Saturday, June 2, 2007

Accounting Flows in Oracle Applications

Given below are the accounting entries generated by ERP in case of

Procure to Pay, Production and Order to Cash Cycles. This is given in
the the context of OPM being used in the implementation.

Cycle: Procure to Pay

1. Enter PO: Accounting Impact Nil

2. Enter a receipt:
-------------Debit --------Inventory Receiving Account
-------------Credit-------- AP Accrual Account
3. Inspect and Accept: Accounting Impact Nil
4. Delivery to stock:
-------------Debit ---------Inventory Account
-------------Credit --------Inventory receiving account (ISP)
5. Enter PO Matched Invoice
-------------Debit ---------AP Accrual Account
-------------Credit --------Supplier Liability Control Account
6. Enter payments against the invoice
-------------Debit ---------Supplier Liability Account
-------------Credit --------Cash / Bank Account

As can be seen inventory receiving account which gets debited in step

2 above, gets reversed in step 4. This is an account required by the
ERP and may not be found in the standard chart of accounts of the
organization. Balance in this account implies that either the received
items are yet to be delivered to the store (Quantity is not available in
stores) or that the accounting entries in step 4 have not yet been
posted to GL. In the OPM scenario, since the posting to GL takes place
at month end, the second reason is most likely the cause of balances
in this account.

The finance user normally takes some time before he clearly

understands the significance of this account. This is a contra to
inventory account and hence is to be considered as a balance sheet
account. The above two factors vis. the non familiarity of the user and
this being a balance sheet account means that in a P&L focussed
accounting environment, this account generally goes unobserved and
sometime piles up huge balances which causes much heartburn at
year end when the auditor asks some probing questions.

This account is set up for each receiving organization and is set up in

the purchasing module under receiving options.

Another contra account is the AP Accrual Account. This is the contra to

the liability and it recognizes an accrued liability where the incidence is
not clear. In India sometimes this account is called 'Provision for
purchases'. This account will get a credit entry in step 2 and will get
reversed in step 5 when PO Matched invoice is entered in the system.
As this implies, the balance in this account means that PO Matched
invoices are not entered in the system or that the accounting entries
for those invoices are not transferred to GL.

In OPM scenario, this account gets picked form the account mapping in
OPM Cost Management module under MAC (Manufacturing Accounting
Controller) set up for account title 'AAP'.

Supplier liability account is the Creditor Account, commonly called as

'Sundry Creditors' in India. In Oracle it is called the A P Liability
account. This account is set up when you set up the supplier site
information in Oracle Purchasing / AP.

Bank / Cash account is linked to the bank that you set up in AP.

In OPM Scenario, the Inventory Account is mapped in OPM Cost

management module under MAC set up for account title 'INV'

The accounting entries mentioned in step 2 above automatically move

to GL interface table on creation. These will be available in the GL
Interface table under the source 'Purchasing'. These entries move to
GL Journal tables when you run the import journals program in GL for
that period and that source

The accounting entries in step 4 will be generated in OPM MAC under

Document type 'PORC' and will get generated when you run the
'Subledger Update' Process and will be moved to GL interface when
you run the GL update process in OPM MAC. These will be available in
the GL interface table under source 'Purchasing /OPM'. These entries
move to GL Journal tables when you run the import journals program
in GL for that period and that source

The accounting entries generated in step 5 and 6 above will move to

GL Interface when you run the 'Payables Transfer to GL' process in AP.
While the entries in step 5 will lie under source 'AP Invoices' (this need
to be validated), those in step 6 will lie under source 'AP Payments'
(this need to be validated). The payables transfer to GL allows you to
automatically move the entries to GL journal tables.

Cycle: OPM Manufacturing

1. Batch Release
----------Debit --------WIP
----------Credit -------Inventory
2. Step certification
----------Debit --------WIP
----------Credit -------RCA
3. Batch Certification
----------Debit --------Inventory
----------Credit -------WIP
4. Batch Close
----------Debit / Credit ------WIP
----------Credit / Debit ------CLS

All the above accounts WIP, RCA and CLS are set up in OPM Cost
Management module under MAC set up.

RCA is otherwise known as 'Overhead absorption control account'. This

is normally a P&L Account and a credit to this account implies that the
overheads used in production are absorbed by the finished product
inventory and hence the finished product inventory value has gone up.
This gets reversed when the actual overhead expenses (wages, power,
water, rent etc) are expensed in the month end.

Since RCA is a P&L account with a credit balance, this could

temporarily inflate the profits of the organization. The consultant
should clearly understand the significance of this account which is
normally used by the cost accountants.

