Today I will explain the vendor subcontracting process, the related financial entries, and I will run a full process on SAP S4HANA. If you like the content you see in this channel, then don't forget to subscribe and hit the bell so you are notified about the new videos and also the new posts that I will be posting every day in the community tab in the YouTube channel. You will find there posts related to the SAP certification questions, different resources you can use to learn. and other SAP related topics.
I'm trying to leave one post every day so don't forget to check the community tab in the YouTube channel and I'm also going to leave you a link in the description below To understand the subcontracting process let's look into a very simple example as always So again we are the owners of a factory that manufactures chairs and after we manufacture our chairs we would like to paint them But the problem is we don't have the resources or the experience to paint the chairs ourselves So what we are going to do is we are going to find a different supplier that will do the painting for us And this is subcontracting. So let's look into the different steps included in the process So number one we are going to create a purchase order to the subcontracting vendor For the service he is going to do to us the painting service And the value that we will have in the purchase order is not the value of the product It is the value of the service only because we own the chairs So we are going to send some chairs that are not painted to the supplier The supplier is going to paint them and then is going to send them back after being painted So the value in the purchase order is the value of the service of the subcontracting step number two We are going to issue some of these chairs that are not painted to the supplier for the painting service step number three we are going to receive the chairs that are painted from the supplier and step number four we are going to post the invoice for the subcontracting service now let's look into the different financial entries when we do the goods issue of the chairs that are not painted there is actually no financial entry because if you look at it we are not actually selling the chairs and we are still the owners of the chairs we are just sending them to the supplier to do the subcontracting service So since we are the owners of the chairs and nothing has changed, it means there are no financial entries and we still have these chairs in our stock inventory as chairs that are not painted. Now, when we do the goods receipts, only then we are going to capture both the goods issue and the goods receipt financial entry.
So when we do a goods receipt of the painted chairs, actually we have three financial transactions happening at the same time. The goods issue of the component, the non-painted share, the goods receipt of the finished product, the painted share, and the goods receipt of the subcontracting service. So let's look into the financial entries related to every one of these transactions. So for the goods issue of the component, the entry is going to be debit to the consumption account and credit to the component stock account.
For the goods receipt of the finished product, the entry is going to be a debit to the stock of the finished product. and a credit to a manufacturing account or a subcontracting stock change account the last transaction for the goods receipt of the subcontracting service the entry is going to be debit to an expense account and a credit to a gr ir account the last step is the invoice receipt and here we have the normal entry for any invoice receipt which is a debit to the gr ir account and a credit to the vendor account And in case if there is a difference between the value of the subcontracting service in the purchase order and the value of the subcontracting service in the invoice, we will also have a debit to the same expense account used in goods receipt for the expense of the subcontracting service. Now let's go into SAP and see how the process works in details. Now I will start by creating the purchase order. And by the way, there are optional steps we can do before the purchase order.
So we can create an info record and a purchase requisition. but they are not necessary to the process so now i will start directly with the purchase order so the transaction is me21n then i have to insert the details ag01 the vendor and then i will insert the material that i'm going to receive from the supplier so my material is 3018 also i have to insert the item category so this will tell sap whether we are using consignment subcontracting or a normal po so i'm going to use subcontracting l then i have to insert the plant and the storage location so ag10 and storage location is AG11 quantity is let's say I'm going to receive 20 chairs then not possible to determine any components so now SAP knows that this is a subcontracting purchase order which means we are going to send the non-painted chairs to the supplier to receive the painted chairs but until now we didn't tell SAP what are the components we will send so i have to click on ok and then go to material data components and here i can insert the different components that i will send to the supplier to receive the painted share now this can also be done through creating a bill of material like the one we used in costing this bill of material is for subcontracting and if you have a bill of material when you create the subcontracting purchase order sap will automatically find the components but since i did not create a bill of material i have to insert the components here manually the component i'm going to use is 3017 this is a chair that is not painted and as you remember we have 20 as the quantity of the purchase order so we are going to receive 20 painted chairs so i'm going to issue 20 chairs that are not painted so the requirement quantity is also 20 you So now as you see I'm going to send 20 chairs without a color from plant AG10 to the supplier and then I'm going to receive 20 chairs that are white. Now let's go back and if we check the price so if I go to conditions the price is 10 INR per one chair.
