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Accrual Process for Perpetual Accruals

Discussion in 'General' started by venkateswarlu.y@genpact, Dec 30, 2011.

  1. venkateswarlu.y@genpact

    venkateswarlu.y@genpact Active Member

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    Introduction

    This article is related to the Accrual Process in Oracle Purchasing in Oracle EBS discussing the following:

    1. Purchase Order Receipt to Receiving Inspection
    2. Delivery From Receiving Inspection to Inventory
    3. Delivery From Receiving Inspection to Expense Destinations
    4. Purchase Order Receipt to Inventory
    5. Purchase Order Receipt to Expense Destinations
    6. Return to Supplier From Receiving
    7. Period-End Reconciliation Tasks
    8. Period-End Checklist

    The Concept

    Use perpetual accruals for expense purchases when you want to record uninvoiced receipt liabilities immediately upon receipt of goods. Receipts for inventory purchases are always accrued upon receipt. Other key points of perpetual accruals include:

    • Actual journal entries are created for the amount of the receipt liabilities, debiting the receiving inspection account and crediting the expense accrual liability account.
    • Accrual journal entries are created when you enter receiving transactions. Purchasing creates adjusting journal entries if you correct your receiving transactions.
    • Perpetual accrual entries do not need to be reversed at the start of a new accounting period.
    • If you are using encumbrance accounting, purchase order encumbrance is relieved when the goods are delivered to their final destination, either by a delivery or a direct receipt.

    Attention: If you accrue expense purchases on receipt, you must reconcile the entries in the A/P accrual accounts. In addition, if you also receive inventory, you need to use the Receiving Value By Destination Account Report to break out your receiving/inspection value by asset and expense.

    Purchase Order Receipt to Receiving Inspection

    When you receive material from a supplier into receiving inspection, Purchasing uses the quantity received and the purchase order price to update the purchase order and the receiving inspection account. The accounting entries for inventory receipts are:

    Account Debit Credit
    Receiving Inspection account @ PO price XX
    Inventory A/P Accrual account @ PO price XX

    The accounting entries for expense destination receipts are:

    Account Debit Credit
    Receiving Inspection account @ PO price XX
    Expense A/P Accrual account @ PO price XX

    Attention: For clarity, the accounting entries in this section refer to the Inventory A/P Accrual Account and the Expense A/P Accrual Account. These are the accounts you typically use as your purchase order distribution accrual accounts for inventory and expense destinations. You can use the Account Generator to define the business rules you want Purchasing to use to determine the actual purchase order distribution accrual account. Purchasing uses the accrual account on the purchase order distribution for all receipt accrual entries.

    For expense destinations, the PO distribution accrual account is the Expense A/P Accrual Account set in the Purchasing Options window. For inventory destinations, the purchase order distribution accrual account is the Inventory A/P accrual account for the receiving organization. The accrual accounts are the liability accounts that offset the material and expense charge accounts. They represent all inventory and expense receipts not matched in Payables.

    Delivery From Receiving Inspection to Inventory

    With the Receiving Transactions window, you can move material from receiving inspection to inventory. See: Receiving Transactions.

    For standard costing, when you enter a delivery transaction in Purchasing and move the items to inventory, Inventory generates a purchase price variance transaction. Inventory books this transaction as a period expense for the current accounting period. If the standard cost is greater than the purchase order price, then the purchase price variance is favorable. Inventory records the expense as a credit (negative expense). If the standard cost is less than the purchase order price, then the variance is unfavorable. Inventory records the expense as a debit (positive expense).

    For average costing, when you enter a delivery transaction in Purchasing, you re-weight the average cost for the inventory organization with the incoming purchase order value. You do not have any purchase price variance for average costing.

    Inventory uses the quantity and the purchase order price of the delivered item to update the receiving inspection account and the quantity, and the standard cost of the delivered item to update the subinventory balances. The accounting entries are:

    Account Debit Credit
    Subinventory accounts @ standard cost XX
    Receiving Inspection account @ PO price XX
    Debit/Credit Purchase Price Variance


    Delivery From Receiving Inspection to Expense Destinations

    With the Receiving Transactions window, you can also move material from receiving inspection to expense destinations. See: Receiving Transactions.

