PO_INV_AP

8/3/2019 PO_INV_AP

http://slidepdf.com/reader/full/poinvap 1/13

Accounting Integration Between GL, AP, PO, and FA

Gerard J. Gallant, CA MCI Systemhouse Corp.

Introduction

The accounting integration between Oracle General

Ledger and Oracle Payables, Purchasing and Assets is

complex. Each of these modules automatically create

accounting entries in the General Ledger (GL) that

eventually find their way onto a company’s Balance

Sheet or Income Statement. This automatic creation of

accounting entries can become perplexing to a user

trying to reconcile a particular GL account and not

understanding how the entries were created. This paper

explains the accounting entries created by these

modules such that there will be no repeat nightmares!

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 Systemhouse’s 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

use of Automatic Offsets will not be discussed. EEC

tax accounting and inventory accounting entries, other

than those related to the receipt process, will also not be

discussed. The asset accounting entries discussed will

be for major assets transactions only.

Oracle PO Accounting Transactions

The accounting transactions created by Oracle

Purchasing largely depend on how your company

accounts for the receipt of goods or services. Unless

you are using encumbrance accounting (activated by

setting the encumbrance options to “Yes” in the Define

Financial Options form), purchase requisitions andpurchase orders (PO) do not create accounting

transactions in the GL. This may seem odd given that

requisitions and POs contain accounting distribution

information which indicates what accounting flexfield

will receive the charges for the goods or services being

purchased. This distribution information does not

create accounting transactions until the goods or

services are received and when they are invoiced and

subsequently paid for.

The first potential accounting impact that a purchase

transaction has on the GL is at the time of receipt of

goods. The accounting transaction that is created is

dependent on whether the goods being purchased are to

be put into inventory or are being expensed. If the

goods are being put into inventory, the accounting

flexfield used depends on the inventory organization

that is receiving the goods. If the goods are being

expensed, the accounting transaction created is

dependent on whether your company accrues for

expensed goods as they are received or only at period

end. Each of these scenarios will be discussed.

Oracle Purchasing automatically accrues for the

financial impact of inventory item receipts at the time of

receipt. Expensed items can be accrued on receipt or at

period end as determined by the configuration option

chosen for “Accrue Expense Items” in the Define

Purchasing Options form. An item is designated as

being an inventory item when the “Destination Type”

on the purchase order distribution is either “Inventory”

or “Shop Floor”. When the “Destination Type” is

“Expense” the item is designated as an expense item.

8/3/2019 PO_INV_AP


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 receivedbut 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.

Oracle PO-Receipt of Inventory Items

After determining whether the item is an inventory item

or an expense item, the type of receipt must bedetermined. Goods can be received in two (2) ways:

Direct Receipt and Standard Receipt. Direct Receipt is

a one step process where goods are received and

delivered to their final destination in one step. Standard

Receipt is a two step process where goods are first

received into a receiving/inspection location and then

delivered to an inventory location with a separate

transaction. The accounting transaction created is

different for standard and direct receipts.

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:

DR CR

Receiving Account @ PO Price 200Inventory AP Accrual Act. @ PO Price 200

Figure 1: Standard Receipt of Inventory Items

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 re-

weighted and no PPV is recorded. The journal entrycreated 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:

DR CR

Subinventory Material Account @ Std Cost 150

Purchase Price Variance Acct. 50

Receiving Account @ PO Price 200

Figure 2: Standard Delivery of Inventory Items with PPV

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

8/3/2019 PO_INV_AP


above standard receipt under standard costing would be

the following entry:

DR CR

Subinventory Material Account @ Std Cost 150

Purchase Price Variance Acct. 50

Invent. AP Accrual Acct. @ PO Price 200

Figure 3: Inventory Standard Receipt Net Effect

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.

Oracle PO-Receipt of Expense Items

If you have chosen to accrue expense items on receipt

(as determined by the configuration option chosen for

“Accrue Expense Items” in the Define Purchasing

Options form), journal entries will be created when the

expense items are received instead of at period end.

