Financial Statement Balancing Adjustments 

Use

Standardizing and consolidation entries can cause an imbalance in the balance sheet and the income statement. For example, an adjustment to depreciation of machinery involves posting in both the income statement and the balance sheet. This causes an imbalance in both the balance sheet and the income statement. The system calculates this imbalance and automatically posts balancing adjustments.

The system posts the balancing adjustment automatically. This ensures that the balance sheet and income statement are posted consistently. Once the adjustment is posted, the two statements balance again.

It may become necessary to post balancing adjustments for both manual and automatic postings. The system checks every manual and automatic posting as to whether a balancing adjustment is necessary and, if so, generates additional line items in the document.

In manual entries, these line items are referred to as automatic line items because the system automatically adds them to your manually entered line items.

Prerequisites

Imbalance in Balance Sheet and Income Statement

When an entry involving both balance sheet and income statement accounts leads to an imbalance in the financial statements, the system generates additional line items to post balancing adjustments.

Selected Items

To enable the system to automatically generate line items for balancing adjustments, the following customizing settings must be made beforehand: In the selected items you specify which accounting objects are posted with the balancing adjustments.

The selected items for balancing adjustments can require a breakdown by subassignments, depending on which breakdown category is being used.

Customizing offers several ways of controlling how the system determines the subassignments for the selected items:

For each selected item with one or more subassignments, you can select the Default indicator for each subassignment, and/or you can specify a value for the subassignment.

Features

During each posting, the system checks if the income statement items are being posted with a non-zero balance. If so, the system computes and posts a balancing adjustment.

The balancing adjustment is also dependent on where the appropriation of retained earnings is stated.

·         If the appropriations are stated at the end of the income statement, the system posts the balancing adjustment to retained earnings items in the balance sheet as well as in the income statement.

·         If the appropriations are stated in the balance sheet, the adjustment is posted to annual net income items in the balance sheet as well as the income statement.

Which items are posted is defined in customizing of the selected items for retained earnings and annual net income.

The posting remains in balance because the balancing adjustment takes both financial statements into account.

Manual Posting: Auxiliary Functions for Automatic Line Items

Simulation

When you enter a manual posting and save, the system generates the automatic line items and writes all line items to the database. You can simulate the posting prior to actually executing the entry. The simulation shows you the automatic line items. This enables you preview if and how the system will post balancing adjustments.

Manual entry of or adjustment to automatic line items

You can suppress the automatic line items and manually enter your own line items. If you do this, the following rules apply:

·         When entering the line items manually, you must enter all “automatic” line items.

·         You must enter the correct values, so that the balance of the balance sheet items and the balance of the income statement items in the entire journal entry both equal zero.

You can also let the system simulate the automatic line items, and then modify these line items. For example, you might modify the subassignments, or distribute the simulated values to several line items.

Example

Say, you want to post a standardizing entry to a balance sheet item. After the standardizing entry is posted, the balance sheet and the income statement are no longer in balance.

The following illustration shows you how the accounts are affected by the original entry and by the automatic balancing adjustment. Whether the entry is posted automatically depends on where retained earnings are stated.