    When you enter a delivery transaction in Purchasing and move the items to an expense location, Purchasing uses the transaction quantity and the purchase order price of the delivered item to update the receiving inspection and expense charge account. The accounting entries are:

    Account Debit Credit
    PO distribution charge accounts @ PO price XX
    Receiving Inspection account @ PO price XX
    Encumbrance @ PO price XX
    Reserve for Encumbrance @ PO price XX

    Purchase Order Receipt to Inventory

    You can use the Receipts window to receive material directly from a supplier to inventory. See: Managing Receipts. Please note that this section addresses inventory destinations only.

    When you receive material from a supplier directly to inventory, Purchasing and Inventory perform the receipt and delivery transactions in one step.

    Purchasing uses the quantity received and the purchase order price to update the purchase order and the receiving inspection account. The accounting entries are:

    Account Debit Credit
    Receiving Inspection account @ PO price XX
    Inventory A/P Accrual account @ PO price XX

    Inventory uses the quantity and standard cost of the received item to update the receiving inspection and subinventory balances. The accounting entries are:

    Account Debit Credit
    Subinventory accounts @ standard cost XX
    Receiving Inspection account @ PO price XX
    Debit/Credit Purchase Price Variance

    If you use average costing, you re-weight the average cost at receipt and do not have any purchase price variance.

    The Inventory A/P Accrual account is the liability account that offsets the material accounts, and represents all inventory receipts not matched in Payables.

    Purchase Order Receipt to Expense Destinations

    You can use the Receipts window to receive material directly from a supplier to the expense destination. See: Managing Receipts. Please note this section addresses expense destinations only.

    When you receive material from a supplier directly to expense destinations, Purchasing performs the receipt and delivery transactions in one step.

    Purchasing uses the quantity received and the purchase order price to update the purchase order and the receiving inspection account. The accounting entries are:

    Account Debit Credit
    Receiving Inspection account @ PO price XX
    Expense A/P Accrual account @ PO price XX

    Purchasing uses the quantity and purchase order price of the received item to update the receiving inspection and expense accounts. The accounting entries are:

    Account Debit Credit
    PO distribution charge accounts @ PO price XX
    Receiving Inspection account @ PO price XX
    Encumbrance @ PO price XX
    Reserve for Encumbrance @ PO price XX


    Match, Approve, and Post an Invoice

    When you enter an invoice in Payables, you match each invoice line to a specific purchase order shipment in Purchasing. You can set up Payables to ensure that you pay only for the quantity you received. If you accrue your receipts online, Payables clears the PO distribution accrual account as part of the accounting transactions.

    Inventory Receipts

    Under standard costing, when you initially enter the purchase order receipt and delivery to inventory destinations in Purchasing, you credit the Inventory A/P Accrual Account for the amount of the receipt, debit the inventory at standard cost, and charge the difference to the purchase price variance. Encumbrance is reserved for the receipt quantity @ purchase order amount. When you match the invoice to the purchase order, Payables offsets the Inventory A/P Accrual Account for the quantity invoiced times the PO price, and records the supplier liability and the invoice price variance. Encumbrances are created or reversed depending on the positive (created) or negative (reversed) variances.

    In general, invoice price variance is the difference between the purchase price and the invoice price paid for a purchase order receipt. Purchasing reports invoice variance. Upon invoice approval, Payables automatically records the invoice price variance to the invoice price variance account and, if appropriate, to the exchange rate variance account.

    Account Debit Credit
    AP accrual account @ PO price XX
    Invoice Price Variance account @ Invoice Quantity * (Invoice Price - PO Price) XX
    Encumbrance XX
    A/P Liability @ (Invoice price * Invoice Quantity) XX
    Reserve for Encumbrance XX

    If you have a foreign currency purchase order, Payables also records exchange rate gains and losses.

