End of Year (EOY) Accounting Close Process and Reporting (retained earnings)
End of Year (EOY) Accounting Close Process and Reporting (retained earnings)
The end of year fiscal close process in iDempiere is different than in most accounting systems. Traditionally, you run find the balance for every unique combination for every income and expense (income statement) account. You import these balances into a GL Journal with the opposite signs thus netting (zeroing) out each account balance for that year. iDempiere uses a better approach. Here are the details:
iDempiere knows an account's type (asset, liability, equity, income expense).
iDempiere knows if a balance should be carried from one year to the next based on the type. Asset, liability and equity accounts sum through the beginning of time. Income and expense accounts only sum inside the current fiscal year.
The iDempiere financial report writer is smart enough to take advantage of this fact; therefore, it frees you from needing to clear each and every combination of its current year's balance.
This concept is important because it allows you to include account dimensions (Accounting Schema window => Dimensions sub-tab) that are not technically 'accounting' dimensions but are 'reporting' dimensions instead. Said another way, you can include dimensions (such as "Campaign" ) for the purpose of reporting but not be restricted by knowing that every combination of a dimension must be cleared or accounted for. This concept is very powerful and freeing.
Instead of clearing every unique account combination, you create an EOY GL Journal entry to a newly created Profit Transfer account to offset retained earnings. Said another way, you create an adjusting GL Journal with two lines:
Dr Profit Transfer (earnings)
Cr Retained Earnings (expense)
The Retained Earnings entry increases your balance sheet => retained earnings line. The Profit Transfer entry removes your balance sheet => current earnings.
The Profit Transfer account does not exist on your income statement. The iDempiere Financial Report is smart enough to handle the current year balance for you.
The Profit Transfer account does exist in your trial balance to ensure that all accounts sum to zero.
Because this approach is different, there are some accountants that are initially concerned or skeptical. However, the fact that the Profit Transfer balance is simply the equal and opposite balance of what was put to Retained Earnings is reassuring. This fact is easily observed and defended with minimal effort. I have customers with over a decade of multinational, multi-currency reporting history to validate the process's accuracy.
How to Create an Adjusting GL Journal
Here are the steps to create an End of Year (EOY) profit transfer entry:
Open the Account Element window => Element Value sub-tab.
Create a "99990 - Profit Transfer" expense account. Be sure to place it outside of any summary folders in the Chart of Accounts tree.
Update your balance sheet financial report to include the Profit Transfer account in your current earnings line. See this example below.
Copy the last period in our desired year to a new record and add a "-adj" to the end of the name. Example: Calendar, Year and Period window => Year sub-tab => Period sub-tab => "17-dec-adj" period. Be sure to set the period's Period Type field to "Adjustment Period" and the increase the value in the Period No field before you save.
Open the newly created adjustment period using the Open/Close All button.
Create a new GL Journal record. Set the date to the last day of your fiscal year. Update the Period field to your newly created adjustment period. Example: "17-dec-adj"
Create your two GL Journal lines with the amount of your current earnings.
Dr Profit Transfer
Cr Retained Earnings
Complete and post the GL Journal.
Run your financials for the last period of the year (not the adjustment period). You should not see the affects of the above entry.
Run your financials for the first period of the next year. You should see the effects on your balance sheet in that your retained earnings are now increased by the above amount.
2014-10-03 - Better Income Statement and Balance Sheet Reports and Demonstrated End of Year EOY Process
This is a great resource for better understanding how financial reporting works! One thing I forgot to mention is that you cannot import the Income Statement and Balance Sheet pack in's to any other client other than GardenWorld. The reason is that the pack in's rely on the accounts that exist in GardenWorld. Your COA in your new client will have different accounts with different account IDs. Therefore, you should us the new GardenWorld examples as a quick reference when creating your Income Statement and Balance Sheet in your new client.
NOTE 20170307: the below video references the December Adjustment period. This feature/fix exists in iDempiere today as late in version 2.1.
0:00:45 delete transactional data from the original GardenWorld installation using chuboe_delete_transactional_data.sh
0:01:30 Create 2015 year - for later use
0;02:15 Create sample transactions (PO, MR, VI, Payment, Bank Statement) for inclusion on income statement and balance sheet.
0:07:00 Create sample transactions (SO, Ship, SI, Receipt, Bank Statement) for inclusion on income statement and balance sheet.
0:10:30 Pack In/Create new Report Line Set for Balance Sheet and Income Statement
0:12:00 Run financials after creating previous transactions with new reports
0:13:15 Create additional expense and re-run financials and show that the net income on the Income Statement equals the current earnings on the Balance Sheet
0:17:45 Review the details of the Report Line Set details that support the above bullet. This is where the magic happens!!
0:21:00 Create Profit Transfer account and add to the Income statement (Profit and Loss P&L)
The Profit Transfer account should be an expense
It should only have a balance in the Period: 12-adj (adjustment period) - because that is the period when you typically post your DR Profit Transfer + CR Retained Earnings.
It can be located in your bottom-of-report => Other Expenses section
0:24:00 Create the 2014 End of Year (EOY) GL Journal to move profits to Retained Earnings (in owner equity section) account. Re-run 2014 financials to see the results.