CLS is the the 'WIP clearing account'. This normally gets a balance in
the standard costing scenario if the sum of the costs of the raw
materials and the resources is different from the standard cost of the
finished product. This account can also get a balance in the OPM PMAC
(Period Moving Average Costing) scenario when a batch is released in
one costing period and completed / closed in the next account period.
In such scenario, this account is to be clubbed with WIP.
The accounting entries in the above 4 steps will be generated in OPM
MAC under Document type 'PROD' and will get generated when you
run the 'Subledger Update' Process and will be moved to GL interface
when you run the GL update process in OPM MAC. These will be
available in the GL interface table under source 'OPM Production
Management'. These entries move to GL Journal tables when you run
the import journals program in GL for that period and that source.

Cycle: Order to Cash

1. Enter Sales Order: Accounting impact Nil

Journal Entries from Order to Cash

Within Oracle, no accounting entries occur upon entry and booking of a sales order. For shippable items,
there are
two journal entries made after ship confirmation and the transactions are interfaced into Inventory and
Accounts
Receivable. These journal entries are:3
A/External Sales Orders
(Inventory Module)
Dr. Cost of Goods Sold Current Cost
Cr. Inventory Current Cost
(Receivables (bill in advance))
Dr. AR/Unbilled Receivable Sales Order price
Cr. Revenue Sales Order price
B/Internal Sales Orders
Inventory
Dr. Cost of Goods Sold Cost is dependent on additional setups
Cr. Inventory Cost is dependent on additional setups
Receivables
Dr. Intercompany AR Transfer Price
Cr. Intercompany Revenue Transfer Price
Payables
Dr. Cost of Goods Sold Current Cost
Cr. Intercompany Payable Current Cost

2. Ship items
-----------Debit ---------PCO
-----------Credit --------Inventory
3. Enter invoice
-----------Debit ---------Receivables
-----------Credit --------Revenue
4. Enter receipts
-----------Debit ---------Cash / Bank
-----------Credit --------Accounts Receivables
PCO is set up in OPM MAC. It is also called the COGS (Cost of Goods
Sold) account. This consists of two parts: Cost of materials sold
(normally known as material consumption) and cost of Overheads
(Overheads consumption). Through the use of 'Selection Priority' MAC
allows you to direct the accounting entries to different accounts
thereby making the preparation of P&L reports much easier.

Accounts receivables (also known as 'Sundry Debtors' in India) and

Revenue Accounts are set up in the Accounts Receivables module. The
autoaccounting set up feature in Oracle AR provides a lot of flexibility
to consultant to account different transactions through different
accounting rules if required.

Note: Oracle Provides a lot of flexibility to the consultant in accounting

the transactions. However it is better to stick to knittings and provide
a simple and intuitive accounting solution rather than using a lot of
accounting rules which could increase the intensity of training and
knowledge transfer requirement in the organization.

The accounting entries in step 2 above will be generated in OPM MAC

under Document type 'OMSO' and will get generated when you run the
'Subledger Update' Process and will be moved to GL interface when
you run the GL update process in OPM MAC. These will be available in
the GL interface table under source 'OPM Order Management'. These
entries move to GL Journal tables when you run the import journals
program in GL for that period and that source.

The accounting entries in step 3 and 4 above will be generated in

Accounts receivables modules and will move to GL Interface table
when you run the 'GL Transfer' Program in AR. While the entries in
step 3 will lie under source 'Invoices' (Need to be validated), those
under 4 will lie under source 'Receipts' (Need to be validated). These
entries move to GL Journal tables when you run the import journals
program in GL for that period and that source.

And finally , the 'Posting' process in GL moves all the transactions from
GL journal tables to the GL Balances Table from where you can print
out all the required financial reports.
Posted by Ramaswamy VK at 2:12 PM

1.At the time of accepting the goods

Inventory A/c Debit

AP Accrual A/C Credit(This A/c We are giving in
Financial Option- Purchasing/Payable Module)

2.At the time of Matching the Invoice with PO

AP Accrual A/c Debit
Supplier A/c Credit

3. At the time of making payment to supplier

Supplier A/C Debit
Bank A/c Credit

After transferring from Inventory & Payables Module to

GL , You can see the above Journal Entries if you
query the JOurnal Source(Inventory/Purchasing/Payable)

Procure to Pay (P2P) - Accounting Entries

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. Inventory item
2. Stock able
3. Transactble
4. 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.

Additional Reading

 Accrual Accounting (Periodic Accrual)

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.