    Expense Destination Receipts

    When you initially enter the purchase order receipt and delivery to expense destinations in Purchasing, when your Expense Accrual Option is set to On Receipt, the net accounting entry credits the Expense A/P Accrual Account for the amount of the receipt and debits the PO distribution charge account at purchase order price. Encumbrance is reversed for the Receipt Quantity at the PO amount. When you match the invoice to the purchase order, Payables offsets the Expense A/P Accrual Account for the quantity invoiced times the PO price and records the supplier liability for the amount of the invoice. Encumbrances are created or reversed depending on the positive (encumbrance created) or negative (encumbrance reversed) variance.

    Normally, you charge the original expense account for any invoice price variances. You do not record invoice price variances for expense purchases. Purchasing uses the Account Generator to set your purchase order distribution variance account to be the same as your purchase order charge account. If you want to record your invoice price variances to a separate account, use the Account Generator to define the business rules you use to determine the correct invoice price variance account.

    Account Debit Credit
    Expense A/P accrual account @ PO price XX
    PO distribution variance account (= PO distribution Charge Account) @ Invoice Quantity * (Invoice Price - PO Price) XX
    Encumbrance XX
    A/P Liability @ (Invoice price * Invoice Quantity) XX
    Reserve for Encumbrance XX


    Invoice Exchange Rate Variances

    Note that Purchasing uses the functional currency for your set of books in all receiving accounting entries. Purchasing converts foreign currency purchase order prices to the functional currency using the currency conversion rate from the purchase order. Payables uses the currency and the conversion rate of the invoice when booking transactions to the general ledger. If the conversion rate differs between the purchase order and invoice, the conversion difference is recorded as an Exchange Rate Variance. Separate accounts are defined for exchange rate gains and losses.

    Return to Supplier From Receiving

    You use the Returns window to return material from receiving inspection or from inventory to a supplier. If you use receiving inspection and you have delivered the material into inventory, you must first return the goods to receiving before you can return to your supplier. For a return from inspection, Purchasing decreases the receiving inspection balance, and reverses the accounting entry created for the original receipt. See: Returns.

    Return To Supplier From Inventory or Expense Destinations

    When you do not use receiving inspection, the return to supplier transaction updates the same accounts as the direct receipt to the inventory or expense destination, with reverse transaction amounts.

    Period-End Reconciliation Tasks

    When you use perpetual inventories, you should balance your inventory accounts to your inventory value report. You should also review the general ledger journal transactions for inventory Purchase Price Variance and A/P Accrual Accounts. You should look for potential problems or errors such as transactions charged to the wrong account and duplicate transactions. This process is called the Inventory Reconciliation and Period Close Review. Purchasing and Inventory provide you with a set of reports you can use to reconcile your transactions with your general ledger account balances quickly and easily.

    Period-End Checklist

    Before reconciling your transactions with your general ledger account balances, you should perform the following steps:

    1. Identify the period you want to reconcile and close.
    2. Enter all receiving transactions for goods and services you received during the period.
    3. Enter and match all invoices you received during the period for your receipt accrual entries.
    4. Perform the GL Transfer in Inventory and reconcile your Inventory Purchase Price Variance and A/P Accrual entries.
    5. Identify the period-end balances of the following accounts in your general ledger:

      • Purchase Price Variance
      • A/P Accrual Account
      • Inventory Accounts
    6. Reconcile the balance of the Purchase Price Variance account using the Purchase Price Variance Report (detailed below).
    7. Identify the Invoice Price Variances amount and Accrued Receipts amounts in the A/P Accrual Account (detailed below).
    8. Manually remove the Invoice Price Variance amount from the A/P Accrual Account using your general ledger (prior release IPV only).
    9. Close your accounts payable period corresponding to the purchasing period for your receipts accrual entries. See: Controlling the Status of AP Accounting Periods
    10. Perform period-end accruals steps for purchasing and one-time items as described in the following section.
    11. Close the period in Purchasing, (You do not need to reverse any journal entry batch in the following period). See:
      Controlling Purchasing Periods.
    12. Close your Inventory period after review. See: Maintaining Accounting Periods.
    13. Close your General Ledger period after review.

