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 companys 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! 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 and purchase 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.

Background
MCI Systemhouse, a wholly-owned subsidiary of MCI Communications Corporation, is a global leader in providing expertise in systems integration, outsourcing, technology deployment and related education services. MCI Systemhouse offers all of the necessary tools to help companies decentralize business processes, empower employees, and prepare to compete in a global, information-based market-place. As an MCI Company, MCI Systemhouse offers the power of networking capability that no other systems integrator can match. Professionals in many of MCI Systemhouses 120 offices worldwide, help small and large businesses leverage the power of Oracle Applications, database, and associated technologies. MCI Systemhouse is a full service provider of financial and manufacturing system expertise from the definition of user requirements through to application implementation, support, and maintenance.

Scope of Paper
The paper will describe the accounting transactions that are generated by Oracle Purchasing, Payables and Assets for posting in Oracle General Ledger. The source of the accounting entries will be defined as will the nature of the entry. The derivation of the accounting flexfield will also be highlighted. Accounting entries related to Encumbrance Accounting, the cash basis of accounting in Oracle Payables, and the

This designation is critical in determining whether a receipt accrual takes place. To determine the default accounting behind a receipt transaction, one must understand how FlexBuilder creates the accounting flexfield combinations on all requisitions, purchase orders, and releases. Oracle Purchasing automatically builds charge, accrual, variance, and budget (if using budgetary control) accounts for each document distribution using FlexBuilder. Understanding the derivation of the accrual account is particularly important as this account is used in the receipt accounting process and is constructed based on default rules supplied with Oracle Purchasing. These rules may be customized, but this is beyond the scope of this paper. The accrual account is the General Ledger accounting flexfield used by Oracle Purchasing to record your payable liability for inventory or expense items received but not yet invoiced. As noted above, Inventory items are always accrued on receipt whereas expense items are accrued either on receipt or at period end depending on how your Purchasing Accrual Options are configured. The default FlexBuilder rules supplied with Oracle Purchasing derive the accrual account from one of two places depending on the destination type. For Expense destination types the accrual account used is defined on the Define Purchasing Options form (Expense AP Accrual Account), while it is defined on the Define Organizational Parameters form (Inventory AP Accrual Account) for Inventory and Shop Floor destination types. Because organizational parameters are specific to an organization, different Inventory AP Accrual Accounts can be used for each organization and for each subinventory within an organization.

A standard receipt of inventory items from a vendor into receiving/inspection generates a journal entry using the quantity received and the PO price. The journal entry created by Oracle Purchasing for an inventory item standard receipt of 10 items at a PO price of $20 each is:
Receiving Account @ PO Price Inventory AP Accrual Act. @ PO Price Figure 1: Standard Receipt of Inventory Items DR 200 CR 200

The accounting flexfield for the receiving account is derived from the receiving options of the inventory organization associated with the location that is receiving the goods. The Inventory AP Accrual account is taken from the PO distribution accrual account that was generated by FlexBuilder. As noted above, this account was generated from the Define Organizational Parameters of the Inventory Organization receiving the goods. A standard delivery of inventory items from receiving/inspection to inventory generates a journal entry using the quantity delivered, the PO price, and the standard cost of the inventory item. Any difference between the PO price and the standard cost is expensed in the period as Purchase Price Variance (PPV) if standard costing is being used. If average costing is being used, the average cost for the organization is reweighted and no PPV is recorded. The journal entry created by Oracle Purchasing for the standard delivery of 10 inventory items into inventory from receiving/inspection at a PO price of $20 and a standard cost of $15 each is:
Subinventory Material Account @ Std Cost Purchase Price Variance Acct. Receiving Account @ PO Price DR 150 50 CR

Oracle PO-Receipt of Inventory Items

After determining whether the item is an inventory item or an expense item, the type of receipt must be determined. 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.

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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

above standard receipt under standard costing would be the following entry:
Subinventory Material Account @ Std Cost Purchase Price Variance Acct. Invent. AP Accrual Acct. @ PO Price Figure 3: Inventory Standard Receipt Net Effect DR 150 50 CR

Purchasing for the standard delivery of 10 expense items from receiving/inspection at a PO price of $20 is:
PO Distribution Charge Accts @ PO Price Receiving Account @ PO Price DR 200 CR 200

200 Figure 5: Standard Delivery of Expense Items

A direct receipt of inventory items from a vendor into inventory is performed in one step and automatically places the items in inventory on receipt. The journal entries created by Oracle Purchasing for an inventory item direct receipt are the same as those created for a standard receipt except the entries are created in one step.

