Item Expense Test Scenario

Difference between Asset and Expense Items

Inventory items: Machine parts, Raw Materials, Any Trading Items etc

Expenses Items:

You can Track items Onhand but the items value will not show in your inventory valuation (Office Stationery)
etc.
Non-Stock able Items that is direct IN & OUT, are expense items. For such items no need to create Item code for all. Only
few codes can be created and in PR & PO description can be change.

You cannot define an item as expense and inventoried at the same time. But you can define the item as inventory
item.
And when you want to use it as expense, move it to an expense subinventory.
Organization Expense Account
Definition of subinventory
Oracle Inventory -> Setup -> Organization ->Subinventory
A subinventory can be of two types
1- Expense subinventory
2- Asset subinventory

1- 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 -> Parameters
In Average Cost Organization You Can Change Expense Account At Subinventory Level
You should uncheck the asset flag for that subinventory. Make sure that the subinventory accounts are setup
correctly.
2- 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 -> Parameters
The terminology of items is rather confusing from an Purchasing/Inventory point of view:
For easy understanding these will be referred to as A , B and C,
A - Expense Items
B - Inventory Expense Items
C - Inventory Asset Items
A - These items have attributes checked
a - Purchasable
b - Purchased

Expense Account At Item Level : 01-000-7530-0000-000

B - These tems have the following attributes checked
a - Inventory item = YES
b - Stockable
c - Transactable
d - Inventory Asset Value = NO
e - 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
As you know "procure to pay" Business Flow start Purchasing requisition till paying to vendors and most
important, in all the case the purchase is made for basic element called Items.
As you know there are three types of items:

 Inventory Expense Item

 Inventory Asset Item
 Expense item

Definition of above Items used in Purchasing can be best understood as:

A - Expense Items B - Inventory Expense C - Inventory Asset
Inventory Item Flag N Y Y
Purchasing Item Flag Y Y Y
Inventory Asset Flag N N Y
Costing Enabled Flag Y
Asset flag means mean it is an asset and the items value will show in your inventory valuation.
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.

-This account is REQUIRED if Inventory Asset Value is set to No and Inventory Item is set to NO.
This attribute is controlled at the Organization level only.
This is the default inventory account for Inventory Expense items (A).

Navigation: Items > Choose an org > Purchasing Attribute.

c) Organization:
When any item is received into an Organization’s 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
Scenario For : All areas
1- Po Creation
Line 1 Item Code Is (A Expense Items)
Line 2 For Item (B Inventory Expense Items)

If You Receive This Item In any Subinventory PO Charge Account Is Expense Account At Item Level
Line 3 For Item (C Inventory Asset Items)

After Choosing Expense Subinventory PO Charge Account Is Expense Account At Subinventory level

2- Approved PO
3- Receiving Into Store
Line Number 1 RCV.
From Purchasing We Can View Po Summary
 Line Number 2 RCV.
We Receive Expense Item In Asset Subinventory

View Materiel Transaction To Understand Accounting

Line Type Account DR CR
Account 01-520-7530-0000-000 1,000.00
Receiving Inspection 01-000-1410-0000-000 1,000.00
In This Case The DR Account Is The Subinventory Expense Account
Line Number 3 RCV.
We Receive Asset Item In Expense Subinventory
Line Type Account DR CR
Account 01-130-7530-0000-000 1,000.00
Receiving Inspection 01-000-1410-0000-000 1,000.00
In This Case The DR Account Is The Subinventory Expense Account

* In This Case We needed To Receiving Expense Item In Expense Subinventory

2) Encumbrance Account
======================
The Encumbrance is has a GL account type of an EXPENSE and is also
defined in 3 areas:
a) Subinventory
b) Item
c) Organization

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 period–end 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 distribution’s
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 combination (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 system 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 Org’s Expense account will be populated.
Navigation: Setup > Organizations > Query the Inventory Org > Organization classifications > Organization
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 > Organization
Parameters > Costing
For one–time 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 Requester.

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 > Organizations > Purchasing Options
If the destination type is Inventory the accrual account is populated from the receiving Organization’s
Organization Parameters region.
Navigation: Setup > Organizations > Query the Inventory Org > Organization Classifications > Organization
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 destination 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 > Organization
Parameters > Other accounts > Inventory Price Variance account

Inventory Item Accounts Cycle

Step Transaction Point Debit Credit
1 Po Creation
2 Create Receipt Inventory Receiving Account Accrual Account
3 Inspection
4 Delivery Of Items Inventory Valuation Account Inventory Receiving Account
5 Matching AP Invoice With Receipt Accrual Account Liability Account
6 Payment Made To Vendor Liability Account Bank Clearing Account
7 When Clearing Payment Transaction Bank Clearing Account Bank Asset Account
8 Issue Item To Dept. Expense Account Inventory Valuation Account

Inventory Expense Items Accounts Cycle

Step Transaction Point Debit Credit
1 Po Creation
2 Create Receipt Inventory Receiving Account Accrual Account
3 Inspection
4 Delivery Of Items Expense Account Inventory Receiving Account
5 Matching AP Invoice With Receipt Accrual Account Liability Account
6 Payment Made To Vendor Liability Account Bank Clearing Account
7 When Clearing Payment Transaction Bank Clearing Account Bank Asset Account
Fexed Asset Item
As discussed above , the following attributes need to be enabled for such an item.
 Inventory item
 Stock able
 transact able
 Costing flag
 Inventory asset value

For entering on purchase orders It should have purchased and purchasable flags enabled and you have to make
sure you are assigning this item to the Purchasing org which you have defined at
Oracle Purchasing > Setup > Organizations > Financial Options > 'Supplier-Purchasing' alternate region
'Inventory Organization' field.
The accounting can be best described for such kind of items is;
Step Transaction Point Debit Credit
1 Po Creation
2 Create Receipt Inventory Receiving Account Accrual Account
3 Inspection
4 Delivery Of Items Asset Clearing Account Inventory Receiving Account
5 Matching AP Invoice With Receipt Accrual Account Liability Account
6 Payment Made To Vendor Liability Account Bank Clearing Account
7 When Clearing Payment Transaction Bank Clearing Account Bank Asset Account
8 When Asset Addition Done And Asset Account Asset Clearing Account
Capitalized In FA Module