A standard receipt of expense items (where the

destination type is “Expense”) 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 expense item

standard receipt of 10 items at a PO price of $20 each

is:

DR CR


Expense AP Accrual Acct. @ PO Price 200

Figure 4: Standard Receipt of Expense Items

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

Purchasing for the standard delivery of 10 expense

items from receiving/inspection at a PO price of $20 is:

DR CR

PO Distribution Charge Accts @ PO Price 200


Figure 5: Standard Delivery of Expense Items

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 organizationassociated 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:

DR CR

PO Distribution Charge Accts @ PO Price 200


Figure 6: Expense Item Standard Receipt Net Effect

A direct receipt of expense items from a vendor to anexpense destination creates journal entries that are the

same as those created for a standard expense receipt

except they are created in one step.

Oracle PO-Period End Accrual

If you have chosen to accrue expense items at period

end (as determined by the configuration option chosen

for “Accrue Expense Items” in the Define Purchasing

Options form), journal entries will only be created when

you run the period end accrual process.

Oracle Purchasing automatically accrues all uninvoiced

receipts of expense items up to the end of the accrual

period you specify. Each time you run the Receipt

Accruals-Period End process, Oracle Purchasing creates

an unposted journal entry batch in your GL for your

receipt accruals.

Each time you create accrual entries for a specific

uninvoiced receipt, Oracle Purchasing marks this receipt

as accrued and ignores it the next time you run the

Receipt Accrual - Period End process. When you close

8/3/2019 PO_INV_AP


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 receiptaccrual 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:

DR CR

PO Charge Accts @ Uninvoiced Qty * PO Price 100Exp. AP Acc. @ Uninvoiced Qty * PO Price 100

Figure 7: Expense Item Period End Accrual

The accounting flexfield for the PO Charge Accounts is

taken from the PO distribution associated with theexpense 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 month’s receipt accruals are

processed. The reversing entry in the GL is as follows:

DR CR

Exp. AP Accrual @ Uninvoiced Qty * PO Price 100PO Charge Acct @ UnInvcd Qty * PO Price 100

Figure 8: Reversing Entry - Expense Item Period End Accrual

Oracle PO-Foreign Currency Impacts

The receipt journal entries that are created above are

created in the functional currency of the set of books

being posted to. Oracle Purchasing is linked to a set of

books in the Define Financial Options form. This set of

books holds transactions in a specific currency (the

functional currency) as defined on the Define Set of Books form.

Purchase Orders entered in a currency other than the

functional currency require a currency conversion rate

type and rate amount. This allows the foreign currency

to be properly converted into the functional currency.

Oracle Purchasing uses the amounts converted into the

functional currency in all receiving transactions. See

Oracle AP - Foreign Currency Impacts below for a

discussion on how foreign exchange gains and losses

are recognized in Oracle Payables.

Oracle AP Accounting Transactions

The accounting transactions created by Oracle Payables

are generated by an invoice or payment document. The

transactions record the official liability for goods

received or services rendered. The journal entriescreated depend on the type of Oracle Payables

transaction that is created (e.g. invoice matched to a PO,

non-matched invoice, payment, payment void, invoice

adjustment, etc.). The actual journal entries are created

in the GL through a journal import of transaction lines

posted from AP to GL by the General Ledger Interface

process.

Oracle AP-Invoice Match to Inventory POs

When an invoice is entered, the user has an option tomatch the invoice to a PO. When a user matches an

invoice to a purchase order shipment, Oracle Payables

automatically creates invoice distribution lines from the

accounting information associated with these matched

purchase order shipment lines. You can update this

accounting information only if the Allow Matching

Flexfield Override system option is enabled.

When an invoice is matched to an inventory destination

PO, the original accrual liability is replaced with the

vendor liability and perhaps an invoice price variance.

An invoice price variance (IPV) is the difference

between the purchase price on the PO and the invoice

price. This IPV is automatically calculated when the

invoice is approved.