Now I'm going to save the purchase order copy the PO number. Now let's go to the second step to allocate some of the stock we have from the non-painted shares to the subcontracting supplier to do the goods issue of the non-painted share and to do this we are going to use a transaction that's specific to the vendor subcontracting process so this is the transaction we are going to use to issue the components to the subcontracting vendor so let's open and here we have the supplier so this is our subcontracting supplier and we have the components provided so we are going to provide 3017 we have the plant is g10 and click on execute now here as you see we have a requirement of 20 shares that is not yet fulfilled so we need to click here and click on post goods issue you can also use an outbound delivery but this is not something that we have to use it's an option and it works in some of the companies of course but it's not related to the demo today so i'm going to post a goods issue directly so click on post goods issue we are missing the storage location ag11 then click on create document and now we have document posted in materials management so we posted a goods issue to the subcontracting supplier and now it's green now if we go back and let's display the material document that we posted so I will go to MIGO click on display material document insert the material document number and the year so this is the material document that we just posted and if you click check here we did a stock transfer from the unrestricted stock for the normal unrestricted stock to the subcontracting stock for the vendor AG01 so we allocated some of our stock to the supplier you so the supplier now can start painting these these chairs now if we check the financial entry so go to document info fi documents there is no financial accounting document why because as i explained we are still the owners of the chairs nothing changes so there is no financial entry now step number three posting the goods receipt of the painted chair of the finished product so let's go again to migo so goods receipt purchase order and then we insert the po number enter and there is our po so if we click here you can see the components so we are going to issue 20 chairs no color and we are going to receive 20 chairs white now if you check the details here and i click on the first line then go to where now the first line is a goods receipt to unrestricted stock for the material of the painted chair so we are going to receive 20 painted chairs and if you go to the second line the entry is 543 for O and if you check this one O is subcontracting stock so we are going to issue from subcontracting stock of the vendor AG01 because subcontracting is similar to consignment any movement that happens it has to be related to a specific vendor so after this click on ok and ok check and post so we posted our goods receipt Now let's look into the financial entry. So display, material document, enter, document info, FI document, accounting document. And there is the financial entry.
Now remember in the explanation, I said there are three financial transactions happening with three financial postings. Now all of them is going to be in one financial document. So you really need to pay attention to this part. Otherwise, it can be very confusing. So the entry is actually very simple you just have to remember that we have three different financial transactions.
So the first one is the goods issue of the components and for the goods issue of the components you can check the last two lines. So we have a credit to the semi-finished goods stock and we have a debit to the consumption of semi-finished goods stock and the value is 20 multiplied by the standard cost of the semi-finished product of the non-painted shares. so this is the first one now the second transaction is the goods receipt of the finished product of the painted share and for this you can check the line number one and line number three so we have a debit to the finished goods stock for 500 so this is 20 multiplied by the standard cost of the finished goods and we have a credit posted to the subcontracting cost of production this is this is an account that can also be called subcontracting stock change but i prefer to call it this way so it is clear for us when we look in the financial entry so subcontracting cost of production credit 500 and we have a debit to the finished goods stock of 500. this is the second financial transaction the last one is the goods receipt of the subcontracting service and for this you can look into line two and line four so we have a debit for the expense account account for purchased services 200 and we have a credit to the grir account of 200 this is the account that will be used when we post the invoice now let's go into the last step which is posting the invoice for the subcontracting so i will open the invoicing transaction slash o m i r o and the invoice date let's say it is 1901 2021 2021 and posting date is the same then we can insert a reference test and purchase order insert the po number now as you see we have 200 for 20 items for 20 shares this is the total value that that we entered in the purchase order now let's assume the value that we are going to pay to the supplier is actually different from what we agreed on in the purchase order for any reason so the invoice is not for 200 but actually it is for 250 then i'm going to remove the taxes so v0 because i'm not interested in posting taxes now v0 and the total value is 250 so insert the amount 250 and then post document created looked for payment the reason it's blocked for payment is because the amount that we invoiced is higher than the amount in the purchase order and i will explain this later but for now let's click on ok and I'm going to display the invoice so we can see the financial entry. Follow on documents and the financial entry we have is a credit to the vendor for 250 because the invoice is for 250. Debit to the GRR account for 200 because this is the value that was posted in the goods receipt which is the value we agreed on in the PO and we have a debit of 50 to the purchase services expense account.
This is the same expense account we used in the goods receipt. Now the price differences between what we posted at goods receipt and what's posted at invoice receipt is posted to the same account. And this is it for the vendor subcontracting demo. Of course there are many other functions in the process but I have given you the general basic process and you can continue exploring the process on your own from here.
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