Accounting Concepts and Accounting Entries in Oracle v1.0

Version 1

Sikandar Hayat Awan

Pakistan -

www.erpstuff.com

Accounting Concepts & Accounting Entries in Oracle www.erpstuff.com

All Rights Reserved 2007 2/26

SEND US YOUR COMMENTS

The contents are revised many times in order to produce quality document but if still you find any discrepancies then please give share your finding. It will help us in improving the quality of document.

You can post your feedback directly on the web site www.erpstuff.com or email to [email protected]. If both options are not working due to any reason then please email directly to [email protected].

Your comments and feedback will be really appreciated.

Thanks



PPrreeffaaccee

This document is for those who are interested to learn Financial Accounting Basics which will help them in Oracle Applications (e-Business Suite) accounting entries. In the document after accounting entries of Oracle different modules are also provided for guidance.

Pre Requisites

o Oracle Applications 11i instance access

References:

o Accounting by Meigs & Meigs o Oracle Applications Instance

Document Change Log

Date Version Description

12-Sep-07 1 Accounting Basics and Accounting Entries of AP



CCoonntteennttss

CCOONNTTEENNTTSS......................................................................................................................................................4 1 -- AACCCCOOUUNNTTIINNGG...........................................................................................................................................6

1. ACCOUNTING...............................................................................................................................................6 2. ACCRUAL BASIS OF ACCOUNTING ......................................................................................................................6 3. CASH BASIS OF ACCOUNTING...........................................................................................................................6 4. TYPES OF ACCOUNTING INFORMATION................................................................................................................7 4.1. FINANCIAL ACCOUNTING.............................................................................................................................7 4.2. MANAGEMENT ACCOUNTING (MANAGERIAL ACCOUNTING) ....................................................................................7 4.3. TAX ACCOUNTING .....................................................................................................................................7 5. FINANCIAL REPORTING...................................................................................................................................7 6. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)........................................................................................7 7. ACCOUNTING EQUATION.................................................................................................................................8

2 -- DDOOUUBBLLEE EENNTTRRYY SSYYSSTTEEMM..........................................................................................................................9 1. DOUBLE ENTRY ............................................................................................................................................9

3 -- DDEEBBIITT && CCRREEDDIITT RRUULLEESS.........................................................................................................................10 1. DEBIT & CREDIT RULES ............................................................................................................................... 10 1.1. PAID CASH RS. 500 FOR TELEPHONE BILL...................................................................................................... 10 1.2. PURCHASED FURNITURE OF RS. 2,000 ON CREDIT FROM MUHAMMAD HAYAT........................................................... 11

4 -- EEXXAAMMPPLLEE TTRRAANNSSAACCTTIIOONNSS.....................................................................................................................12 1. ACCOUNTING TRANSACTIONS EXAMPLES ........................................................................................................... 12

5 -- TTRRIIAALL BBAALLAANNCCEE .....................................................................................................................................15 1. TRIAL BALANCE.......................................................................................................................................... 15

6 -- BBAALLAANNCCEE SSHHEEEETT.....................................................................................................................................16 1. BALANCE SHEET FINANCIAL STATEMENT............................................................................................................ 16 1.1. ASSETS................................................................................................................................................ 17 1.2. LIABILITIES (DEBTS) ............................................................................................................................... 17 1.3. OWNERS EQUITY ................................................................................................................................... 17

7 -- IINNVVOOIICCEESS ((AAPP)) ......................................................................................................................................18 1. INVOICE (PURCHASE / OTHER DEBIT) .............................................................................................................. 18 2. PREPAYMENT INVOICES ................................................................................................................................ 18 3. PAYMENT ENTRY ........................................................................................................................................ 18 4. PURCHASE RETURN / OTHER CREDIT ............................................................................................................... 19 5. FIXED ASSET(S) PURCHASES.......................................................................................................................... 19 6. PAYMENT OF SALARY (WITHOUT PAYROLL SETUP) ............................................................................................... 20 6.1. RECORDING OF LIABILITY ......................................................................................................................... 20 6.2. RECORDING INVOICE AT THE TIME OF PAYMENT .............................................................................................. 20 6.3. PROCESSING PAYMENT ............................................................................................................................. 20 7. ADVANCES TO SUPPLIERS, EMPLOYEES AND PREPAID EXPENSES ............................................................................... 21 8. PROCESSING OF PREPAYMENT ........................................................................................................................ 21 8.1. PREPAYMENT INVOICE.............................................................................................................................. 21



