Setup and Defaulting of Accounts in a Purchasing Encumbrance Environment [ID 245096.

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SETUP & Defaulting of accounts in an Encumbrance environment. ==================================================== TOPICS I) Definition of Items II) Definition of subinventory III) Accounts involved and their setup IV) Account Generator in Oracle Public Sector Purchasing V) Defaulting rules of the accounts on a Purchase Order Distribution.

I)Definition of Items: ========================= The terminlogy of items is rather confusing from an Purchasing/Inventory point of view. For A B C easy understanding these will be referres to as Expense Items Inventory Expense Items Inventory Asset Items A , B and C,

A - These items have attributes checked Purchasable Purchased B a b c d e These tems have the following attributes checked - inventory item = YES - stockable - transactable - Inventory Asset Value = NO - Costing Enabled = No

C - These items have the following attributes checked a - inventory item = YES b - stockable. c - transactable d - Inventory Asset Value = YES e - Costing Enabled = YES II) Definition of subinventory =============================== A subinventory can be of two types i) Expense Subinventory ii) Asset subinventory i)Expense subinventory can be defined as an inventory which keeps track of Items delivered into Inventory, which may NOT be of asset value. When Defining a new subinventory, the attribute Asset Subinventory remains UNCHECKED, which means that this Subinventory is NOT an asset subinventory and hence an Expense Subinventory.

Navigation: Oracle Inventory > Subinventories window > Costing section of the Master Item window ii)Asset subinventory on the other hand keeps track/record of asset items received INTO this organization. When Defining a new subinventory, the attribute Asset Subinventory is CHECKED , which means that this subinventory is an asset subinventory. Navigation: Oracle Inventory > Subinventories window > Costing section of the Master Item Window III)Accounts involved and their setup ===================================== The following accounts play a vital role in Purchase Order Processing: 1) Expense Account 2) Encumbrance Account 3) Expense AP accrual account 4) Inventory AP Accrual account 5) Receiving Inspection account 6) Purchase Price Variance Account 7) Invoice Price Variance Account 8) Material 1)Expense Account ================= The Expense account is has an GL account type of an EXPENSE and is defined in 3 areas: a)Subinventory b)Item c)Organization a) Subinventory - This is the GL account used to accumulate expenses for this subinventory. The EXPENSE account of an EXPENSE subinventory is charged when you receive any item (A, B, C) into it. The Expense account of an ASSET subinventory is charged ONLY when you receive an expense item (A). b)Item - This account is REQUIRED if Inventory Asset Value is set to No and Inventory Item is set to Yes. This attribute is controlled at the Organization level only. This is the default inventory account for Inventory Expense items (B). Oracle Purchasing debits this account when you receive an item into inventory. only if the item is being expensed and received into the expense subinventory. If the Purchase Order for an Inventory Expense Item (B) has a destination of Inventory AND the expense subinventory is entered on the Purchase Order itself, then Oracle Purchasing uses THIS (Items Expense account) FIRST; if NOT, Oracle Purchasing uses the expense account you assigned to the subinventory. Navigation: Items > Choose an org > Purchasing Attribute. c) Organization: When any item is received into an Organizations Expense Subinventory, this account (Organizations-Expense account) is charged against. When an EXPENSE item is received into an Organizations Asset Subinventory this ( Organizations-Expense account) is charged against.

This account accumulates Encumbrance for this organization. This account is used if the Organization uses AVERAGE costing. This is the default account when you define an EXPENSE subinventory. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Other > Inventory information > Alternate region > Other accounts 2) Encumbrance Account ====================== The Encumbrance is has a GL account type of an EXPENSE and is defined in 3 areas: a) Subinventory b) Item c) Organization

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a) Subinventory This account holds the value of encumbrances against ITEMS in this subinventory. This account is used for purchase order receipts and returns. Navigation: Inventory resp > Subinventories > Define Subinventories b) Item This account is REQUIRED if Reverse Encumbrance parameter is set to Yes This attribute is controlled at the Organization level only. This is the default encumbrance account Oracle Purchasing uses when an item is received. If the item encumbrance account on an item does NOT exist, Oracle Purchasing uses the encumbrance account from the subinventory. You encumber, or reserve against funds, when the purchase requisition or purchase order is approved. When you deliver into a subinventory you reverse the encumbrance. The total receipts plus encumbrances equals your total funds spent. Navigation: Items > Choose an org > Purchasing Attribute c) Organization This encumbrance account at the organization level account recognizes the reservation of funds when a purchase order is approved. This account is used if Organization uses AVERAGE costing. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > other > Inventory information > Alternate region > Other accounts 3) Expense AP Accrual account ============================= This account is used by Purchasing to accrue your Accounts Payable liability for expense items at time of receipt when your Expense Accrual Option is At Receipt, or at periodend when your Expense Accrual Option is Period End. This account represents your uninvoiced receipts and is usually part of your accounts payable liabilities in the balance sheet. Use the Purchasing Options window to set up this account. To populate the Accrual account for distributions with an Expense destination type, the Account Generator locates the Expense AP Accrual Account that you

