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Background
MCI Systemhouse, a wholly-owned subsidiary of MCI Communications Corporation, is a global leader in providing expertise in systems integration, outsourcing, technology deployment and related education services. MCI Systemhouse offers all of the necessary tools to help companies decentralize business processes, empower employees, and prepare to compete in a global, information-based market-place. As an MCI Company, MCI Systemhouse offers the power of networking capability that no other systems integrator can match. Professionals in many of MCI Systemhouses 120 offices worldwide, help small and large businesses leverage the power of Oracle Applications, database, and associated technologies. MCI Systemhouse is a full service provider of financial and manufacturing system expertise from the definition of user requirements through to application implementation, support, and maintenance.
Scope of Paper
The paper will describe the accounting transactions that are generated by Oracle Purchasing, Payables and Assets for posting in Oracle General Ledger. The source of the accounting entries will be defined as will the nature of the entry. The derivation of the accounting flexfield will also be highlighted. Accounting entries related to Encumbrance Accounting, the cash basis of accounting in Oracle Payables, and the
This designation is critical in determining whether a receipt accrual takes place. To determine the default accounting behind a receipt transaction, one must understand how FlexBuilder creates the accounting flexfield combinations on all requisitions, purchase orders, and releases. Oracle Purchasing automatically builds charge, accrual, variance, and budget (if using budgetary control) accounts for each document distribution using FlexBuilder. Understanding the derivation of the accrual account is particularly important as this account is used in the receipt accounting process and is constructed based on default rules supplied with Oracle Purchasing. These rules may be customized, but this is beyond the scope of this paper. The accrual account is the General Ledger accounting flexfield used by Oracle Purchasing to record your payable liability for inventory or expense items received but not yet invoiced. As noted above, Inventory items are always accrued on receipt whereas expense items are accrued either on receipt or at period end depending on how your Purchasing Accrual Options are configured. The default FlexBuilder rules supplied with Oracle Purchasing derive the accrual account from one of two places depending on the destination type. For Expense destination types the accrual account used is defined on the Define Purchasing Options form (Expense AP Accrual Account), while it is defined on the Define Organizational Parameters form (Inventory AP Accrual Account) for Inventory and Shop Floor destination types. Because organizational parameters are specific to an organization, different Inventory AP Accrual Accounts can be used for each organization and for each subinventory within an organization.
A standard receipt of inventory items from a vendor into receiving/inspection generates a journal entry using the quantity received and the PO price. The journal entry created by Oracle Purchasing for an inventory item standard receipt of 10 items at a PO price of $20 each is:
Receiving Account @ PO Price Inventory AP Accrual Act. @ PO Price Figure 1: Standard Receipt of Inventory Items DR 200 CR 200
The accounting flexfield for the receiving account is derived from the receiving options of the inventory organization associated with the location that is receiving the goods. The Inventory AP Accrual account is taken from the PO distribution accrual account that was generated by FlexBuilder. As noted above, this account was generated from the Define Organizational Parameters of the Inventory Organization receiving the goods. A standard delivery of inventory items from receiving/inspection to inventory generates a journal entry using the quantity delivered, the PO price, and the standard cost of the inventory item. Any difference between the PO price and the standard cost is expensed in the period as Purchase Price Variance (PPV) if standard costing is being used. If average costing is being used, the average cost for the organization is reweighted and no PPV is recorded. The journal entry created by Oracle Purchasing for the standard delivery of 10 inventory items into inventory from receiving/inspection at a PO price of $20 and a standard cost of $15 each is:
Subinventory Material Account @ Std Cost Purchase Price Variance Acct. Receiving Account @ PO Price DR 150 50 CR
200
The accounting flexfield for the Subinventory Material Account is defined on the Define Subinventory form for the subinventory where the goods were delivered while the PPV account is defined on the Define Organizational Parameters form of the Inventory Organization receiving the goods. If the standard cost exceeds the PO price the PPV account is credited for the difference. A standard receipt accounts for the receipt and the delivery as two distinct steps. The net effect of the
above standard receipt under standard costing would be the following entry:
Subinventory Material Account @ Std Cost Purchase Price Variance Acct. Invent. AP Accrual Acct. @ PO Price Figure 3: Inventory Standard Receipt Net Effect DR 150 50 CR
Purchasing for the standard delivery of 10 expense items from receiving/inspection at a PO price of $20 is:
PO Distribution Charge Accts @ PO Price Receiving Account @ PO Price DR 200 CR 200
A direct receipt of inventory items from a vendor into inventory is performed in one step and automatically places the items in inventory on receipt. The journal entries created by Oracle Purchasing for an inventory item direct receipt are the same as those created for a standard receipt except the entries are created in one step.