The accounting flexfield for the PO Distribution Charge Accounts is taken from the PO distribution associated with the expense item being delivered. This charge account was either generated by FlexBuilder from the expense account associated to the item being ordered or was entered by the person creating the PO. The expense account associated to the item is defined on the Define Item form under the Expense Account Purchasing Item attributes. The receiving account is once again derived from the receiving options of the inventory organization associated to the location that is receiving the goods. The net effect of the above standard receipt of an expense item would be the following entry:
PO Distribution Charge Accts @ PO Price Expense AP Accrual Acct. @ PO Price DR 200 CR 200

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:
Receiving Account @ PO Price Expense AP Accrual Acct. @ PO Price Figure 4: Standard Receipt of Expense Items DR 200 CR 200

Figure 6: Expense Item Standard Receipt Net Effect

A direct receipt of expense items from a vendor to an expense destination creates journal entries that are the same as those created for a standard expense receipt except they are created in one step.

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

As with the receipt of inventory items, the accounting flexfield for the receiving account is once again derived from the receiving options of the inventory organization associated with the location that is receiving the goods. The Expense AP Accrual account is taken from the PO distribution accrual account that was generated by FlexBuilder. As noted above, this account was taken from the Expense AP Accrual Account defined on the Define Purchasing Options form. A standard delivery of expense items from receiving/inspection to inventory generates a journal entry using the quantity delivered and the PO price. There is no PPV entry made because the items are being expensed. The journal entry created by Oracle

the purchasing period all previous receipt accruals are unmarked so that they may be accrued again next period if they are still uninvoiced. Oracle Purchasing creates accrual entries only up to the quantity the vendor did not invoice for partially invoiced receipts. The Receipt Accrual - Period End process is run from the Standard Report Submission form. The journal entry created by the period end receipt accrual process for expense item receipts with a receipt of 10 expense items at a PO price of $20 with 5 items already having been invoiced is as follows:
PO Charge Accts @ Uninvoiced Qty * PO Price Exp. AP Acc. @ Uninvoiced Qty * PO Price

discussion on how foreign exchange gains and losses are recognized in Oracle Payables.

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 entries created 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.

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Figure 7: Expense Item Period End Accrual

Oracle AP-Invoice Match to Inventory POs

When an invoice is entered, the user has an option to match 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:
Inventory AP Accrual Acct. @ PO Price IPV @ Invoice Qty* (Inv. Price - PO Price) AP Liability @ (Inv. Price * Inv. Qty) DR 200 10 CR

The accounting flexfield for the PO Charge Accounts is taken from the PO distribution associated with the expense item being delivered. The Expense AP Accrual account is taken from the PO distribution accrual account that was generated by FlexBuilder. The receipt accruals are reversed in the general ledger into the next accounting period so that there is no double counting when next months receipt accruals are processed. The reversing entry in the GL is as follows:
Exp. AP Accrual @ Uninvoiced Qty * PO Price PO Charge Acct @ UnInvcd Qty * PO Price

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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

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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

originally generated by FlexBuilder when the PO was created.) The AP Liability account can be obtained from the either the liability account entered for the invoice batch defaults, the defaulted liability accounting flexfield that Oracle Payables assigns from the vendor or vendor site, or from what the user entry during invoice entry. If the invoice price is less than the PO price the IPV account is credited for the difference.

that reverses at the beginning of the next GL period and therefore does not have to be offset by the invoice liability. The journal entry created by Oracle Payables for the match of an expense destination PO (that was accrued at period end) to an invoice for 10 expense items at a PO price of $20 and an invoice price of $21 each is:
PO Dist Charge Acct @ Inv Qty* PO Price) PO Dist. @ Inv Qty* (Inv. Price - PO Price) AP Liability @ (Inv. Price * Inv. Qty) DR 200 10 CR

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 is automatically 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. The journal entry created by Oracle Payables for the 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:
Expense AP Accrual Acct. @ PO Price PO Dist @ Inv. Qty* (Inv. Price - PO Price) AP Liability @ (Inv. Price * Inv. Qty) DR 200 10 CR

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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, 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-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 loss calculated. 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.

