Tuesday, June 21, 2011

Setup and Defaulting of Accounts in a Purchasing Encumbrance Environment

Subject: Setup and Defaulting of Accounts in a Purchasing Encumbrance Environment Doc ID: Note:245096.1 Type: HOWTO Last Revision Date: 28-MAR-2007 Status: PUBLISHED SETUP & Defaulting of accounts in an Encumbrance environment. ==================================================== TOPICS I) Definition of Items II) Definition of subinventory III) Accounts involved and their setup IV) Account Generator in Oracle Public Sector Purchasing V) Defaulting rules of the accounts on a Purchase Order Distribution. I)Definition of Items: ========================= The terminlogy of items is rather confusing from an Purchasing/Inventory point of view. For easy understanding these will be referres to as A , B and C, A - Expense Items B - Inventory Expense Items C - Inventory Asset Items A - These items have attributes checked Purchasable Purchased B - These tems have the following attributes checked a - inventory item = YES b - stockable c - transactable d - Inventory Asset Value = NO e - Costing Enabled = No C - These items have the following attributes checked a - inventory item = YES b - stockable. c - transactable d - Inventory Asset Value = YES e - Costing Enabled = YES

II) Definition of subinventory =============================== A subinventory can be of two types i) Expense Subinventory ii) Asset subinventory i)Expense subinventory can be defined as an inventory which keeps track of Items delivered into Inventory, which may NOT be of asset value. When Defining a new subinventory, the attribute Asset Subinventory remains UNCHECKED, which means that this Subinventory is NOT an asset subinventory and hence an Expense Subinventory. Navigation: Oracle Inventory > Subinventories window > Costing section of the Master Item window ii)Asset subinventory on the other hand keeps track/record of asset items received INTO this organization. When Defining a new subinventory, the attribute Asset Subinventory is CHECKED , which means that this subinventory is an asset subinventory. Navigation: Oracle Inventory > Subinventories window > Costing section of the Master Item Window III)Accounts involved and their setup ===================================== The following accounts play a vital role in Purchase Order Processing: 1) Expense Account 2) Encumbrance Account 3) Expense AP accrual account 4) Inventory AP Accrual account 5) Receiving Inspection account 6) Purchase Price Variance Account 7) Invoice Price Variance Account 8) Material 1)Expense Account ================= The Expense account is has an GL account type of an EXPENSE and is defined in 3 areas: a)Subinventory b)Item c)Organization a) Subinventory - This is the GL account used to accumulate expenses for this subinventory. The EXPENSE account of an EXPENSE subinventory is charged when you receive any item (A, B, C) into it. The Expense account of an ASSET subinventory is charged ONLY when you receive an expense item (A). b)Item - This account is REQUIRED if Inventory Asset Value is set to No and Inventory Item is set to Yes. This attribute is controlled at the Organization level only. This is the default inventory account for Inventory Expense items (B). Oracle Purchasing debits this account when you receive an item into inventory. only if the item is being expensed and received into the

expense subinventory. If the Purchase Order for an Inventory Expense Item (B) has a destination of Inventory AND the expense subinventory is entered on the Purchase Order itself, then Oracle Purchasing uses THIS (Items Expense account) FIRST; if NOT, Oracle Purchasing uses the expense account you assigned to the subinventory. Navigation: Items > Choose an org > Purchasing Attribute. c) Organization: When any item is received into an Organizations Expense Subinventory, this account (Organizations-Expense account) is charged against. When an EXPENSE item is received into an Organizations Asset Subinventory this ( Organizations-Expense account) is charged against. This account accumulates Encumbrance for this organization. This account is used if the Organization uses AVERAGE costing. This is the default account when you define an EXPENSE subinventory. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Other > Inventory information > Alternate region > Other accounts 2) Encumbrance Account ====================== The Encumbrance is has a GL account type of an EXPENSE and is also defined in 3 areas: a) Subinventory b) Item c) Organization a) Subinventory This account holds the value of encumbrances against ITEMS in this subinventory. This account is used for purchase order receipts and returns. Navigation: Inventory resp > Subinventories > Define Subinventories b) Item This account is REQUIRED if Reverse Encumbrance parameter is set to Yes This attribute is controlled at the Organization level only. This is the default encumbrance account Oracle Purchasing uses when an item is received. If the item encumbrance account on an item does NOT exist, Oracle Purchasing uses the encumbrance account from the subinventory. You encumber, or reserve against funds, when the purchase requisition or purchase order is approved. When you deliver into a subinventory you reverse the encumbrance. The total receipts plus encumbrances equals your total funds spent. Navigation: Items > Choose an org > Purchasing Attribute c) Organization This encumbrance account at the organization level account recognizes the reservation of funds when a purchase order is approved. This account is used if Organization uses AVERAGE costing. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > other > Inventory information > Alternate region >