specify in Define Purchasing Options as part of your application setup and copies it into the Accrual Account on the document. The Account Generator then overlays the balancing segment of the AP Accrual Account with the balancing segment of the charge account so that your transactions always balance by fund. Navigation : Setup > Organizations > Purchasing Options Please note that this will only occur if the Account Generator has been customized to accomplish this overlay. See the Purchasing User's Guide for additional information. 4) Inventory AP Accrual account ================================ This account is used by Purchasing to accrue your payable liability for an organization when you receive your Inventory items. This account represents your uninvoiced receipts and is usually part of your accounts payable liabilities in the balance sheet. Payables relieves this account when the invoice is matched and approved. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Other > Inventory information > Alternate region > Other Accounts. 5) Receiving Inspection account =============================== This account also goes by the name - Receiving Accrual Account, and is used to record the current balance of material in receiving and inspection. Navigation: Purchasing > Setup > Organizations > Organizations > Receiving Options 6) Purchase Price Variance Account ================================== The account records the difference between the purchase order cost and an item's standard cost at the time you receive an item in inventory .Purchasing calculates the PPV as: PPV = (PO unit price standard unit cost) quantity received Purchase price variance is not used for average costing. Use the Organization Parameters window to set this account. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Other > Inventory information > Alternate region > other accounts 7) Invoice Price Variance Account ================================= This account records difference between the purchase order price for an inventory item and the actual invoice price multiplied by the quantity invoiced:

Invoice Quantity x (Invoice Price PO Price) x Invoice Exchange Rate. Purchasing uses this account on the PO distribution when the requisition or purchase order is created. When Payables creates accounting entries for the invoice, it uses the invoice price variance account from the purchase order to record invoice price variance entries. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Other > Inventory information > Alternate region > Other accounts 8) Material =========== This is an asset type account that tracks material cost. Under standard costing, these accounts are defaulted when you define subinventories and can be overridden. For average costing, this account holds your inventory and intransit values. Once you perform transactions, you cannot change this account. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > other > Inventory information > Alternate region > other accounts

IV) Account Generator in Oracle Public Sector Purchasing ========================================================= The default Account Generator processes in Oracle Public Sector Purchasing build a charge, budget, accrual, and variance account for each purchase order, release, and requisition distribution based on the distributions Expense, Inventory, or Shop Floor destination type. Oracle Public Sector Purchasing always builds these accounts using the Account Generator; you cannot disable this feature. For Inventory charge account construction, the Account Generator further distinguishes between asset and expense purchases based on the item and subinventory that you provide for the distribution. If you select an expense item, the Account Generator disregards the subinventory and builds an expense charge account. If you select an asset item, the Account Generator evaluates the subinventory to decide whether to build an expense or asset charge account. When the Account Generator locates a source account based on the distribution destination type, it copies complete code combinations (full Accounting Flexfields) from designated fields to destination Accounting Flexfields. The default Oracle Public Sector Purchasing processes do not build individual flexfield segments. For example, to populate the Accrual account for distributions with an Expense destination type, the Account Generator locates the Expense AP Accrual Account that you specify in the Purchasing Options window as part of your application setup, and copies it into the Accrual

Account Flexfield in your document. V) Defaulting rules of the accounts on a Purchase Order Distribution ==================================================================== CHARGE ACCOUNT ============== The account generation depends MAINLY on the destination type of the Purchase order. Therefore: A) If the destination type is Expense and item is an Expense item, the Charge account comes from the Organization Items Expense account which is Navigation : Items > Organization Items > Purchasing attribute > Expense account B) If the destination type is Inventory and the Item is an Inventory expense item, there exists an order, in which the sytem looks for the accounts to be defined. Subinventory Expense account (Expense subinventory) into which the item is being received. If this Expense account is NOT defined then the system looks at Organization Items Expense account, if this is also NOT available then The Organization parameters of the Receiving Orgs Expense account will be populated. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Organzation Parameters > Costing > Expense account C) If the destination type is Inventory and the item is an Inventory Asset item, the charge account is defaulted in the following order: 1) Subinventory Material or Expense account of the Subinventory into the RECEIVING subinventory. Navigation: Inventory resp > Subinventories > Define Subinventories If this account does NOT exist then: 2) Material Account from the Organization Parameters of the Receiving organization is populated. Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Organzation Parameters > Costing For onetime or predefined items with no associated expense account, the Account Generator will be unable to build a charge account. In this case, you can either manually specify a charge account in your document or you can design a custom Account Generator function to build Expense destination charge accounts based on field values like Requestor. BUDGET ACCOUNT ============== If the destination type is Expense, the Budget account is built off of the Charge account. If the destination type is Inventory, the Budget account is built based in the following order: i)Encumbrance account of the subinventory into which the item is being received. ii)Encumbrance account defined against the item iii)Encumbrance account from the Organization Parameters of the Receiving Org. If none of the above are available, then it copies the charge account.

ACCRUAL ACCOUNT =============== If the destination type is Expense then the Accrual account is populated from the Purchasing Options Expense AP accrual account. Navigation: Purchasing Resp > Setup > Organizations > Organzations > Purchasing Options If the destination type is Inventory the accrual account is populated from the receiving Organizations Organization Parameters region. Navigation: Setup > Organizations > Query the Inventory Org > Organization Classifications > Organzation Parameters > Other accounts > Inventory AP accrual account VARIANCE ACCOUNT ================ If the destination type is Expense then the Variance account is copied from the Charge account. If the detsination type is Inventory, then this value is populated from the Organization Parameters of the receiving Organization. Navigation: Setup > Organizations > Query the Inventory Org > Organization Classifications > Organzation Parameters > Other accounts > Inventory Price Variance account Additional Reference documents: Note:240928.1 Troubleshooting Encumbrance entries against a PO having an EXPENSE destination. Note:242175.1 Definition of Items used in Purchasing. Note:243641.1 CHARGE ACCOUNT defaults on PO DISTRIBUTIONS Note:243291.1 Troubleshooting Encumbrance entries against a PO having an I