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Accounting in Procure To Pay cycle

Manighandan Venkatraman
Principal Software Engineer
Agenda
• Basic Accounting Concepts
 Basic Accounting Principles
 Role of P2P Accounting in Financial statement
 Accounting method – Accrual Vs Cash
 11i design Vs R12 design – Basic architecture
• Receipt Accounting
 Accrual Methods – Online Vs Period end
 Deliver Accounting – Standard Costing Vs Average Costing
• Encumbrance Accounting
 Concept of Encumbrance & Funds Availability calculation
 Budgetary Control & Encumbrance – Setups
• Accounting flow from Sub-ledger to General Ledger (11i & R12)
 Expense PO set to accrue at receipt (Online Accruals)
 Inventory PO set to accrue at receipt (Online Accruals)
 Expense PO set to accrue at period end (Period end Accruals)
• Reports & Reconciliation of Accounts (11i & R12)
 Accrual Reconciliation Report & Accrual Write offs
 Uninvoiced Receipts Report
 Encumbrance Detailed Report
• Account Generator – Defaulting of Accounts
 Basic Accounting Concepts
Basic Accounting Principle:
DR CR

Asset + Expense = Owner’s equity + Liability + Revenue

What major accounts are used in P2P cycle?

 Accrual a/c – Liability
 Receiving Inspection a/c – Asset
 Expense a/c – Expense
 Material Valuation a/c – Asset
 Trade Payables a/c – Liability
 Cash/Bank a/c - Asset

• Debit or Credit?
• When will it get hit?
• At What Price?
Basic Accounting Concepts

Role of P2P Accounting in Financial statement:

• Track the Liability in your Balance Sheet – Accrual a/c & Trade payables a/c
• Track the Expenses in your P&L statement – Expense a/c
• Track the Asset in your Balance Sheet – Material Valuation a/c & Bank a/c
• Track the Budget & Funds Availability to avoid over expenditure or understating
of budget – Encumbrance /Budget a/c
Basic Accounting Concepts

• Cash Basis Accounting Vs Accrual Basis Accounting

 Cash Basis – Single entry system
 Accrual Basis – Double entry system
• Benefits of R12 Sub-ledger Accounting
– Multiple way of representing the accounting for same transaction
e.g – Accrual basis and Cash basis, Accrual with Encumbrance and without
Encumbrance
– Flexibility to write rules based on which accounts can be derived to meet different
business requirement
– Flexibility to write rules based on which accounting entries can be generated to meet
different business requirement
• Concept of Secondary Ledger
– Multiple way of representing the accounting for same transaction using same/different
chart of accounts
e.g - Primary ledger can use Accrual basis and Secondary ledger can use Cash basis
• Concept of Reporting Ledger
– Generation of accounting entries in different currency depending on ledger currency
(same Chart of Accounts)
e.g – Primary ledger can have the currency as INR but Reporting ledger will have USD
Receipt Accounting

• Online Accruals - Liability captured the moment goods/services are received generally
recommended for high value items
 Accrue at Receipt with Expense destination
 Accrue at Receipt with Inventory destination

• Period End Accruals – Liability captured only during the month end for the
goods/services received but not billed. It is just a snapshot of accruals during month end.
 Accrue at Period end with Expense destination
Receipt Accounting – Period end accruals

Steps involved in Period end Accrual Process (11i)

• Close the AP period for period ‘X’
• PO period and GL period for period ‘X’ should be opened
• Submit the Receipt Accruals-Period end program for the period ‘X’ from Purchasing which
generates the accruals for period ‘X’. This process updates the “Accrued_flag” in
po_distributions_all to Yes indicating that the PO distribution is accrued
• Perform Journal import so that the accounting generated during this process get transferred
to GL in period ‘X’
• Close the PO period for period ‘X’. This will inturn trigger the process “Reset period end
accrual flag” which updates the “Accrued_flag” in po_distributions_all to No so that the PO
distribution becomes eligible for getting accrued in the next period. Note that the accrual
needs to be generated every month till the invoice is created for the received qty.
• Perform the Accrual reversals in the next period ‘Y’ in GL to avoid duplication of accrual
entries for a PO distribution
Conditions to be satisfied for accruals to get generated:
• Accrue_on_receipt_flag in po_line_locations_all and po_distributions_all = N
• Accrued_flag in po_distributions_all = N or null
• Received qty > Billed qty
• PO shipment is not finally closed or cancelled as on dates falling under the period for which accrual will be
generated
Receipt Accounting – Period end accruals
Steps involved in Period end Accrual Process (R12)
• Close the AP period for period ‘X’
• PO period and GL period for period ‘X’ should be opened
• Submit the Receipt Accruals-Period end program for the period ‘X’ from Purchasing which
generates the accruals for period ‘X’. This process updates the “Accrued_flag” in
po_distributions_all to Yes indicating that the PO distribution is accrued
• Submit the Create Accounting-Receiving program with end date equal to or greater than the
first date of next period ‘Y’ which generates the accruals in SLA and transfer the entries to
GL in period ‘X’ depending on the parameters ‘Transfer to GL’ and ‘Post to GL’given while
submitting the program
• Close the PO period for period ‘X’. This will inturn trigger the process “Reset period end
accrual flag” which updates the “Accrued_flag” in po_distributions_all to No so that the PO
distribution becomes eligible for getting accrued in the next period. Note that the accrual
needs to be generated every month till the invoice is created for the received qty.
• This Create Accounting program also spawns another program ‘Subledger Multiperiod
Accounting’ which generates the accrual reversals in the next period ‘Y’ in SLA and GL to
avoid duplication of accrual entries for a PO distribution
Conditions to be satisfied for accruals to get generated:
• Accrue_on_receipt_flag in po_line_locations_all and po_distributions_all = N
• Accrued_flag in po_distributions_all = N or null
• Received qty > Billed qty
• PO shipment is not finally closed or cancelled as on dates falling under the period for which accrual will be
generated
Encumbrance Accounting