8.2. PROCESSING PAYMENT ............................................................................................................................. 21 9. ADJUSTMENT OF PREPAYMENT AGAINST INVOICE ................................................................................................. 22 9.1. PROCESSING OF INVOICE FOR EXPENSES ....................................................................................................... 22 9.2. ADJUSTING PREPAYMENT AGAINST INVOICE.................................................................................................... 22 10. PROCESSING PETTY CASH PAYMENTS ........................................................................................................... 22 10.1. RECORDING OF INVOICES (FOR DAILY CASH PAYMENTS).................................................................................... 23 10.2. PROCESSING OF PAYMENT FROM PETTY CASH ACCOUNT .................................................................................... 23

8 -- IIMMPPOORRTTSS................................................................................................................................................24 1. LETTER OF CREDIT...................................................................................................................................... 24 1.1. SIGHT L/C............................................................................................................................................ 24 1.1.1. ENTERING PREPAYMENT INVOICE ............................................................................................................ 24 1.1.2. RECORDING INVOICE FOR GOODS RECEIVED AGAINST IMPORT ........................................................................ 24 1.1.3. APPLYING PREPAYMENT AGAINST PURCHASE INVOICE.................................................................................... 25 2. USANCE L/C ............................................................................................................................................. 25 2.1. PROCESSING INVOICE .............................................................................................................................. 25 2.2. PROCESSING PAYMENT ............................................................................................................................. 25



11 -- AAccccoouunnttiinngg

1. Accounting

Accounting is to provide information to decision makers and this will help them in making economic decisions. Managers, investors, and other internal groups want the answers to two important questions,

1.1. How well did the organization perform?

1.2. Where does the organization stand?

The accounts answer these questions with two major financial statements,

1. Income Statement

2. Balance Sheet

There are two basis of accounting Accrual and Cash.

2. Accrual Basis of Accounting The accrual basis of accounting recognizes revenues and expenses when they occur instead of when cash is received or disbursed. For example we consumed electricity in the month of January while the bill will be received and paid in the month of February. If we will not record the electricity expense in January then there will be no expense of electricity in January and the February will bear the burden of January and so on. In accrual the effect should be in the period in which the expense occurred not when the payment is made.

3. Cash Basis of Accounting The cash basis of accounting recognizes revenue and expense when cash is received and disbursed. Now as in the above example demonstrated in the accrual basis the expense will be recorded in the month of February in cash basis accounting. So when we will generate January reports there will be no effect of expense which are occurred but no payment is yet made.



4. Types of Accounting Information

4.1. Financial Accounting It deals with financial resources, obligations and activities of an economic entity. The Financial Accounting assists investors and creditors in deciding where to place their scarce investment resources.

4.2. Management Accounting (Managerial Accounting) Management Accounting is the development and interpretation of accounting information to aid management in running the business.

4.3. Tax Accounting The preparation of income tax returns is a specialized field within accounting. The tax returns are based upon financial accounting information. However the information often is adjusted or reorganized to conform to income tax reporting requirements.

5. Financial Reporting Now as the information is available so the next step is to arrange the information in presentable and analyzable so the management should be able to analyze their business position and should take decisions on the basis of that information. To provide financial reporting financial statements are generated. Here is a complete set of financial statements,

o Balance Sheet: It shows the financial position/status of the business on a specific date. o Income Statement: The purpose of this statement is to view the profitability of the business. o Owners Equity Statement: To show the changes in the amount of owners equity the

statement of owners equity is used. In corporations it is called as statement of retained earnings.

o Cash Flow Statement: To summarize the cash receipts (inflows) and cash payments (outflows) of the business over the same time period covered by the income statement.

In addition to these statements several notes are also included which contain additional information useful for the interpretation of financial statements.

6. Generally Accepted Accounting Principles (GAAP)



Different people or companies have different ways of presenting information. So if we have statements of two different companies and both are formatted on different standards and we have to compare. May be with certain effort we would be able to make comparison but that would be time consuming and not much informative. It is also not easy when there is a need to compare statements of multiple companies on frequent basis. To overcome this problem few rules are developed which are called as generally accepted accounting principles. The GAAP ensures two concepts comparability and reliability.

7. Accounting Equation The accounting equation shows that how much assets business owns and who provided these resources to the business. This accounting equation will always be balanced means left hand side and right hand side always equal.

Assets = Liabilities + Owners Equity

1,000,000 = 300,000 + 700,000

If any two of the above are known then the third one can be calculated very easily.