The journal entry created by Oracle Payables for the

match of an inventory destination PO to an invoice for

10 inventory items at a PO price of $20 and an invoice

price of $21 each is:

DR CR

Inventory AP Accrual Acct. @ PO Price 200IPV @ Invoice Qty* (Inv. Price - PO Price) 10

AP Liability @ (Inv. Price * Inv. Qty) 210

Figure 9: Invoice Matched to Inventory Item PO with IPV

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

8/3/2019 PO_INV_AP


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.

Oracle AP-Invoice Match to Expense POs

Assuming that you accrue expense items on receipt,

when an invoice is matched to an expense destination

PO, the original accrual liability is also replaced with

the vendor liability (the same as inventory destination

POs). However, there is usually no invoice price

variance calculated as any differences between invoice

and PO prices are expensed to the original charge

account on the PO. The reason for this is that the

variance account for expense destinations isautomatically set to the charge account on the PO. This

is the default FlexBuilder rule that comes with Oracle

Purchasing and can modified if you wish to separate the

IPV on expense items from regular charges.


match of an expense destination PO to an invoice for 10

expense items at a PO price of $20 and an invoice price

of $21 each is:

DR CR


PO Dist @ Inv. Qty* (Inv. Price - PO Price) 10


Figure 10: Invoice Matched to Expense Item PO with Variance

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.

Oracle AP-Period End Accrual Impacts

Accruing expense items at period end in Oracle

Purchasing does not affect the accounting transaction

that is created by matching an invoice to the accrued

purchase order. The accrual is a temporary GL entry

that reverses at the beginning of the next GL period and

therefore does not have to be offset by the invoice

liability.


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:

DR CR

PO Dist Charge Acct @ Inv Qty* PO Price) 200

PO Dist. @ Inv Qty* (Inv. Price - PO Price) 10


Figure 11: Expense Item PO Accrued at Period End & Variance

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, usingdefault 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.

Oracle AP-Foreign Currency Impacts

When a foreign currency invoice is matched to a foreign

currency purchase order that has been accrued on

receipt, there may be an exchange gain or losscalculated. Oracle Payables uses the exchange rate on

the invoice (as opposed to the exchange rate on the PO)

for each invoice distribution line that is created by

matching to a foreign currency PO. The result of this

matching may be that there is a difference between the

exchange rate on the purchase order and the exchange

rate on the invoice. This difference in exchange rates is

charged to an exchange rate gain or loss account. This

allows the Inventory or Expense AP accrual accounts to

be properly relieved at the prevailing PO exchange rate.

For example, assume the following facts:

• Inventory destination PO for 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, and

• Invoice for 10 items at an invoice price of $25

CAD converted at an invoice exchange rate of

$0.70 for a total of $175 USD.

The journal entry created by this transaction will

account for the exchange gain separately from the

8/3/2019 PO_INV_AP


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:

DR CR

Inventory AP Accrual Acct. @ PO Price 150

IPV @ Invoice Qty* (Inv. Price - PO Price) 35

Exchange Rate Gain 10AP Liability @ (Inv. Price * Inv. Qty) 175

Figure 12: Foreign $ Invoice with Exchange Gain & IPV

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 priceand 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 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).

Oracle AP-Unmatched Invoices

Oracle Payables’ invoices that are not matched to a PO

must have accounting distributions entered to indicate

where the charges will be accounted for. These

invoices create accounting transactions when they are

posted to the GL after being approved in Oracle

Payables.

The basic difference between the accounting transaction

created by an invoice matched to an accrued on receipt

PO versus one that is not matched to PO is that the

unmatched invoice debits the accounting distribution

that will receive the charge instead of relieving an

accrual account. This transaction is very similar to an

invoice matched to a expense destination PO that has

simply been accrued at period end.

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:

DR CR

Invoice Distrib. @ Invoice Qty* Inv Price) 200


Figure 13: Unmatched Invoice

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.

Oracle AP-Prepayment Invoices

Prepayments are a special type of invoice that allow a

payment to made and an accounting transaction created

that recognizes the prepayment receivable as a result of the payment. The prepayment can then be subsequently

offset against another invoice so that only the net

amount due is actually paid.