The accounting flexfield for the PO Distribution Charge Accounts is taken from the PO distribution associated with the expense item being delivered. This charge account was either generated by FlexBuilder from the expense account associated to the item being ordered or was entered by the person creating the PO. The expense account associated to the item is defined on the Define Item form under the Expense Account Purchasing Item attributes. The receiving account is once again derived from the receiving options of the inventory organization associated to the location that is receiving the goods. The net effect of the above standard receipt of an expense item would be the following entry:
PO Distribution Charge Accts @ PO Price Expense AP Accrual Acct. @ PO Price DR 200 CR 200
A direct receipt of expense items from a vendor to an expense destination creates journal entries that are the same as those created for a standard expense receipt except they are created in one step.
As with the receipt of inventory items, the accounting flexfield for the receiving account is once again derived from the receiving options of the inventory organization associated with the location that is receiving the goods. The Expense AP Accrual account is taken from the PO distribution accrual account that was generated by FlexBuilder. As noted above, this account was taken from the Expense AP Accrual Account defined on the Define Purchasing Options form. A standard delivery of expense items from receiving/inspection to inventory generates a journal entry using the quantity delivered and the PO price. There is no PPV entry made because the items are being expensed. The journal entry created by Oracle
the purchasing period all previous receipt accruals are unmarked so that they may be accrued again next period if they are still uninvoiced. Oracle Purchasing creates accrual entries only up to the quantity the vendor did not invoice for partially invoiced receipts. The Receipt Accrual - Period End process is run from the Standard Report Submission form. The journal entry created by the period end receipt accrual process for expense item receipts with a receipt of 10 expense items at a PO price of $20 with 5 items already having been invoiced is as follows:
PO Charge Accts @ Uninvoiced Qty * PO Price Exp. AP Acc. @ Uninvoiced Qty * PO Price
discussion on how foreign exchange gains and losses are recognized in Oracle Payables.
DR 100
CR 100
The accounting flexfield for the PO Charge Accounts is taken from the PO distribution associated with the expense item being delivered. The Expense AP Accrual account is taken from the PO distribution accrual account that was generated by FlexBuilder. The receipt accruals are reversed in the general ledger into the next accounting period so that there is no double counting when next months receipt accruals are processed. The reversing entry in the GL is as follows:
Exp. AP Accrual @ Uninvoiced Qty * PO Price PO Charge Acct @ UnInvcd Qty * PO Price
DR 100
CR 100
210
The Inventory AP Accrual account is taken from the matched PO distribution accrual account that was generated by FlexBuilder. The accounting flexfield for the IPV account is taken from the Define Organizational Parameters of the Inventory Organization that has received the goods. (This IPV accounting flexfield is actually stored with the PO distributions after being
originally generated by FlexBuilder when the PO was created.) The AP Liability account can be obtained from the either the liability account entered for the invoice batch defaults, the defaulted liability accounting flexfield that Oracle Payables assigns from the vendor or vendor site, or from what the user entry during invoice entry. If the invoice price is less than the PO price the IPV account is credited for the difference.
that reverses at the beginning of the next GL period and therefore does not have to be offset by the invoice liability. The journal entry created by Oracle Payables for the match of an expense destination PO (that was accrued at period end) to an invoice for 10 expense items at a PO price of $20 and an invoice price of $21 each is:
PO Dist Charge Acct @ Inv Qty* PO Price) PO Dist. @ Inv Qty* (Inv. Price - PO Price) AP Liability @ (Inv. Price * Inv. Qty) DR 200 10 CR
210
The PO distribution charge accounts were created on the invoice by the matching process. Any difference between the PO price and the invoice price (in this case there is a $1 difference) is expensed to the PO distribution variance account. As noted above, using default FlexBuilder rules this account is generated from the PO distribution charge account. The AP Liability is generated in the same manner as inventory destinations matches - from invoice batch defaults, vendor, vendor sites, or user entry.
