memo
 Debit Memos are issued for goods or services not
accepted or returned to vendors.

 In SAP the two document types used are DG for


Customer Credit Memo and KG for Vendor Credit
Memo.

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67 Internal Trading Partners
 The economic unit concept, however, states that the
consolidated balance sheet cannot include payables and
receivables from companies within the same group. The balance
sheet value in the individual financial statements is due to the
legal independence of the internal trading partners. The
consolidation activity 'Elimination of intercompany unit
payables and receivables' eliminates group-internal financial
relationships.
 All intercompany profits/losses have to be adjusted including
profits on transfer of assets within internal trading partners.
Eliminations are always posted in pairs. To enable the system to
eliminate IC trading partner relations, therefore, you need to
enter the relevant financial statement item data using trading
partner account assignments
68 Sub Ledger
 For all sub ledgers a reconciliation account is created
in the General Ledger. The transactions line items are
maintained in the sub ledgers.

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69 Inter-Company Transfers
 Refer to Internal Trading Partners.
 All intercompany profits/losses have to be adjusted
including profits on transfer of assets within internal
trading partners.

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70 Reclassification
 Reclassification stands for regrouping. It is the process
of adjusting the entry to an account at the end of the
calendar or fiscal year in order to properly state it for
financial statement preparation purposes. Types of
required adjustments include accrual or deferral of a
revenue or expense item, reclassification, adjustments
to conform book figures to physical counts (i.e.,
inventory), and reflecting unusual transactions.
 Normally, the characteristics of the transactions and
events are reclassified for presenting the financial
statements to conform to GAAP.
Sushma Kulkarni , CA , CPA
Financial /Business Intelligence Expert

sushma_klkrn@yahoo.com

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