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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

The journal entry created by this transaction will account for the exchange gain separately from the

invoice price variance and will accurately relieve the Inventory AP Accrual Account at the exchange rate on the PO. The journal entry created by this transactions is as follows:
Inventory AP Accrual Acct. @ PO Price IPV @ Invoice Qty* (Inv. Price - PO Price) Exchange Rate Gain AP Liability @ (Inv. Price * Inv. Qty) DR 150 35 CR

The journal entry created by Oracle Payables for a standard invoice not matched to a PO for 10 items at an invoice price of $20:
Invoice Distrib. @ Invoice Qty* Inv Price) AP Liability @ (Inv. Price * Inv. Qty)
Figure 13: Unmatched Invoice

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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 price and exchange rate (10 items at an invoice price of $25 CAD converted into USD at an invoice exchange rate of $0.70 for a total of $175 USD).

The Invoice distributions are entered by the user or are defaulted from a distribution set. The AP Liability account is generated in the same manner as other AP transactions - from invoice batch defaults, vendor, vendor sites, or user entry.

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. The journal entry created by Oracle Payables for a prepayment invoice of $200:
Prepayment Account AP Liability
Figure 14: Prepayment Invoice

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).

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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 prepayment account is defaulted to the vendor from the Financial Options form. This account can be modified by the user at data entry time and represents the amount receivable from the vendor (employee) until the prepayment is applied to another invoice. The AP Liability account is generated in the same manner as other AP transactions - from invoice batch defaults, vendor, vendor sites, or user entry. The prepayment is cleared by applying it to another invoice or using XpenseXpress. The only difference between the two processes is that regular invoice entry requires the user to enter each accounting distribution for each type of expense while XpenseXpress builds the accounting flexfield from the expense types defined

(like hotels, meals, airfare, etc.) and from the default expense account associated with the vendor (employee). XpenseXpress also requires that an invoice import be completed. In either approach the prepayment is offset against an invoice and the net amount remains either due or payable from/to the vendor. Any remaining prepayment can be applied against subsequent invoices. The following journal entry would result from an application of a $200 prepayment to a $400 invoice:
Expense Distributions Prepayment Account AP Liability
Figure 15: Application of Prepayment to Invoice

and services. When you enter a use tax name on an invoice, Oracle Payables does not automatically create an invoice distribution or a general ledger journal entry for the tax. The journal entry created by Oracle Payables for a standard invoice not matched to a PO for 10 items at an invoice price of $20 with a sales tax amount of 8% or $16 is as follows:
Invoice Distrib. @ Invoice Qty* Inv Price) Tax Expense Account AP Liability including tax
Figure 16: Unmatched Invoice with Sales Tax

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The expense distributions are either entered by the user or generated through XpenseXpress. The prepayment account is taken from the prepayment transaction that was applied to the invoice and the AP Liability account is generated in the same manner as other AP transactions - from invoice batch defaults, vendor, vendor sites, or user entry.

In this example the sales tax is charged to a separate tax distribution account. The invoice distributions are entered by the user while the tax expense account can be automatically generated from the tax name defined on the invoice header. The AP Liability account is generated in the same manner as other AP transactions. The journal entry created by Oracle Payables for a standard invoice not matched to a PO for 10 items at an invoice price of $20 with a sales tax amount of 8% or $16 and with taxes being prorated to existing accounting distributions is as follows:
Invoice Distrib 1 @ Invoice Qty* Inv Price) Invoice Distrib 2 @ Invoice Qty* Inv Price) Invoice Distrib 1 @ Invoice Qty* Inv Price) Invoice Distrib 2 @ Invoice Qty* Inv Price) AP Liability including tax DR 100 100 8 8 CR

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 are expenses 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 nontax 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

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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.