210
The Expense AP Accrual account is taken from the matched PO distribution accrual account that was generated by FlexBuilder. Any difference between the PO price and the invoice price (in this case there is a $1 difference) is expensed to the PO distribution variance account. As noted above, using default FlexBuilder rules this account is generated from the PO distribution charge account. The AP Liability is generated in the same manner as inventory destinations matches - from invoice batch defaults, vendor, vendor sites, or user entry.
The journal entry created by this transaction will account for the exchange gain separately from the
invoice price variance and will accurately relieve the Inventory AP Accrual Account at the exchange rate on the PO. The journal entry created by this transactions is as follows:
Inventory AP Accrual Acct. @ PO Price IPV @ Invoice Qty* (Inv. Price - PO Price) Exchange Rate Gain AP Liability @ (Inv. Price * Inv. Qty) DR 150 35 CR
The journal entry created by Oracle Payables for a standard invoice not matched to a PO for 10 items at an invoice price of $20:
Invoice Distrib. @ Invoice Qty* Inv Price) AP Liability @ (Inv. Price * Inv. Qty)
Figure 13: Unmatched Invoice
DR 200
CR 200
10 175
In this case: the Inventory AP Accrual Account is debited at the original PO price and exchange rate (10 items at a PO price of $20 CAD converted into USD at a PO exchange rate of $0.75 for a total of $150 USD). the AP Liability is credited at the invoice price and exchange rate (10 items at an invoice price of $25 CAD converted into USD at an invoice exchange rate of $0.70 for a total of $175 USD).
The Invoice distributions are entered by the user or are defaulted from a distribution set. The AP Liability account is generated in the same manner as other AP transactions - from invoice batch defaults, vendor, vendor sites, or user entry.
The difference between the amounts is not solely due to exchange rate fluctuations but is also due to an invoice price variance. The IPV is calculated at the exchange rate on the invoice and reflects only the fluctuation in price (10 items at a price difference of $5 CAD with an invoice exchange rate of $0.70 for a total of $35 USD). The exchange rate gain is actually the difference between the invoice and PO exchange rates multiplied by the PO price ($0.05 difference in rates on an original PO price of $20 CAD).
DR 200
CR 200
The prepayment account is defaulted to the vendor from the Financial Options form. This account can be modified by the user at data entry time and represents the amount receivable from the vendor (employee) until the prepayment is applied to another invoice. The AP Liability account is generated in the same manner as other AP transactions - from invoice batch defaults, vendor, vendor sites, or user entry. The prepayment is cleared by applying it to another invoice or using XpenseXpress. The only difference between the two processes is that regular invoice entry requires the user to enter each accounting distribution for each type of expense while XpenseXpress builds the accounting flexfield from the expense types defined
(like hotels, meals, airfare, etc.) and from the default expense account associated with the vendor (employee). XpenseXpress also requires that an invoice import be completed. In either approach the prepayment is offset against an invoice and the net amount remains either due or payable from/to the vendor. Any remaining prepayment can be applied against subsequent invoices. The following journal entry would result from an application of a $200 prepayment to a $400 invoice:
Expense Distributions Prepayment Account AP Liability
Figure 15: Application of Prepayment to Invoice
and services. When you enter a use tax name on an invoice, Oracle Payables does not automatically create an invoice distribution or a general ledger journal entry for the tax. The journal entry created by Oracle Payables for a standard invoice not matched to a PO for 10 items at an invoice price of $20 with a sales tax amount of 8% or $16 is as follows:
Invoice Distrib. @ Invoice Qty* Inv Price) Tax Expense Account AP Liability including tax
Figure 16: Unmatched Invoice with Sales Tax
DR 200 16
CR
DR 400
CR 200 200
216
The expense distributions are either entered by the user or generated through XpenseXpress. The prepayment account is taken from the prepayment transaction that was applied to the invoice and the AP Liability account is generated in the same manner as other AP transactions - from invoice batch defaults, vendor, vendor sites, or user entry.