The most common form of prepayments are employee

advances that are subsequently settled by the employee

submitting an expense report. The employee

prepayment is entered, approved, and paid in Oracle

Payables and an expense report is then submitted and

entered through XpenseXpress or as an invoice entry.


prepayment invoice of $200:

DR CR

Prepayment Account 200

AP Liability 200

Figure 14: Prepayment Invoice

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

8/3/2019 PO_INV_AP


(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:

DR CR

Expense Distributions 400

Prepayment Account 200

AP Liability 200

Figure 15: Application of Prepayment to Invoice

The expense distributions are either entered by the useror 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.

Oracle AP-Invoice Taxes

In certain cases, goods or services may be subject to

some sort of tax that must be remitted to the vendor.

This tax could be a sales tax or a use tax. It is important

to understand the difference between the two taxes and

how Oracle Payables treats both.

A sales tax is collected by a tax authority on purchases

of goods and services. The vendor of the good or

service collects sales taxes from its customers (tax is

usually included in the invoice amount), and remits

them to a tax authority. Tax is usually charged as a

percentage of the price of the good or service. The

percentage rate usually varies by authority and

sometimes by category of product. Sales taxes areexpenses to the buyer of goods and services. Oracle

Payables will automatically create tax distribution lines

or will allow tax amount to be prorated to existing non-

tax distribution lines.

A use tax is one which you pay directly to a tax

authority instead of to the vendor. Vendors do not

include use tax on their invoices. You sometimes owe

use tax for goods or services you purchased outside of,

but consumed (used) within the territory of a tax

authority. Use taxes are liabilities to the buyer of goods

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.



invoice price of $20 with a sales tax amount of 8% or

$16 is as follows:

DR CR

Invoice Distrib. @ Invoice Qty* Inv Price) 200

Tax Expense Account 16

AP Liability including tax 216

Figure 16: Unmatched Invoice with Sales Tax

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.



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:

DR CR

Invoice Distrib 1 @ Invoice Qty* Inv Price) 100




AP Liability including tax 216

Figure 17: Unmatched Invoice with Prorated Sales Tax

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.

Oracle AP-Invoice Adjustments

Invoices that have been paid or simply posted to the GL

may be adjusted to correct distribution errors. Paid or

partially paid invoices may only be adjusted if the

Allow Adjustments to Paid Invoices system option has

been enabled. Invoices can also be canceled if they do

not have any effective payments or posting holds.

8/3/2019 PO_INV_AP


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:

DR CR

Corrected Invoice Distribution 50

Original Invoice Distribution 50

Figure 18: Invoice Distribution Adjustment

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:

DR CR

AP Liability Account 216

Original Invoice Distribution 1 100

Original Invoice Distribution 2 100

Original Invoice Tax Distribution 16

Figure 19: Invoice Cancellation

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.


simple payment of an invoice for 10 items at an invoice

price of $20 is as follows:

DR CR

AP Liability 200

Cash 200

Figure 20: Invoice Payment

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.

Oracle AP-Payments with Interest

Oracle Payables has the ability to automatically

calculate interest on overdue payments if the Automatic

Interest Calculation field is enabled on the System

Options form. Interest is calculated using a number of factors including invoice date, goods received date,

receipt acceptance days (or grace periods), payment

terms, and user defined interest rates. These factors

combined with an interest formula create interest

invoices to reflect amounts due to the vendor. These

interest invoices use pre-defined accounting flexfields

The journal entry generated by Oracle Payables for an

interest invoice created when a payment of an invoice

for 10 items at an invoice price of $20 is overdue is as

follows:

DR CR

Interest Expense 10

Interest Liability 10

Figure 21: Interest Invoice due to Overdue Payment

The Interest Expense and the Interest Liability accounts

are define on the Define System Options form.

Oracle AP-Payments with Discounts

Oracle Payables has complete functionality to account

for all discounts that are taken at time of payment.

When you pay an invoice and take a discount, Oracle

Payables automatically creates discount distributions for

the discount amount. Oracle Payables calculates the

discount amount based on the payment terms and

payment schedule you define for the invoice.