Assets = Liabilities + Owners Equity

1,000,000 = ? + 700,000

Like for example if we know total assets and owners equity then we can calculate liabilities as below,

Assets - Owners Equity = Liabilities

1,000,000 - 700,000 = 300,000



22 -- DDoouubbllee EEnnttrryy SSyysstteemm

1. Double Entry

Each accounting transaction will always affect at least two accounts where one will be debit and the other will be credit. This will make sure that the accounting equation will always be balanced. In double entry transactions are recorded as debit and credit where debit is the left hand side while the credit is the right hand side. The following is the T-Account.

Debit (Dr) Credit (Cr)

0 0



33 -- DDeebbiitt && CCrreeddiitt RRuulleess

1. Debit & Credit Rules

In order to decide which account is debit and which is credit after a transaction you need to remember few rules.

Accounts Increase Decrease

Assets Debit Credit

Liabilities Credit Debit

Owners Equity Credit Debit

Revenue Credit Debit

Expenses Debit Credit

Revenue: The revenue is the price of goods sold and services rendered during a given accounting period. The revenue increases owners equity and expenses decreases the same so rules for revenue and expenses are extension of Owners equity. With increase in revenue there will be increase in Owners equity and increase in Owners equity is always credit so revenue will also be credited.

Expenses: The expenses are the costs of the goods and services used up in the process of earning revenue. The increase in expenses decreases Owners equity and decrease in Owners equity is always debit so expense will also be debited if increased.

Now as we know the rules of debit and credit so we will pass few entries for practice.

1.1. Paid Cash Rs. 500 for telephone bill.



In this transaction two accounts are involved the first is cash and other is telephone expense. As the cash is an asset and we have paid cash so our cash is decreased means our assets are decreased. We know that decrease in assets is always Credit so here our cash account is credit. For the 2nd account simple way is that if the 1st account is credit then the 2nd will always be debit and vice versa. But here we will evaluate as that it is an expense and increase in expense is always debit so our telephone expense will also be debit.

Account Description Debit Credit

Telephone Expense 500

Cash 500

1.2. Purchased furniture of Rs. 2,000 on credit from Muhammad Hayat. In this transaction there is no involvement of cash but it is a credit transaction which is a liability and the supplier name is Muhammad Hayat. So the two accounts in this transaction are furniture which is an asset account and increase in asset is always debit so furniture is debit by 2,000 while the second is supplier account named Muhammad Hayat which is a liability and increase in liability is always credit.


Furniture 2,000

Muhammad Hayat (Supplier) 2,000

With the help of rules we can easily decide which account will be debited and which will be credited.



44 -- EExxaammppllee TTrraannssaaccttiioonnss

Transaction: A transaction represents the movement of money from one account to another account. Whenever you spend or receive money, or transfer money between accounts is called a transaction or a transaction is any event that affects the financial position of an organization and requires recording. Transactions always involve at least two accounts. Examples of transactions are: paying a bill, transferring money from savings to checking, buying a pizza, withdrawing money, and depositing a paycheck etc.

1. Accounting Transactions Examples Now we will discuss in detail few accounting transactions.

# Transactions Accounts Account 1 Account 2

1 Owner of the Business invested Cash 500,000 in business.

Capital

Cash

As owner provided capital to the business as cash so the cash of business increased and cash is an asset. As we know increase in asset will always be debit.

Owner investment is a liability on the business and business has to payback that amount to the owner. And as we know increase in liability is always credit.

2 Purchased Land for Cash 100,000.

Land

Cash

Land is an asset and increase in asset is always debit.

As the cash is paid so the cash is decreased. Cash is an asset and decrease in asset is always credit.

3 Purchased stationary on credit for 2,500.

Stationary

Accounts Payables

Purchasing of stationary is an expense and increase in expense is always debit.

As we purchased on credit which means we have not paid any cash and will make payment on a future date. So this is a liability and increase in liability is always credit.



4 Purchased furniture for Cash 20,000.

Furniture

Cash

Furniture is an asset and as this is an addition in our assets so assets are increased. As we know that increase in assets is always debit.

We made this purchase on cash that is we immediately paid cash so this is a cash transaction and cash is our asset and on decrease on cash/asset we will record it as credit.