In this example the sales tax is charged to a separate tax distribution account. The invoice distributions are entered by the user while the tax expense account can be automatically generated from the tax name defined on the invoice header. The AP Liability account is generated in the same manner as other AP transactions. The journal entry created by Oracle Payables for a standard invoice not matched to a PO for 10 items at an invoice price of $20 with a sales tax amount of 8% or $16 and with taxes being prorated to existing accounting distributions is as follows:
Invoice Distrib 1 @ Invoice Qty* Inv Price) Invoice Distrib 2 @ Invoice Qty* Inv Price) Invoice Distrib 1 @ Invoice Qty* Inv Price) Invoice Distrib 2 @ Invoice Qty* Inv Price) AP Liability including tax DR 100 100 8 8 CR
216
In this example the sales tax is prorated to the original invoice distributions using QuickPro. Although all distribution lines attracted tax in this example, distribution lines can be excluded from attracting tax using QuickPro.
Invoice distribution information is modified by reversing the original distribution line(s) and either rematching to a purchase order or manually reentering invoice distributions. The basic journal entry to record a distribution adjustment of an invoice is:
Corrected Invoice Distribution Original Invoice Distribution
Figure 18: Invoice Distribution Adjustment
The journal entry created by Oracle Payables for a simple payment of an invoice for 10 items at an invoice price of $20 is as follows:
AP Liability Cash
Figure 20: Invoice Payment
DR 200
CR 200
DR 50
CR 50
When an invoice is canceled, Oracle Payables sets the invoice amount to zero, reverses all the invoice distribution lines and any matches to purchase orders, and sets all invoice payment schedule line amounts to zero. The basic journal entry to record an invoice cancellation is:
AP Liability Account Original Invoice Distribution 1 Original Invoice Distribution 2 Original Invoice Tax Distribution
Figure 19: Invoice Cancellation
The AP Liability Account is taken from the invoice that is being paid. The cash account is taken from the Bank Account being used for the payment as defined on the Setup Bank Information form.
DR 216
CR 100 100 16
All original invoice distributions are credited. If the invoice involved foreign currency, any exchange gain or loss that was recognized on the match to a PO would also be adjusted.
Oracle AP-Payments
Payments processed through Oracle Payables generate accounting transactions that will offset the original accounts payable liability and will charge the bank account for the value of the payments. Payments may be made using Automatic Payments, QuickCheck, or Manual Payments. In all cases, the invoices to be paid are known such that the appropriate accounting transactions can be created. Automatic payments selects approved invoices that are not on hold and that meet the selection criteria defined for the payment batch. QuickCheck allows you to choose any invoices for the vendor site you specify, as long as they are approved, unpaid or partially paid, uncancelled, have the same payment method as the payment document you enter, and the same currency as the bank account you choose. Manual Payments can record a payment you have created outside Oracle Payables, and the invoices you are paying with that payment.
The Interest Expense and the Interest Liability accounts are define on the Define System Options form.
single Discount Taken Accounting Flexfield, you can prorate your discount amount across all of your invoice distribution lines, or you can prorate discount across just your tax lines with the remainder going to the system discount account. When you create a journal entry for an invoice payment on which you realized a discount, Oracle Payables distributes the discount to the discount or expense accounts you define. For example assume the following facts: an invoice is received for 10 items at an invoice price of $20 with two distribution lines of $100 each and 10% tax of $20 and the invoice is paid with a 10% discount.
198 20 2
The proportionate share for the tax distribution is calculated as Total Tax Distributions divided by Total Invoice Amount multiplied by Total Discount.