    Accrual Process for Period-End Accruals

    Key points for accruing expense purchases at period-end include:
    • You record the total uninvoiced receipt liabilities accrued during the accounting period.
    • Actual journal entries are created for the amount of the receipt liabilities, debiting the charge account and crediting the PO distribution accrual account (normally the Expense A/P Accrual Account defined in the Define Purchasing Options form).
    • You reverse accrual journal entries manually at the start of the new accounting period.
    • If you are using encumbrance accounting, purchase order encumbrance is relieved when the invoice(s) matched to the purchase order are posted to the general ledger.

    Receiving Transactions

    Purchasing does not record any accounting entries for expense during a receiving transaction if you use period-end accruals. You record all of your uninvoiced liabilities at month end using the Receipt Accruals - Period-End process. See: Receipt Accruals - Period End Process

    Receipts Accruals-Period End

    Use the Receipt Accruals - Period End process to create period-end accruals for your uninvoiced receipts for expense distributions. Purchasing creates an accrual journal entry in your general ledger for each uninvoiced receipt you choose using this form. If you use encumbrance or budgetary control, Purchasing reverses your encumbrance entry when creating the corresponding accrual entry.

    Purchasing never accrues an uninvoiced receipt twice. Each time you create accrual entries for a specific uninvoiced receipt, Purchasing marks this receipt as accrued and ignores it the next time you run the Receipt Accrual - Period-End process. Purchasing creates accrual entries only up to the quantity the supplier did not invoice for partially invoiced receipts.

    Purchasing creates the following accounting entries for each distribution you accrue using the Receipt Accruals - Period-End process:

    Account Debit Credit
    PO charge account @ Uninvoiced Quantity * PO Price XX
    Expense A/P accrual account @ Uninvoiced Quantity * PO price XX

    As soon as you open the next period, Purchasing reverses the accrual entries using the following accounting entries:

    Account Debit Credit
    Expense A/P accrual account @ Uninvoiced Quantity * PO price XX
    PO charge account @ Uninvoiced Quantity * PO Price XX


    Match, Approve, and Post an Invoice

    When you enter an invoice in Payables, you match each invoice line to a specific purchase order shipment in Purchasing. You can set up Payables to ensure that you pay only for the quantity you received. If you accrue your uninvoiced receipts at period-end, Payables records the expense transactions part of the accounting transactions:

    Account Debit Credit
    PO Distribution Charge Account @ Invoice Quantity * PO Price XX
    PO Distribution Variance Account @ Invoice Quantity * (Invoice Price - PO Price) XX
    A/P Liability @ (Invoice price * Invoice Quantity) XX

    Attention: Normally, you charge the original expense account for any invoice price variances, so your PO distribution variance account is the same as the PO distribution charge account. You do not record invoice price variances for expense purchases. Purchasing uses the Account Generator to set your purchase order distribution variance account to be the same as your purchase order charge account. If you want to record your invoice price variances to a separate account, use the Account Generator to define the business rules you use to determine the correct invoice price variance account.

    Complete Period Transactions

    If you use encumbrance or budgetary control, Purchasing creates encumbrance journal entries in your general ledger each time you approve a purchase order. Similar to accrual journal entries, encumbrance journal entries recognize a liability towards your supplier before any invoicing transactions occur. Unlike accrual journal entries, encumbrance journal entries are not actual transactions. General Ledger tracks actual and encumbrance journal entries and balances separately.

