Understand and use divisions

A Division is a group of one or more branches, most commonly categorized by ownership interest or Tax ID number. The function and benefit of using Divisions is the internal tracking of inter-company liabilities and added costs when merchandise is bought, sold or transferred between legal entities.

• Merchandise Transfers.  Movements of merchandise from a branch in one division to a branch in another division are summarized at the close of the month with the creation of intercompany invoices.
• Inter Divisional Fulfillment.   If a sale recorded to a branch in one division is fulfilled from a branch in another division, the system will summarize and generate a receivable and payable.

To implement a divisional structure, the following setups must be in place:

1. Branches must already be established.  Go to File > Company > Branch > Defaults to assign a branch to each division.
2. The Balance Sheet must be completely separated.  This means that the system uses branch-specific G/L accounts for assets and liabilities such as Accounts Receivable, Inventory, Accounts Payable, Sales Tax Payable and any other internally mapped system account.  To prevent the G/L from going out of balance, an Inter-Branch Exchange account is required.

A/R & A/P Branch/Division Exchange serves as the “Due to or from” for cash receipts, cash disbursements or vendor invoice entries that affect more than one branch.  This account must be specified for all multi-branch organizations producing separate Balance Sheets, regardless of the presence of divisions.  It should occupy a Current Liability position on your Chart of Accounts.

3. Specify the account in Accounting > General Ledger > G/L Control Table.
4. Active Bank G/L accounts must be associated with a branch in File > Company > Bank: Setup.
5. Three new General Ledger Accounts are needed for internal placement on the G/L Control Table and association with Miscellaneous Charge Codes.
   • Division Transfer Merchandise Revenue will record the value of the merchandise only for the “selling” portion of the transaction.  This account should occupy a Revenue position on your Chart of Accounts.
   • Division Transfer Merchandise Cost will record the value of the merchandise for the “purchasing” portion of the transaction.  This account should occupy a Cost of Sales position on your Chart of Accounts.
   • Division Transfer Handling Expense adds a fee based on a percentage of the stock value.  This account should occupy a Cost of Goods position on the Chart of Accounts and is optional.
6. In all inter-divisional transactions, the balance in Division Transfer Merchandise Revenue will offset the balance in Division Transfer Merchandise Cost because the interdivisional sale is at 0% gross profit.  Consider grouping the revenue and cost accounts into a separate section of the Income Statement to avoid eroding normal operating margins.
7. Populate the G/L Control Table with the same account used for Inter Divisional COGS in the Stock Transfer in Transit Field.  This is the same account used as the “expense” for each divisional vendor.
8. Create a Transfer Customer for each division by going to File > Customer > Master.  From the perspective of the division, this is the “customer” which will “buy” incoming merchandise. 
9. Create a Transfer Vendor for each division by going to File > Vendor > Master.  From the perspective of the division, this is the “vendor” which will “sell” outgoing merchandise.
10. An Outgoing Stock Transfer Fee Percent may be established, but is not required.  This calculated percent of merchandise value will be recorded to the Division Transfer Handling Expense account as specified in the G/L Control Table.
11. Create two Miscellaneous Charge Codes by going to File > Company > Miscellaneous Charge.
    • A “DM” code for the merchandise transfer. Specify Division Transfer Merchandise Revenue in the G/L account field.
    • A “DH” code for the merchandise transfer fee.  Specify Division Transfer Handling Expense in the G/L account field.
12. Go to File > Company > Master: Sales to set the following fields.  These settings enable the End of Month Close process to generate Inter-Division customer and vendor invoices.
    • Division Transfer Billing must be set to “Y” in order to generate customer and vendor invoices.
    • Misc Charge Code for Division Stock Transfer must be set to the appropriate code to control the sales journal posting.
    • Misc Charge Code for Division Stock Transfer Fee must be set to the appropriate code to control the sales journal posting.

The inter division billing is generated at the time of End of Month Close.  In order for the process to affect the current period, the A/R module must be closed immediately before the A/P module.  If you close the A/P module before closing the A/R module, the revenue derived from the monthly transfers will post to the current period, but the associated costs will post to the next period.  DDI highly recommends using the Consolidated Close of A/R and A/P to ensure the steps are completed in order.

Note that this process is irreversible.  Extra care should be taken to perform monthly closes on time and ensure that transactions are entered to the appropriate accounting period.

• Timing Considerations.  The timing of the End of Month process is critical with a divisional setup.  For inclusion into the current period, all inventory receipts, adjustments and transfers must be posted.  If there is an open stock transfer at the time of the close, the transfer effects will post in the following period.  It’s recommended that there are no unnecessary users on the system at the time of the close to prevent contamination of the data.
• Close Accounts Receivable.  Be sure to close A/R immediately after finance charges are calculated and statements produced.  This will reduce the possibility that any other inter-divisional transactions can be posted.  Accounts Receivable must be closed before Accounts Payable to facilitate production of customer and vendor invoices.
• Close Accounts Payable.  It is recommended that A/P is closed immediately after closing A/R.  Users of divisions must close Accounts Payable in order to generate vendor invoices for any merchandise transfers or inter-branch fulfillment.
• Generate reports from the End of Month Closing & Journals menu.
  • Produce the Inventory Adjustment Report for stock transfers to summarize movements between warehouses.
  • Produce the Inter-Division Sales Journal for a listing of sales fulfilled from a different warehouse than that of the selling location.  Customer and vendor invoices are produced separately from stock transfer invoices.

A receivable will be generated in the form of a customer invoice on the Receiving division and a vendor invoice on the Sending division.

• Use A/P Check Print to produce a check from the Receiving division bank to the Sending division vendor.  Verify Vendor Ledger for the Sending division. 

Source “CD” G/L effect:  Debit Receiving Accounts Payable / Credit Receiving Bank

• Use Cash Receipts Posting to apply the check to the Receiving division customer. Verify Customer Ledger for the Receiving division.  The Sending division will apply this payment against its receivable from the Receiving customer.

Source “CR” G/L effect:  Debit Sending Bank / Credit Sending Accounts Receivable

Follow this transaction summary makes it easier to see the exchanges.  Many of the accounts serve as temporary “Suspense” accounts.

• Source “IC” G/L effect:  Debit Receiving Inventory Asset / Credit Receiving Inter Divisional COGS
• Debit Sending Inter Divisional COGS / Credit Sending Inventory Asset
• Source “SJ” G/L effect:  Debit Sending Accounts Receivable / Credit Sending Inter Division Revenue
• Source “AP” G/L effect:  Debit Receiving Inter Division COGS / Credit Receiving Accounts Payable
• Source “CD” G/L effect:  Debit Receiving Accounts Payable / Credit Receiving Bank
• Source “CR” G/L effect:  Debit Sending Bank / Credit Sending Accounts Receivable

After all activity is recorded and settled, we are left with:

• Debit Receiving Inventory Asset / Credit Sending Inventory Asset
• Debit Sending Inter Divisional COGS / Credit Sending Inter Division Revenue
• Debit Sending Bank / Credit Receiving Bank