5 Sold unused stationary & equipments of 500 to Mr. Liaquat Ali.

Accounts Receivable

Stationary

As we sold stationary to Mr. Liaquat Ali who is our customer and we have not received any cash yet and will receive in future so this is our Accounts Receivables. As we know that accounts receivables is an asset and increase in asset is always debit.

Stationary was our expense and we recorded it as debit as it was increased. But here we are reducing our expense by selling stationary. So now expense is decreased and decrease in expense is always credit.

6 Purchased Office Building for 100,000 from Mr. Imran Nawaz.

Building

Account Payables

We purchased Building and increased our assets. Here building account will be debited.

As this is not a cash transaction and here Mr. Imran Nawaz is our supplier from whom we purchased building. As we have to pay in future so this is liability and increase in liability is always credit.

7 Received cash 5,000 from Mr. Liaquat Ali

Cash

Accounts Receivables

Cash is received from our customer Mr. Liaquat Ali hence our asset which is cash is increased so it is a debit account.

Accounts receivables is an asset and as our accounts receivables are decreased and decrease in assets is always debit.

# Accounts Debit Credit

1 Cash

Capital

500,000

500,000



2 Land

Cash

100,000

100,000

3 Stationary

Accounts Payables

2,500

2,500

4 Furniture

Cash

20,000

20,000

5 Accounts Receivables

Stationary

500

500

6 Building

Accounts Payables

100,000

100,000

7 Cash


5,000

5,000



55 -- TTrriiaall BBaallaannccee

1. Trial Balance In the double entry each transaction always have double sided equal effect so the debit side must be equal to credit side. So before preparing balance sheet it is better to verify your entries balance which should be equal that is debit balance = credit balance. Keep in mind that trial balance will only find numeric mistakes like user entered 75 on debit side while 57 on credit side or vice versa. So here the debit and credit balance is not equal. So what we will do is that we will take balances of each ledger and will update it in the trial balance. A sample trial balance is as below,

ERPSTUFF COMPANY

Trial Balance

June 31, 2006

Cash


Land

Building

Office Equipment

Accounts Payables

Salaries Payable

Capital

200,000

20,00

100,000

50,000

30,000

150,000

75,000

175,000

400,000 400,000



66 -- BBaallaannccee SShheeeett

1. Balance Sheet Financial Statement It shows the financial position of the business on a specific date. The balance sheet will have a header with company name (legal entity), title as Balance Sheet and the balance sheet date. In the body there are 3 major sections Assets, Liabilities and Owners Equity.

ERPSTUFF COMPANY

Balance Sheet

June 31, 2006

Assets

Cash


Land

Building

Office Equipment

Total

200,000

20,00

100,000

50,000

30,000

400,000

Liabilities and Owners Equity

Liabilities

Accounts Payable

Salaries Payable

Total

Owners Equity

Capital

Total

150,000

75,00

225,000

175,000

400,000

Now we will discuss each section of Balance Sheet separately.



1.1. Assets

These are economic resources that are owned by a business and are expected to benefit future operations. The assets can be further divided into two categories tangible and intangible.

Tangible: Tangible assets are those assets which you can touch or which have physical existence like building, land and cash. Intangible: The intangible assets are those assets which you can not touch. Like good will, accounts receivables etc.

Here is a question that what will be the value of assets like land and building. So there the concept of Cost Principle will be used.

Cost Principle-Historical Cost: The cost principle says that show such assets in the balance sheet at their cost. This cost will be historical cost. The historical cost is the purchase price of that asset.

1.2. Liabilities (Debts)

Liabilities are also called as debts. These are payables to the suppliers and to whom we have to pay are our creditors. The creditors claims have high priority than owners claim. That is the business first have to pay to the creditors and then to the owner. The liabilities are further divided into two categories Short Term and Long Term liabilities.

Short Term: Those liabilities which are due within one year. Long Term: These liabilities are not due within one year.

1.3. Owners Equity

Owners Equity is the owners claim to the assets of the business. As creditors claims have priority over owners claim so the Owners Equity is the residual value that is,

Assets Liabilities = Owners Equity

The withdrawals by the owner are called as drawings.



77 -- IInnvvooiicceess ((AAPP))

1. Invoice (Purchase / Other Debit)


Relevant Charge / Expense Account ***

Creditors Control Account ***

2. Prepayment Invoices


Advance to Creditors Control Account ***


3. Payment Entry


Creditor Control Account ***

Bank/Cash Account ***



4. Purchase Return / Other Credit



AP Accrual / Expense Account ***

5. Fixed Asset(s) Purchases For all Assets related invoices, CWIP Clearing Account will be selected at the invoice distribution level. Upon selection of CWIP Clearing Account the field Track as Asset will be automatically activated (activation of this field is mandatory for data to be transferred to Oracle Assets).