Encumbrance – Blocking the funds from allocated budget for some purpose
Funds Available = Budget - Encumbrance – Actuals
(Navigation to Funds Inquiry screen to check funds availability: General Ledger > Inquiry > Funds)
 Encumbrance Accounting - Setups

Mandatory Steps:
• Enable the encumbrance flag in Payables > Setup > Financial options > Encumbrance tab
• Enable Budgetary control flag in Accounting Setup Manager(ASM)
• Define the Reserve for Encumbrance a/c in ASM (This a/c should be a non-controlled account)
• Define the Encumbrance SLAM in ASM. Ensure that the Application Accounting Definition(AAD) is defined for
the application Purchasing, Payables and Cost Management (Specific to R12 architecture)
• Ensure that all the above mentioned setups are in place for Secondary ledger if encumbrance is required for
the secondary ledger (Specific to R12 architecture)
• Enable the ‘Reverse Encumbrance’ flag in Inventory > Setup > Organization > Parameters and define the
Encumbrance account
• Ensure that the following encumbrance types are enabled in GL > Setup > Journal > Encumbrances
Encumbrance types:
• Commitment for Requisitions
• Obligation for Purchase Orders
• INV (Other) for Invoices

Optional Steps: (These steps are required to have a real time budgetary control and to avoid over
expenditure)
• Define Budget and Budget Organization with accounts and set the funds check level for the budget accounts
• Allocate budget for the accounts defined and post it in GL
(Refer to whitepapers available in Master Note – 1138043.1)
Encumbrance Accounting - Reserving the funds in 11i

Reserve PO Validate invoice

gl_bc_packets

Program – Create
Deletion of enc entries
Journals

gl_je_
batches gl_je_ gl_je_
headers lines

Posting to GL gl_balances
 Encumbrance Accounting - Reserving the funds in R12
Validate invoice
Reserve PO

po_bc_distributions xla_distribution_links
xla_ae_headers
gl_bc_packets xla_ae_lines

Transfer Entries
Deletion of enc entries
to GL

gl_import_ gl_je_ gl_je_ gl_je_

references batches headers lines

Posting to GL gl_balances
 Encumbrance Accounting - Mechanism of Funds Inquiry

Funds Available = Budget – Encumbrance – Actual

- Condition to get satisfied for the Funds Inquiry to reflect Encumbrance reversal and
Actuals

Accounting entry should undergo funds check

For 11i:
- Encumbrance from gl_bc_packets/gl_balances
- Reversal of Encumbrance from gl_bc_packets/gl_balances
- Actuals from gl_bc_packets/gl_balances

For R12:
- Encumbrance from gl_bc_packets/gl_balances
- Reversal of Encumbrance from gl_balances
- Actuals from gl_balances

Refer to Notes:
728064.1 - R12 - Encumbrance Not Getting Converted To Actuals
For Expense Destination POs
Note. 975139.1 - R12 Posting Of Actuals Completes With Error "Funds Reservation Failure"
 Encumbrance Accounting – Mechanism of Active Encumbrance

• Encumbered Amount in PO Distributions:

Encumbered amount = (PO Ordered quantity * PO unit price * Currency rate) + Non Recoverable Tax

• Calculation of Active Encumbrance:

If the PO is set to accrue at receipt
Encumbered amount - (quantity delivered * PO unit Price)
pod.encumbered_amount - Receiving API "RCV_ACCRUALUTILITIES_GRP.Get_encumReversalAmt"

If the PO is set to accrue at period end

Encumbered amount - (quantity billed * Invoice unit Price) - Invoice Price Variance
pod.encumbered_amount - AP API "AP_ACCOUNTING_UTILITIES_PKG.get_po_reversed_encumb_amount"