Other accounts 3) Expense AP Accrual account ============================= This account is used by Purchasing to accrue your Accounts Payable liability for expense items at time of receipt when your Expense Accrual Option is At Receipt, or at periodend when your Expense Accrual Option is Period End. This account represents your uninvoiced receipts and is usually part of your accounts payable liabilities in the balance sheet. Use the Purchasing Options window to set up this account. To populate the Accrual account for distributions with an Expense destination type, the Account Generator locates the Expense AP Accrual Account that you specify in Define Purchasing Options as part of your application setup and copies it into the Accrual Account on the document. The Account Generator then overlays the balancing segment of the AP Accrual Account with the balancing segment of the charge account so that your transactions always balance by fund. Navigation : Setup > Organizations > Purchasing Options Please note that this will only occur if the Account Generator has been customized to accomplish this overlay. See the Purchasing User's Guide for additional information. 4) Inventory AP Accrual account ================================ This account is used by Purchasing to accrue your payable liability for an organization when you receive your Inventory items. This account represents your uninvoiced receipts and is usually part of your accounts payable liabilities in the balance sheet. Payables relieves this account when the invoice is matched and approved. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Other > Inventory information > Alternate region > Other Accounts. 5) Receiving Inspection account =============================== This account also goes by the name - Receiving Accrual Account, and is used to record the current balance of material in receiving and inspection. Navigation: Purchasing > Setup > Organizations > Organizations > Receiving Options 6) Purchase Price Variance Account ================================== The account records the difference between the purchase order cost and an item's standard cost at the time you receive an item in inventory .Purchasing calculates the PPV as: PPV = (PO unit price standard unit cost) quantity received

Purchase price variance is not used for average costing. Use the Organization Parameters window to set this account. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Other > Inventory information > Alternate region > other accounts 7) Invoice Price Variance Account ================================= This account records difference between the purchase order price for an inventory item and the actual invoice price multiplied by the quantity invoiced: Invoice Quantity x (Invoice Price PO Price) x Invoice Exchange Rate. Purchasing uses this account on the PO distribution when the requisition or purchase order is created. When Payables creates accounting entries for the invoice, it uses the invoice price variance account from the purchase order to record invoice price variance entries. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Other > Inventory information > Alternate region > Other accounts 8) Material =========== This is an asset type account that tracks material cost. Under standard costing, these accounts are defaulted when you define subinventories and can be overridden. For average costing, this account holds your inventory and intransit values. Once you perform transactions, you cannot change this account. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > other > Inventory information > Alternate region > other accounts IV) Account Generator in Oracle Public Sector Purchasing ========================================================= The default Account Generator processes in Oracle Public Sector Purchasing build a charge, budget, accrual, and variance account for each purchase order, release, and requisition distribution based on the distributions Expense, Inventory, or Shop Floor destination type. Oracle Public Sector Purchasing always builds these accounts using the Account Generator; you cannot disable this feature. For Inventory charge account construction, the Account Generator further distinguishes between asset and expense purchases based on the item and subinventory that you provide for the distribution. If you select an expense item, the Account Generator disregards the subinventory and builds an expense charge account.

If you select an asset item, the Account Generator evaluates the subinventory to decide whether to build an expense or asset charge account. When the Account Generator locates a source account based on the distribution destination type, it copies complete code combinations (full Accounting Flexfields) from designated fields to destination Accounting Flexfields. The default Oracle Public Sector Purchasing processes do not build individual flexfield segments. For example, to populate the Accrual account for distributions with an Expense destination type, the Account Generator locates the Expense AP Accrual Account that you specify in the Purchasing Options window as part of your application setup, and copies it into the Accrual Account Flexfield in your document. V) Defaulting rules of the accounts on a Purchase Order Distribution ==================================================== CHARGE ACCOUNT ============== The account generation depends MAINLY on the destination type of the Purchase order. Therefore: A) If the destination type is Expense and item is an Expense item, the Charge account comes from the Organization Items Expense account which is Navigation : Items > Organization Items > Purchasing attribute > Expense account B) If the destination type is Inventory and the Item is an Inventory expense item, there exists an order, in which the sytem looks for the accounts to be defined. Subinventory Expense account (Expense subinventory) into which the item is being received. If this Expense account is NOT defined then the system looks at Organization Items Expense account, if this is also NOT available then The Organization parameters of the Receiving Orgs Expense account will be populated. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Organzation Parameters > Costing > Expense account C) If the destination type is Inventory and the item is an Inventory Asset item, the charge account is defaulted in the following order: 1) Subinventory Material or Expense account of the Subinventory into the RECEIVING subinventory. Navigation: Inventory resp > Subinventories > Define Subinventories If this account does NOT exist then: 2) Material Account from the Organization Parameters of the Receiving organization is populated. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Organzation Parameters > Costing For onetime or predefined items with no associated expense account, the