    Period-End Checklist

    Purchasing provides you with complete flexibility and control for your period-end accruals. You can use the Uninvoiced Receipts Report to analyze your uninvoiced non-inventory receipts before you accrue these receipts. You can then use the Receipt Accruals - Period-End process as many times as you want to generate accrual entries for the receipts you choose.
    For your period-end reconciliation, you should perform the following steps:
    1. Identify the purchasing period you want to reconcile and close.
    2. Enter all receiving transactions for goods and services you received during the period. Purchasing automatically creates receipt accruals for all receipts you entered up to the end of this period. To prevent any period-end disruption, Purchasing lets you provide a receipt date that is different from the date you enter the receipts. You never have to enter all the receipts for a period before the end of this period. You can enter these receipts later. You simply need to back date the receipt date.
    3. Enter and match all invoices you received during the period for your receipt accrual entries. You should make sure that you solve all posting holds problems in Payables before accruing receipts. Purchasing creates accrual journal entries for all purchase orders you received and did not match to an invoice. If you matched a purchase order to an invoice, Purchasing does not accrue the corresponding receipts. Purchasing does not accrue any purchase order that you closed on or before the end of the accrual period you choose. If the invoice is on posting hold, Payables has not yet accounted for the liability corresponding to the invoice. Under these conditions, the liability corresponding to this invoice would not appear in your books for the period. Payables lets you recognize this liability in the following period.
    4. Close your accounts payable period corresponding to the purchasing period for your receipt accrual entries.
      Note: The List of Values for period end accruals does not require the Accounts Payable period to be closed, however it's strongly recommended that closed periods are used, as the receipt accruals process will not pick up invoices entered after the accruals process is run for the period.rcvaccov
    5. For period-end accruals of expense purchases, run the Uninvoiced Receipts Report. Use this report to analyze your uninvoiced receipts. The Uninvoiced Receipts Report lets you use the same selection criteria for your uninvoiced receipts as the Receipt Accruals - Period-End process. You always know exactly what you accrue and for what amount.
    6. For period-end accruals of expense purchases, use the Receipt Accruals - Period-End process as many times as you need. You can use the search criteria to choose what you want to accrue and accrue your receipts steps by steps. You create accruals for a specific purchasing period. Purchasing automatically accrues all uninvoiced receipts your entered up to the end of the accrual period you specify. See: Receipt Accruals - Period End Process.

      Each time you use the Receipt Accruals - Period-End process, Purchasing creates an unposted journal entries batch in your general ledger for your receipt accruals. If you are using encumbrance, Purchasing creates another journal entries batch in your general ledger corresponding to the encumbrance reversal entries for the uninvoiced receipts you accrued.

      Purchasing never accrues your uninvoiced receipt twice. Each time you create accrual entries for a specific uninvoiced receipt, Purchasing marks this receipt as accrued and ignores it the next time you use the Receipt Accruals - Period-End process. Purchasing creates accrual entries only up to the quantity your supplier did not invoice for your partially invoiced receipts.
    7. Post Accrual and Encumbrance Reversal journal entry batches in your general ledger (See the following section to identify Accrual and Encumbrance Reversal journal entry batches.)
    8. Perform all the steps you need to close your accounting period and generate your period-end reports and financial statements in your general ledger.
    9. Use your general ledger system to reverse all the receipt accrual and encumbrance reversal batches you created for your period-end accruals.
    10. Close the purchasing period for your receipt accruals. When you close a purchasing period, Purchasing automatically un-marks all the receipts you previously accrued to make sure you can accrue these receipts again if they are still uninvoiced in the next period. See: Uninvoiced Receipts Report


    References
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  2. mikladious

    mikladious Guest

    Hi venkateswarlu

    could you please advise me with oracle reference document including all accounting entries for inventory transactions (miscellaneous, inter-organization, move orders, sub-inventories, receiving, returns, and corrections)?

    Thanks in advance
    Magdy Ikladious
     
  3. vamsi18

    vamsi18 Active Member

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    HI Venkat,

    am working in manfacturing industry, could u please provide me any refernce documents.(Inventory,move orders etc.)

    Regards,
    vamsi
     
  4. Indee

    Indee Guest

    Hi,

    Really useful document.thanks for sharing.

    Regards,
    Indee