The accounting transaction created by Oracle Payables

for a discount taken is dependent on how the system

option “Discount Distribution Method” has been

configured. You can credit a payment discount to a

8/3/2019 PO_INV_AP


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.

The journal entry created by this payment transaction

assuming the discount is credited to a single system

account would be:

DR CR

AP Liability 220

Cash 198

System Discount Account 22

Figure 22: Invoice Payment with Discount to System Account

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:

DR CR

AP Liability 220

Cash 198

Expense Distribution # 1 10

Expense Distribution # 2 10

Tax Distribution 2

Figure 23: Invoice Payment with Discount & Expense Proration

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:

DR CR

AP Liability 220

Cash 198

System Discount Account 20

Tax Distribution 2

Figure 24: Invoice Payment with Discount & Tax Proration

The proportionate share for the tax distribution is

calculated as Total Tax Distributions divided by Total

Invoice Amount multiplied by Total Discount.

Oracle AP-Foreign Currency Payments

When a foreign currency invoice is paid by Oracle

Payables, there may be an exchange gain or loss

calculated. Oracle Payables compares the exchange rate

on the invoice to the payment exchange rate and

calculates an exchange gain or loss if there is a

difference.

For example, assume the following facts:

• a foreign currency invoice for 10 items at an

invoice price of $25 CAD converted at an

invoice exchange rate of $0.80 for a total of

$200 USD and

• a foreign currency payment for this invoice an

a payment exchange rate of $0.82 for a total of

$205 USD.

The journal entry created by this transaction will

account for the exchange loss separately from the

payment The journal entry created by this transactions

is as follows:

DR CR


Exchange Rate Loss 5

Cash (Invoice Amt.* Payment FX rate) 205

Figure 25: Foreign $ Payment with Exchange Loss

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 iscredited 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.

Oracle AP-Payment Voids

Voiding a payment in Oracle Payables reverses the

payment accounting entry and payment records so your

general ledger has the correct information, and so the

status of the paid invoices is reset to Unpaid. Oracle

8/3/2019 PO_INV_AP


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 asimple void payment of a $200 invoice that had a 10%

discount taken on payment is as follows:

DR CR

Cash 180

Discount Taken 20

AP Liability 200

Figure 26: Payment Void

Payment voiding also correctly accounts for any

discount taken or interest previously calculated.

Oracle FA Accounting Transactions

Oracle Assets creates journal entries for all asset

transactions that have a financial impact. These journal

entries are usually created when you run the Create

Journal entries process.

Assets are created in two ways in Oracle Assets: 1) a

Manual Addition of the asset or 2) a Mass Addition of

the asset. As the name implies, a manual addition of an

asset includes entering all asset data includingdescription, vendor, cost, location, employee assigned,

and depreciation accounting flexfield. A Mass Addition

on the other hand is created from data in Oracle

Payables pertaining to the assets purchased and paid for.

The underlying accounting treatment for both manual

and Mass Additions is based on the fact that the original

purchase of the asset was recorded in the GL to an asset

clearing account. Upon entry into Oracle Assets this

clearing account will be replaced by the Asset Cost

account associated to the asset category that the asset

belongs to. The asset category will drive much of the

accounting flexfields used in the journal entries.

Accounts associated to an asset category may vary by

depreciation book.

Oracle FA-Asset Additions

An asset addition creates a journal entry to move the

cost of the asset from the asset clearing account to the

asset cost account. The journal entry created by the

addition of a $5,00 asset is as follows:

DR CR

Asset Cost Account (from Category) 500

Asset Clearing Account (AP or Cat.) 500

Figure 27: Asset Addition (Manual or Mass)

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 theasset 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.

Oracle FA-Asset Cost Adjustments

The cost of an asset may be adjusted for either manualor Mass Additions assets. Manual cost adjustments

simply change the cost of an asset while the accounting

treatment of a Mass Additions cost adjustment depends

on the period that the original asset was added and

whether or not the adjustment is a result of adding a

Mass Addition to a current asset.

The journal entry created by adjusting the cost of a

manual addition is the same as the entry in Figure 27

above for the asset addition. The cost adjustment is

debited to the asset cost account and credited to theasset clearing account.