Account Generator will be unable to build a charge account. In this case, you can either manually specify a charge account in your document or you can design a custom Account Generator function to build Expense destination charge accounts based on field values like Requestor. BUDGET ACCOUNT ============== If the destination type is Expense, the Budget account is built off of the Charge account. If the destination type is Inventory, the Budget account is built based in the following order: i)Encumbrance account of the subinventory into which the item is being received. ii)Encumbrance account defined against the item iii)Encumbrance account from the Organization Parameters of the Receiving Org. If none of the above are available, then it copies the charge account. ACCRUAL ACCOUNT =============== If the destination type is Expense then the Accrual account is populated from the Purchasing Options Expense AP accrual account. Navigation: Purchasing Resp > Setup > Organizations > Organzations > Purchasing Options If the destination type is Inventory the accrual account is populated from the receiving Organizations Organization Parameters region. Navigation: Setup > Organizations > Query the Inventory Org > Organization Classifications > Organzation Parameters > Other accounts > Inventory AP accrual account VARIANCE ACCOUNT ================ If the destination type is Expense then the Variance account is copied from the Charge account. If the detsination type is Inventory, then this value is populated from the Organization Parameters of the receiving Organization. Navigation: Setup > Organizations > Query the Inventory Org > Organization Classifications > Organzation Parameters > Other accounts > Inventory Price Variance account Additional Reference documents: Note 240928.1 Troubleshooting Encumbrance entries against a PO having an EXPENSE destination. Note 242175.1 Definition of Items used in Purchasing. Note 243641.1 CHARGE ACCOUNT defaults on PO DISTRIBUTIONS Note 243291.1 Troubleshooting Encumbrance entries against a PO having an

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Key accounts P2P Cycle

Posted on March 22nd, 2008 by Sanjit Anand | Print This Post | Email This Post

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Here are some of the key accounts used in P2P(Procure to Pay) Cycle. RECEIVING INVENTORY ACCOUNT This is one of the clearing account. The account is used for receipt accruals. After receiving transactions are processed and the Transfer Transactions to GL process is run, the Receiving Inventory Account is cleared and the Material account is charged with the cost of the capitalized inventory . You can specify this account when you define Receiving Information for your inventory organizations. INVENTORY AP ACCRUAL This is the account used by Purchasing to accrue your payable liabilities when you receive items you will capitalize as inventory. This account represents your uninvoiced receipt liability and is usually part of your Accounts Payable Liabilities in the balance sheet. Oracle payables relieves this account when the invoice is matched and validated. So, you have to specify this account when you define Inventory Information for your inventory organizations in the Other Accounts tab. AP LIABILITY ACCOUNT This account defaults from the supplier site and is credited when a standard invoice is entered or debited when a credit memo or debit memo is entered. The account is relieved when the invoice is paid.

When you are creating an invoice, the liability account will get defaulted based on the hierarchy i.e., it can be from Financial options/Supplier /Supplier site.However you will still have an option to modify the Liability account by replacing the defaulted account. (0r) do you see a different account getting defaulted during Invoice creation EXPENSE AP ACCRUAL This is the account used by Purchasing to accrue your payable liabilities when you receive items you will expense. This account represents your uninvoiced receipt liability when you run the Receipt Accruals - Period End process. When you receive the goods,the accounting entry will be Receiving Inv Dr To Expense Accrual Cr In Payables Expense Accrual Dr To Liability Cr. So the Expense Accrual will knock-off You can specify this account on the Accrual tab when you set up Purchasing Options. MATERIAL ACCOUNT An asset account is used for to tracks material cost . In the average costing, this account holds your inventory and in transit values. Once you perform transactions, you cannot change this account. You can specify this account when you define Inventory Information for your inventory organizations in the Valuation Accounts region for the Costing Information tab. CHARGE ACCOUNT This is the charge account is the account that will be charged for the purchase on either the balance sheet or income statement.

If the destination type for the distribution is Inventory, this account will be the Material account associated with the subinventory and you cannot override it. This is the balance sheet account that will be charged after inventory is capitalized. If the destination type is expense, you can specify this account (provided it isnt project related) and override any defaults. This account will be either an asset clearing account that will be included on the balance sheet or an expense account that will be included on the income statement. This account is either created or specified when you create a purchase order.