Asset / CWIP Clearing Account ***

Supplier Control Account ***

After running "Mass Addition Program" in Oracle Payables, system will transfer all invoices distributions containing "CWIP Clearing Account" to Oracle Assets which will then be matched to purchase orders.



6. Payment of Salary (Without Payroll Setup) 6.1. Recording of Liability In order to record liability, you will have to process a Journal Voucher in the General Ledger. The relevant Liability Account will be debited.


Salary Expense Account ***

Salary Payable Account ***

6.2. Recording Invoice at the time of Payment Now as we have created a liability in the General Ledger now in order to process payment we need to create an invoice in the Oracle Accounts Payable module. To this we need a dummy supplier to process an invoice of type Other Debits.


Salary Payable Account ***


6.3. Processing Payment After creation of invoice in the AP module now we can process payment.





Bank Account/Cash ***

7. Advances to Suppliers, Employees and Prepaid Expenses

To record advances to Suppliers and Employees and to process prepaid expenses such as prepaid rent, prepaid insurance etc. a Prepayment type invoice will be created in the system. For this purpose, employees will be opened in the system as suppliers.

8. Processing of Prepayment

8.1. Prepayment Invoice Create a Prepayment Type invoice.


Advances to Creditors / Advances to Employees / Prepaid Expenses Account ***


8.2. Processing payment The user will then process payment in the normal manner for this Prepayment Invoice. Following accounting entry will be created:





Withholding Tax Payable Account* ***

Bank / Cash Account ***

* Withholding Tax will only be deducted at time of payment and if applicable.

9. Adjustment of Prepayment against Invoice

9.1. Processing of Invoice for Expenses The user will then process a Purchase Invoice or Other Debit type invoice depending upon the type of expense. Following accounting entry will be created:


Expense Account ***


9.2. Adjusting Prepayment against Invoice The Purchase Invoice or Other Debit type invoice entered above will then be matched with the relevant Prepayment Invoice.



Advance to Creditors Control Account ***

10. Processing Petty Cash Payments



10.1. Recording of Invoices (for Daily Cash Payments) For the purpose of booking daily cash payments user will process Purchase Invoices / Other Debits (depending on the type of expenses / payment) for these expenses in the system in the name of the either Petty Cash Supplier or original supplier as the case might be. The relevant Expense / Charge Account will be captured in the invoice distributions window. Following accounting entry will be created:


Relevant Expense Account ***


10.2. Processing of Payment from Petty Cash Account Payment will then be processed for these expenses using the relevant Bank Account (Petty Cash Account) set up in the system for cash payments. Following accounting entry will be created in the system:



Cash in Hand Account ***



88 -- IImmppoorrttss

1. Letter of Credit Letter of Credit (L/C) is used while importing goods from other country and there are two types of L/Cs.

1.1. Sight L/C In Sight L/C you will have to pay full payment in advance and for this we will record a Prepayment Invoice.

1.1.1. Entering Prepayment Invoice On receipt of Bank Debit Advice, the user will process a Prepayment Invoice in L/C currency with the amount of Debit Advice. User will enter exchange rate as appearing on Debit advice.


Advance to Supplier (Imports) Account ***


To generate L/C cost sheet and L/C Register you will have to capture L/C related information by using Descriptive Flexfield (DFF).

1.1.2. Recording Invoice for Goods Received Against Import After receipt of goods, a Purchase invoice will be processed for the invoice value of goods received in the name of the relevant Supplier.




Stock Account ***


1.1.3. Applying Prepayment against Purchase Invoice This invoice will then be matched with the prepayment invoice entered above.



Advance to Supplier (Imports) Account ***

2. Usance L/C In Usance L/C the payment is made after receipt of goods so there will be no prepayment in case of Usance L/C.

2.1. Processing Invoice In case of Usance LC, invoice for value of goods will be processed after the receipt of goods. The Invoice will be processed in foreign currency and Exchange rate on Invoice will be manually entered. Invoice type Purchase Invoice will be used for this purpose.


Stock Account ***


2.2. Processing payment



Then process payment for the invoice.



Bank Account ***

Accounting Concepts and Accounting Entries in Oracle v1.0

Documents

Transcript of Accounting Concepts and Accounting Entries in Oracle v1.0