The journal entry created by manually adjusting the cost

of a $500 Mass Addition asset up by $100 will be as

follows:

DR CR

Asset Cost Account (from Category) 600Asset Clearing Account (from AP) 500Asset Clearing Account (from Category) 100

Figure 28: Manual Mass Addition Cost Adjustment

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

8/3/2019 PO_INV_AP


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:

DR CR

Asset Cost Account (from MA Category) 600

Asset Clearing Account (from AP) 100

Asset Clearing Account (from Category) 500

Figure 29: Adding Mass Addition to Current Period Asset


of the Mass Addition cost adjustment. The clearingaccount 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:

DR CR



Depreciation Expense (from Category) 25

Depreciation Reserve 25

Figure 30: Expensed Mass Addition to Prior Period Asset

with Asset Category from Existing Asset


of the existing asset. The clearing account is taken from

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 abovein 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:

DR CR

Depreciation Reserve (original Category) 200

Depreciation Reserve (new Category) 200

Asset Cost Account (new Category) 500Asset Cost Account (orig. Category) 500

Asset Cost Account (new Category) 100


Depreciation Expense (new Category) 10

Depreciation Reserve 10

Figure 31: Expensed Mass Addition to Prior Period Asset

with Asset Category from Existing Asset

This four part journal entry effectively records thereclassification 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.

Oracle FA-Intercompany Asset Transfers

An asset can be transferred from one company to

another by simply changing financial coding on the

Asset Transfers form to indicate that another company

(balancing segment value) will be assigned the asset.

This transfer between balancing segment values triggers

8/3/2019 PO_INV_AP


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:

DR CR

Depreciation Reserve (old Company) 200

Intercompany Receivable (old Company) 700

Asset Cost Account (old Company) 900

Asset Cost Account (new Company) 900

Depreciation Reserve (new Company) 200

Intercompany Payable (new Company) 700

Figure 32: Intercompany Asset Transfer

This two part journal entry records the transfer to the

new company and records the intercompany payable

and receivable.

Oracle FA-Asset Retirements

When an asset is retired in Oracle Assets, accounting

transactions are created that will clear the asset cost and

depreciation reserve accounts and account for any gain

or loss, proceeds of sale and cost of removal. The

accounting transaction created may separate the

gain/loss into its components or into a single gain/loss

account. These accounts are defined on the book

controls form.

Assume the following example for the sale of an asset

with cost incurred to remove the asset and a single

gain/loss account:

• Cost of Asset = $900

• Depreciation Reserve = $400

• Sales Price for Asset = $600

•Cost of Removal of Asset = $50

The journal entry created by the above example will be

as follows:

DR CR

Depreciation Reserve (from Category) 400

Proceeds of Sale Clearing 600


Cost of Removal Clearing 50

Gain/Loss 50

Figure 33: Asset Retirement with Sales & Cost of Removal

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 alsoreceive 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:

DR CR

Depreciation Reserve (from Category) 400

Proceeds of Sale Clearing 600

Cost of Removal Gain 50

Net Book Value Retired Gain 500


Cost of Removal Clearing 50

Proceeds of Sale Gain 600

Figure 34: Asset Retirement with Sales & Cost of Removal

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 it’s 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.

8/3/2019 PO_INV_AP


About the Author

Gerard J. Gallant, BComm, CA is a Senior Consultant

in the Oracle Applications practice of MCI

Systemhouse Corp. Mr. Gallant is based in Dallas,

Texas and provides financial systems consulting

services to clients throughout North America. He holds

a Bachelor of Commerce degree from CarletonUniversity in Ottawa, Ontario and is a licensed

Chartered Accountant under the membership of the

Institute of Chartered Accountants of Ontario.

Mr. Gallant has been involved with financial

applications consulting, including Oracle Applications,

for six (6) years for both private and public

organizations. He has worked extensively with clients

to define their financial system requirements, to

evaluate and choose a solution that best fulfills their

requirements, and to implement all aspects of the

chosen solution.

PO_INV_AP

Documents

Transcript of PO_INV_AP