Look at the Material Account on the destination inventory organization, or (if specified), destination subinventory. Under Inventory: Setup/Organizations/Parameters or Sub inventories PURCHASE PRICE VARIANCE This account is used to record differences between purchase order line price and standard cost. The Purchase Price Variance is calculated when items delivered to inventory are costed. You should note, this account is not used with the average cost method. For example, assume the purchase order line price for an item was set at $100 per item but standard cost was set to $120 per item and you purchased 10 items. The Purchase Price Variance would be $200. You can specify the Purchase Price Variance account when you define Inventory Information for your inventory organizations in the Other Accounts tab. INVOICE PRICE VARIANCE The variance account used to record differences between purchase order price and invoice price. This account is used by Payables to record the invoice price variance for inventory items. For expense items, the account generator uses the charge account to record any invoice price variance. You can understand with this set of example, how its works; 1). Create a purchase order with expense type item having the above Navigation: Purchasing->Purchase Orders->Purchase Orders 2). Receive the goods for this PO. Navigation: Purchasing->Receiving->Receipts 3). Login as Payables manager, create an invoice and match it to the PO created in step 1. Navigation:Payables->Invoices->Entry-Invoices for example PO Quantity=100 PO Price = 5 Now you match an invoice to the PO and Invoice(match) details are as follows: Matched Quantity=100 Price on Invoice= 1

in this case, probably you have set the Invoice price variance account in define Organization Parameters form( alternate region: other accounts) same as the expense account on the PO Invoice Price Variance= (PO Price - Invoice Price) x Qty. Invoiced You can specify this account when you define Inventory Information for your inventory organizations in the Other Accounts tab.

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Accrual Accounting (Periodic Accrual)

Posted on March 20th, 2008 by Sanjit Anand | Print This Post | Email This Post

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Some time back one of my reader asked to provide accounting details information that take place in accrual accounting, so here to go: Lets try to understand the accounting details with these entry:

PO Cost SGD 200 Invoice Price SGD 200 Payment Rate SGD 200

Enter purchase order When you enter a purchase order, accounts are created and stored with the purchase order distribution. The accounts will eventually be used as a basis for creating accounting that is sent to the general ledger. Creating a purchase order in and of itself generates no accounting that is sent to the general ledger. Receive When you process a receipt, no accounting is created for period end accruals. Receipts that are accrued at period end will always be for a destination type of expense. Deliver and cost When you deliver a receipt to its final destination, no accounting is created. The expense will be recorded after matching to the purchase order, running the Payables Accounting process and subsequently running the Payables Transfer to General Ledger process. Period end accrual If an invoice is not entered by period end, the Receipt Accruals - Period End process will generate accruals and transfer the accounting for them to the GL Interface. Use the Journal Import program to create unposted journals. This journal is created with a reversal date in a subsequent period. The journal must be reversed so your receipt liability is not overstated. Reverse accrual in the general ledger In the subsequent period, reverse the prior period accrual.

Invoice and match Entering an invoice and matching creates a debit to the Inventory AP Accrual account to clear the liability for the uninvoiced receipt (you now have an invoice). The entire credit is to the AP Liability account that defaults from the supplier site if the invoice unit price is the same as the purchase order line unit price. Any difference is charged to the Invoice Price Variance account. For items with destination type of Expense, the Invoice Price Variance account will be the same as the charge account. The AP Liability account is cleared when a payment is processed.

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Procure to Pay (P2P) Accounting Entries

Posted on March 21st, 2008 by Sanjit Anand | Print This Post | Email This Post

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In response of my last post ,yet another reader asked for "Asset ,Purchasing & Inventory Purchasing and there corresponding accounting entry within P2P cycle. Therefore this post highlights some of key accounting entry in each steps with respect to th As you know "procure to pay" Business Flow start Purchasing requisition till paying to vendors and most important, in all the case the purchase is made for basic element called Items. As you know there are three types of items:

Inventory Expense Item Inventory Asset Item Expense item

Definition of above Items used in Purchasing can be best understood as:

Asset flag means means it is an asset and the items value will show in your inventory valuation. Inventory Item

Expense Item These are one which is used for consumable items purchase for your organization. More importantly , for creating an expense item you have to perform following setup doing in the Master Item form.Go to same path in oracle inventory Oracle Inventory -> Items -> Master Items When master items form open Go to Inventory Menu you need to tick followings
1. 2. 3. 4. Inventory item Stock able Transactble Resolvable

And you can also setup in Costing and purchasing menu account code as per your requirement.

Asset Item As discussed above , the following attributes need to be enabled for such an item.

Inventory item Stock able transact able Costing flag Inventory asset value

For entering on purchase orders It should have purchased and purchasable flags enabled and you have to make sure you are assigning this item to the Purchasing org which you have defined at Oracle Purchasing > Setup > Organizations > Financial Options > 'Supplier-Purchasing' alternate region 'Inventory Organization' field. The accounting can be best described for such kind of items is;

Is there any effect on Step 5 in all three cases, that mean do matching have different accounting entry? The answer is no; as per my understanding purpose of setting the PO to a 2way, 3 way or 4 way match is to ensure that the corresponding hold is generated on the invoice. The holds are basically designed for control purposes, they do not have any accounting effects.

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