Invoice distribution information is modified by reversing the original distribution line(s) and either rematching to a purchase order or manually reentering invoice distributions. The basic journal entry to record a distribution adjustment of an invoice is:
Corrected Invoice Distribution Original Invoice Distribution
Figure 18: Invoice Distribution Adjustment

The journal entry created by Oracle Payables for a simple payment of an invoice for 10 items at an invoice price of $20 is as follows:
AP Liability Cash
Figure 20: Invoice Payment

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When an invoice is canceled, Oracle Payables sets the invoice amount to zero, reverses all the invoice distribution lines and any matches to purchase orders, and sets all invoice payment schedule line amounts to zero. The basic journal entry to record an invoice cancellation is:
AP Liability Account Original Invoice Distribution 1 Original Invoice Distribution 2 Original Invoice Tax Distribution
Figure 19: Invoice Cancellation

The AP Liability Account is taken from the invoice that is being paid. The cash account is taken from the Bank Account being used for the payment as defined on the Setup Bank Information form.

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:
Interest Expense Interest Liability DR 10 CR 10

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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.

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

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.

Cash System Discount Account Tax Distribution

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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:
AP Liability @ (Inv. Price * Inv. Qty) Exchange Rate Loss Cash (Invoice Amt.* Payment FX rate) DR 200 5 CR

The journal entry created by this payment transaction assuming the discount is credited to a single system account would be:
AP Liability Cash System Discount Account DR 220 CR 198 22

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:
AP Liability Cash Expense Distribution # 1 Expense Distribution # 2 Tax Distribution DR 220 CR 198 10 10 2

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Figure 25: Foreign $ Payment with Exchange Loss

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:
AP Liability DR 220 CR

The AP Liability is debited at the invoice price and exchange rate (10 items at an invoice price of $25 CAD converted into USD at an invoice exchange rate of $0.80 for a total of $200 USD). The Cash account is credited for the total payment amount in USD. This payment amount is calculated at the Invoice Amount of $250 CAD converted at a payment exchange rate of $0.82 for a total of $205. The exchange rate loss account is taken from Setup Bank Information form.

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

Payables also reverses any realized gains or losses on foreign currency invoices you paid. When you void a payment, the invoices are immediately available for payment, unless you choose to cancel the invoices on the payment. The accounting entries generated by an invoice cancellation are shown Figure 19 in the section above titled AP-Invoice Adjustments The journal entry created by Oracle Payables for a simple void payment of a $200 invoice that had a 10% discount taken on payment is as follows:
Cash Discount Taken AP Liability
Figure 26: Payment Void

Asset Cost Account (from Category) Asset Clearing Account (AP or Cat.) Figure 27: Asset Addition (Manual or Mass)

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The asset cost account is taken from the asset category assigned to the asset. If the addition was a manual addition, the asset clearing account is taken from the asset category and depreciation books. If the addition was a Mass Addition, the asset clearing account is taken from the invoice line obtained from Oracle Payables. The above journal entry is equally applicable to construction in process (CIP) assets. These asset are usually identified with separate asset cost and clearing accounts.

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Payment voiding also correctly accounts for any discount taken or interest previously calculated.

Oracle FA-Asset Cost Adjustments

The cost of an asset may be adjusted for either manual or 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 the asset 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 Asset Cost Account (from Category) Asset Clearing Account (from AP) Asset Clearing Account (from Category) CR

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 including description, 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.

600 500 100

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

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:

conditions ensure that an accurate accounting flexfield is used in the accounting transaction. A cost adjustment through a Mass Addition to a current period asset will simply modify the asset cost and clearing accounts previously used by original asset. The journal entry created by adding a $100 Mass Addition to a $500 asset created in the current period (where the asset takes the category of the Mass Addition) will be as follows:
Asset Cost Account (from MA Category) Asset Clearing Account (from AP) Asset Clearing Account (from Category) DR 600 CR 100 500

the Mass Addition line which came from Oracle Payables. The depreciation expense account is taken from the asset distribution while the depreciation reserve account is taken from the asset category. The journal entry created by adding a $100 Mass Addition to an asset created in the prior period with the cost adjustment being amortized (and the asset takes the category of the existing asset) will be the same as above in Figure 30 except the depreciation expense and reserve entries will not be created as the adjustment is being amortized. A Mass Addition may also be added to an asset that was created in a prior period and take on the category of the Mass Addition. In this case, Oracle Assets will create a reclassification transaction to move the original asset cost and depreciation reserve from the accounts associated to its asset category to the accounts associated to the asset category of the Mass Addition. The journal entries created by adding a $100 Mass Addition to a $500 asset created in the prior period with a depreciation reserve of $200 and with the cost adjustment being expensed (and the asset takes the category of the Mass Addition asset) will be as follows:
Depreciation Reserve (original Category) Depreciation Reserve (new Category) Asset Cost Account (new Category) Asset Cost Account (orig. Category) Asset Cost Account (new Category) Asset Clearing Account (from AP) Depreciation Expense (new Category) Depreciation Reserve DR 200 CR 200 500 500 100 100 10 10