The journal entry created by this payment transaction assuming the discount is credited to a single system account would be:
AP Liability Cash System Discount Account DR 220 CR 198 22
The System Discount Account is defined in the Define Financial Options form. The Cash account is taken from the bank account used on the payment while the AP Liability account is taken from the invoice being paid. The journal entry created by the payment transaction assuming the discount is prorated across all invoice distribution lines would be:
AP Liability Cash Expense Distribution # 1 Expense Distribution # 2 Tax Distribution DR 220 CR 198 10 10 2
205
In this case the discount is credited across the original invoice distributions on a prorated basis. When the discount is prorated across your tax lines the tax distribution is credited for its proportion of the discount relative to all other distribution lines. The remaining discount is credited to the system discount account. The journal entry created would be as follows:
AP Liability DR 220 CR
The AP Liability is debited at the invoice price and exchange rate (10 items at an invoice price of $25 CAD converted into USD at an invoice exchange rate of $0.80 for a total of $200 USD). The Cash account is credited for the total payment amount in USD. This payment amount is calculated at the Invoice Amount of $250 CAD converted at a payment exchange rate of $0.82 for a total of $205. The exchange rate loss account is taken from Setup Bank Information form.
Payables also reverses any realized gains or losses on foreign currency invoices you paid. When you void a payment, the invoices are immediately available for payment, unless you choose to cancel the invoices on the payment. The accounting entries generated by an invoice cancellation are shown Figure 19 in the section above titled AP-Invoice Adjustments The journal entry created by Oracle Payables for a simple void payment of a $200 invoice that had a 10% discount taken on payment is as follows:
Cash Discount Taken AP Liability
Figure 26: Payment Void
Asset Cost Account (from Category) Asset Clearing Account (AP or Cat.) Figure 27: Asset Addition (Manual or Mass)
DR 500
CR 500
The asset cost account is taken from the asset category assigned to the asset. If the addition was a manual addition, the asset clearing account is taken from the asset category and depreciation books. If the addition was a Mass Addition, the asset clearing account is taken from the invoice line obtained from Oracle Payables. The above journal entry is equally applicable to construction in process (CIP) assets. These asset are usually identified with separate asset cost and clearing accounts.
DR 180 20
CR
200
Payment voiding also correctly accounts for any discount taken or interest previously calculated.
The asset clearing account from the original Oracle Payables invoice is cleared and the cost adjustment is charged to the clearing account from the asset category. An asset cost adjustment may also be effected by adding a Mass Addition to an already existing asset. The accounting transaction created depends on whether the existing asset was created in the current period or in a past period, whether the cost adjustment is expensed or amortized, and whether the cost adjustment takes on the asset category of the Mass Addition asset. These
conditions ensure that an accurate accounting flexfield is used in the accounting transaction. A cost adjustment through a Mass Addition to a current period asset will simply modify the asset cost and clearing accounts previously used by original asset. The journal entry created by adding a $100 Mass Addition to a $500 asset created in the current period (where the asset takes the category of the Mass Addition) will be as follows:
Asset Cost Account (from MA Category) Asset Clearing Account (from AP) Asset Clearing Account (from Category) DR 600 CR 100 500
the Mass Addition line which came from Oracle Payables. The depreciation expense account is taken from the asset distribution while the depreciation reserve account is taken from the asset category. The journal entry created by adding a $100 Mass Addition to an asset created in the prior period with the cost adjustment being amortized (and the asset takes the category of the existing asset) will be the same as above in Figure 30 except the depreciation expense and reserve entries will not be created as the adjustment is being amortized. A Mass Addition may also be added to an asset that was created in a prior period and take on the category of the Mass Addition. In this case, Oracle Assets will create a reclassification transaction to move the original asset cost and depreciation reserve from the accounts associated to its asset category to the accounts associated to the asset category of the Mass Addition. The journal entries created by adding a $100 Mass Addition to a $500 asset created in the prior period with a depreciation reserve of $200 and with the cost adjustment being expensed (and the asset takes the category of the Mass Addition asset) will be as follows:
