Encumbrance Flow from Purchasing to

Payables to General Ledger

Doc ID: Note:77291.1
Type: BULLETIN
Last Revision
Status:
05-JUL-2006
PUBLISHED
Date:
Encumbrance flow from Purchasing to Payables to General Ledger.
ENCUMBRANCE:
------------Encumbrance accounting is a means of budgetary control.
The primary purpose of tracking encumbrances is to avoid overspending a
budget.
Encumbrance can also be used to predict cash outflow and as a general
planning tool.
Encumbrance deals mainly with General Ledger, Purchasing and Payables
modules.
ENCUMBRANCE SETUP:
-----------------1. In General Ledger
----------------1.1. Enable budgetary control in your Set of Books:
Navigation: Setup -> Financials -> Books -> Define
Alternative Region : Budgetary Control Options
Flag Enable Budgetary Control.
1.2. Create budgetary control groups:
Navigation: Budgets -> Define -> Controls
Enter name and description and create budgetary control rules.
eg. Add Purchasing as Source with category Purchases.
This control group has to be attached at the Site level or User level
Profile Option (Budgetary Control Group) and this will control the behavior
regarding the tolerance of budgetary control.
See MetaLink Note 297949.1
How to Use Budgetary Control Groups in the Purchasing Application
for additional information.

1.3. Define Budget:

Navigation -> Budget -> Define -> Budget
In Budget, basically you set period boundary for your budget i.e. time frame.
Remember to open the periods for the budget by pressing the Open Next Year
button.
NOTE: A prerequisite to the above step is that Encumbrance year should be
open at Set of Books level.
Navigation: Setup -> Open/Close
1.4. Define Budget Organization:
Navigation: Budget->Define->Organization
In this step you choose the accounts for which you want to have control and
link it to your Budget defined in step 1.3. Complete Header of form and
navigate to Ranges and define your ranges for your organization.
1.5. Encumbrance types:
Navigation: Setup -> Journals -> Encumbrances.
Encumbrance types are defined so as to bifurcate the reservation of funds
done at different levels i.e. Requisition, PO or Invoice level, it helps
management people in having better financial control.
2. In Purchasing OR Payables
------------------------Enable encumbrance: Encumbrance has to be enabled in Financial Options
form in Payables or Purchasing modules.
In Purchasing: Setup -> Organization -> Financial Options
Alternative Region Encumbrance
In Payables: Setup -> Options -> Financials
Alternative region Encumbrance
Select different encumbrance types for Requisition, PO and Invoice. Here you
attach the types that you defined in step 1.5. of GL setup.
ENCUMBRANCE TRANSACTIONS:
-------------------------

1) Enter requisition
Navigation: Requisitions -> Requisitions.
Create a requisition, reserve and approve the requisition. When approved you
can do a funds check in GL and this should be in commitment phase,
provided commitment is the type of encumbrance you have attached at
requisition level in Financial options.
No journal entries are created for this particular transaction but
encumbrance entries can be created by running the Create Journal Program
in GL.
2) Create Purchase order from Requisition
Navigation: AutoCreate
Find your requisition, Select the requisition and go to automatic. Make sure
that your supplier information is entered and select create.
This will now create your PO. Complete, reserve and approve your PO.
When approved you can do a funds check and this should be in obligation
phase, assuming obligation is the type you attached at PO level.
No journal entries are created at this stage but similar to the previous step
you can create encumbrance entries by Create Journal
Entry program. While using PO Encumbrance you cannot change price,
quantity, shipment or currency once a PO has been reserved and approved,
the only way to deal with
such a situation is to cancel the existing PO and create a new one when a PO
is cancelled system takes care of adjusting encumbrance.
NOTE: The important point over here is that if you create the PO manually
then it will lead to the duplication of reservation of
funds for the same transaction as the system will treat PO as a separate
transaction and you will end up having double reservation
for the same transaction one at requisition level and other at PO level, so
always go for Autocreate mode while using Encumbrance Accounting.
3) Receive your goods.
Navigation: Receiving Receipts

Find your PO. Mark as receipt and save. Depending on the routing you may
have to deliver it. Once the Goods are received Journal
entries will be generated for Receiving by the system. At this point PO
encumbrance is relieved otherwise it gets relieved when
you post the invoice from payables to GL, this is in case in Accrual basis of
Accounting while in case of Cash basis of accounting PO encumbrance gets
relieved when you post payment information from Payables.
NOTE: Important reports which can be used to track the things are:
1. Requisition Distribution Detail Report.
2. Purchase Order Distribution Detail Report.
3. Encumbrance Detail Report.
Change Responsibility to Payables.
4) Enter invoice with the type PO Default (This will ask you for a PO
Number)
Navigation: Invoices -> Entry -> Invoices
Complete by entering invoice number, date and amount. Navigate to match
and in the find screen the PO number will be displayed, if not correct
Navigate to find. The PO information will be displayed. Flag the lines and
select Match.
Your PO distributions lines will be copied to your Invoice distributions.
Approve your invoice. When approved you can do a funds check and this
should be in the other phase.
5) Transfer to GL
-------------Navigation: Other -> Request -> Run
Select the Payables Transfer to General Ledger. Complete parameters and
submit request. This will now transfer all journal lines
created in AP to GL and if automatic import was selected in it will result in
an unposted journal batch. If an error was encountered this will entries will
be in the GL_INTERFACE table. Do the correction and re-run the import.
Change Responsibility to General Ledger
6) Review actual and encumbrance journal entries.
Navigation: Journals -> Entry

Find your journal and select Review Journal. The entries should be debit to
the expense account and credit to your payables control account. If this is fine
you can post your journal.
Navigation: Journals -> Encumbrance
Find your journal and select Review Journal. The entries at this point is a
single sided credit entry to your expense account. The debit entry to your
encumbrance account will be created at posting. You can now post these
entries as well.
NOTE: It is clear with these entries that the entries from Purchasing and
Payables where the encumbrance was created is still outstanding.
This is normally the big concern. Very little reference in the Purchasing,
Payables and General Ledger Reference Manuals describes
the process of creating these entries. The result at this point is that your
encumbrance accounts and funds available does not represent correct
balances in GL.
To complete the process you have to Run the concurrent program: Create
Journal Entries in General Ledger. This will create the journal
entries out of transactions that pass funds reservation from Purchasing and
Payables. Note that you can no longer view these details online or through
reports.
Refer to the creation of requisitions and PO's; this program creates the
entries that represent the movement form Obligation to commitment to
Other. This will result in unposted entries in GL and you can now view these
journals and post.
It is recommended that you schedule this program to run at desirable
intervals.