Figure 29: Adding Mass Addition to Current Period Asset

The asset cost account is taken from the asset category of the Mass Addition cost adjustment. The clearing account entries are split between the original clearing account on the original asset category and the clearing account on the Mass Addition line which came from Oracle Payables. The clearing accounts are therefore properly relieved. When a Mass Addition is added to an asset that was created in a prior period and the Mass Addition takes on the category of the existing asset, accounting transactions are created that will add the cost adjustment to the original asset. A transaction may also be created to take a one-time depreciation adjustment to catch-up depreciation on the adjusted cost. This transaction will only take place if adjustments are expensed in the current period for the depreciation books. If adjustments are amortized over the remaining life of the asset, there is no depreciation catch-up entry. The journal entries created by adding a $100 Mass Addition to an asset created in the prior period with the cost adjustment being expensed (and the asset takes the category of the existing asset) will be as follows:
Asset Cost Account (from Category) Asset Clearing Account (from AP) Depreciation Expense (from Category) Depreciation Reserve DR 100 CR 100 25 25

Figure 31: Expensed Mass Addition to Prior Period Asset with Asset Category from Existing Asset

This four part journal entry effectively records the reclassification from the accounts of the original category to the accounts of the new category, adjusts the cost to reflect the new Mass Addition cost, and records a depreciation catch-up for the new costs added.

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

Figure 30: Expensed Mass Addition to Prior Period Asset with Asset Category from Existing Asset

The asset cost account is taken from the asset category of the existing asset. The clearing account is taken from

an accounting transaction that will transfer the asset cost and depreciation reserve to the new company and setup an intercompany receivable for the transferring company and an intercompany payable for the receiving company. The journal entry created for the intercompany transfer of an asset with a $900 cost and a depreciation reserve of $200 will be as follows:
Depreciation Reserve (old Company) Intercompany Receivable (old Company) Asset Cost Account (old Company) Asset Cost Account (new Company) Depreciation Reserve (new Company) Intercompany Payable (new Company) Figure 32: Intercompany Asset Transfer DR 200 700 CR

This journal entry records the asset retirement with the gain/loss being posted into a single account. The Proceeds of Sale Clearing, Cost of Removal Clearing, and the Gain/Loss accounts are defined on the Book Controls form. The other segments of the accounting flexfields are taken from the default segments also defined on the Book Controls form. The Proceeds of Sale Clearing account is meant to also receive a credit entry from accounts receivable when an invoice was created for the sale of the asset. The Cost of Removal Clearing account is also meant to receive a debit entry from accounts payable when the invoice for the cost of removal services is approved and paid. The journal entry created for the above example when the gain/loss is separated into its component parts will be as follows:
Depreciation Reserve (from Category) Proceeds of Sale Clearing Cost of Removal Gain Net Book Value Retired Gain Asset Cost Account (from Category) Cost of Removal Clearing Proceeds of Sale Gain DR 400 600 50 500 CR

900 900 200 700

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

900 50 600

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 its component parts of: Proceeds of Sales Gain $600 Gain on Net Book Value Retired $500 Cost of Removal Gain $50 Net Gain $50

Conclusion
This paper has presented the accounting integration between Oracle General Ledger and Oracle Payables, Purchasing, and Assets. The accounting entries created by these modules have been detailed and an explanation of how the accounting flexfields are derived has been presented. Understanding these accounting entries will ensure that reconciliation nightmares and confusion over what a particular entry means will be a thing of the past. There is no substitute for a clear understanding of the facts.

The journal entry created by the above example will be as follows:

Depreciation Reserve (from Category) Proceeds of Sale Clearing Asset Cost Account (from Category) Cost of Removal Clearing Gain/Loss DR 400 600 CR

900 50 50

Figure 33: Asset Retirement with Sales & Cost of Removal

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 Carleton University 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.