Depreciation Reserve (original Category) Depreciation Reserve (new Category) Asset Cost Account (new Category) Asset Cost Account (orig. Category) Asset Cost Account (new Category) Asset Clearing Account (from AP) Depreciation Expense (new Category) Depreciation Reserve DR 200 CR 200 500 500 100 100 10 10
The asset cost account is taken from the asset category of the Mass Addition cost adjustment. The clearing account entries are split between the original clearing account on the original asset category and the clearing account on the Mass Addition line which came from Oracle Payables. The clearing accounts are therefore properly relieved. When a Mass Addition is added to an asset that was created in a prior period and the Mass Addition takes on the category of the existing asset, accounting transactions are created that will add the cost adjustment to the original asset. A transaction may also be created to take a one-time depreciation adjustment to catch-up depreciation on the adjusted cost. This transaction will only take place if adjustments are expensed in the current period for the depreciation books. If adjustments are amortized over the remaining life of the asset, there is no depreciation catch-up entry. The journal entries created by adding a $100 Mass Addition to an asset created in the prior period with the cost adjustment being expensed (and the asset takes the category of the existing asset) will be as follows:
Asset Cost Account (from Category) Asset Clearing Account (from AP) Depreciation Expense (from Category) Depreciation Reserve DR 100 CR 100 25 25
Figure 31: Expensed Mass Addition to Prior Period Asset with Asset Category from Existing Asset
This four part journal entry effectively records the reclassification from the accounts of the original category to the accounts of the new category, adjusts the cost to reflect the new Mass Addition cost, and records a depreciation catch-up for the new costs added.
Figure 30: Expensed Mass Addition to Prior Period Asset with Asset Category from Existing Asset
The asset cost account is taken from the asset category of the existing asset. The clearing account is taken from
an accounting transaction that will transfer the asset cost and depreciation reserve to the new company and setup an intercompany receivable for the transferring company and an intercompany payable for the receiving company. The journal entry created for the intercompany transfer of an asset with a $900 cost and a depreciation reserve of $200 will be as follows:
Depreciation Reserve (old Company) Intercompany Receivable (old Company) Asset Cost Account (old Company) Asset Cost Account (new Company) Depreciation Reserve (new Company) Intercompany Payable (new Company) Figure 32: Intercompany Asset Transfer DR 200 700 CR
This journal entry records the asset retirement with the gain/loss being posted into a single account. The Proceeds of Sale Clearing, Cost of Removal Clearing, and the Gain/Loss accounts are defined on the Book Controls form. The other segments of the accounting flexfields are taken from the default segments also defined on the Book Controls form. The Proceeds of Sale Clearing account is meant to also receive a credit entry from accounts receivable when an invoice was created for the sale of the asset. The Cost of Removal Clearing account is also meant to receive a debit entry from accounts payable when the invoice for the cost of removal services is approved and paid. The journal entry created for the above example when the gain/loss is separated into its component parts will be as follows:
Depreciation Reserve (from Category) Proceeds of Sale Clearing Cost of Removal Gain Net Book Value Retired Gain Asset Cost Account (from Category) Cost of Removal Clearing Proceeds of Sale Gain DR 400 600 50 500 CR
This two part journal entry records the transfer to the new company and records the intercompany payable and receivable.
900 50 600
The only difference between the journal entry in Figure 34 and the one in Figure 33 is that the $50 gain is now split into its component parts of: Proceeds of Sales Gain $600 Gain on Net Book Value Retired $500 Cost of Removal Gain $50 Net Gain $50
Conclusion
This paper has presented the accounting integration between Oracle General Ledger and Oracle Payables, Purchasing, and Assets. The accounting entries created by these modules have been detailed and an explanation of how the accounting flexfields are derived has been presented. Understanding these accounting entries will ensure that reconciliation nightmares and confusion over what a particular entry means will be a thing of the past. There is no substitute for a clear understanding of the facts.
900 50 50