If the PO is canceled or finally closed before receipt or invoice

Active Encumbrance = Encumbered amount
where Encumbered amount in PO distributions will get calculated as given below when the PO is canceled or finally
closed
Encumbered amount = Original encumbered amount - (Canceled qty/Final closed qty * PO unit price)
Accounting flow from Sub-ledger to General Ledger – Accrue at
receipt

Debit Credit Deliver the PO Debit Credit

Reserve the PO
Budget a/c Expense/Mat.Val
a/c R.I a/c
RFE a/c
Budget a/c
RFE a/c

Debit Credit Invoice

Receive the PO Debit Credit
R.I a/c
Expense/inventory Expense/inventory
AP Accrual a/c AP Accrual a/c
Liability
a/c

Blue - PSA

Green - Costing

Orange - Payables
 Accounting flow from Sub-ledger to General Ledger – Accrue at
Period end
Debit Credit
Debit Credit Invoice
Reserve the PO Validation PO Enc a/c

Budget a/c INV Enc

RFE a/c a/c

Debit Credit Invoice

Run Receipt Debit Credit
Accruals-Period end Expense a/c Accounting
Expense AP Expense a/c
program & Create Liability
Accrual a/c
Accounting program a/c
Budget a/c
Expense a/c
RFE a/c
Blue - PSA RFE a/c
Green - Costing Expense AP
Accrual a/c
Expense a/c
Orange - Payables
RFE a/c
Purple - SLA
Budget a/c
 Accounting flow from Sub-ledger to General Ledger – Accrue at
receipt with Expense destination(11i)

Program –
Reserve PO gl_bc_packets
Create Journals

Receive PO GIR,GJH,GJL Posting to GL

Deletion of enc entries

RTP
gl_balances

RSL GLI JI

Invoice Matching Create Accounting Transfer to

Ap_ae_lines_all
GL
Accounting flow from Sub-ledger to General Ledger – Accrue at
receipt with Expense destination (R12)
Transfer Entries
gl_bc_packets
to GL
Reserve PO
po_bc_distributions Deletion of enc ent
gl_import_
references
Receive PO
Xla Tables
xla_ae_headers gl_je_lines

RTP xla_ae_lines
xla_distribution_links
Posting to GL

RSL JI
Create Accounting
program gl_balances

Invoice Matching Create Accounting

 Accounting flow from Sub-ledger to General Ledger – Accrue at
receipt with Inventory destination (11i)

Program –
Reserve PO gl_bc_packets
Create Journals

Receive PO GIR,GJH,GJL Posting to GL

Deletion of enc entries

MMT RTP
gl_balances

RSL GLI JI

Transfer to
CM MTA
GL

Invoice Matching Create Accounting Transfer to

Ap_ae_lines_all
GL
 Accounting flow from Sub-ledger to General Ledger – Accrue at
receipt with Inventory destination (R12)
Transfer Entries
gl_bc_packets
to GL
Reserve PO
po_bc_distributions
gl_import_
Receive PO references
Xla Tables
xla_ae_headers gl_je_lines

MMT RTP xla_ae_lines

xla_distribution_links
Posting to GL

RSL JI
Create Accounting
CM program gl_balances
MTA

Invoice Matching Create Accounting

 Accounting flow from Sub-ledger to General Ledger – Accrue at
Period end with Expense destination (R12)
po_bc_distributions
Reserve PO
Transfer Entries
gl_bc_packets
to GL

Received qty > Billed qty Received qty < = Billed gl_import_
gl_je_lines
references

Invoice Validation
Receipt Accruals Posting to GL
Xla Tables
Period end program
xla_ae_headers
Create Accounting
xla_ae_lines
gl_balances
xla_distribution_links

Create Accounting
RSL JI
Program
Reports & Reconciliation of Accounts

• Accrual Reconciliation Report (ARR) – To reconcile online accruals

– Accrual balance shown in ARR can be compared with the accrual balance shown in
Account Analysis Report in GL which gives a picture of accrual balance in the Sub-
ldeger and General Ledger
– Pos that have accrual balance will be listed in ARR so that users can analyze the report
and see why there is an accrual balance
• Uninvoiced Receipts Report (URR) – To reconcile Period end accruals
– Run the URR with the parameters ‘Include online accruals’ to No and ‘Accrued
Receipts’ = No before submitting the Period end accrual process which will give the
amount that needs to be accrued
– Run the URR with the parameters ‘Include online accruals’ to No and ‘Accrued
Receipts’ = Yes after submitting the Period end accrual process which will give the
amount that has got accrued
– Compare the accrual balance in both the URR output which tells that whether the
accrual got generated correctly
• Encumbrance Detailed Report (EDR) – To reconcile encumbrance account
– Compare the encumbrance amount shown in EDR with the encumbrance shown in
Funds Inquiry screen
– Compare the encumbrance amount shown in EDR with the balance for encumbrance
account shown in Account Analysis report in GL
R12 Accrual Reconciliation and Write-Off
Functional Flow
Accrual Reconciliation and Write-Off
List of Tables

For R12:
• Cst_reconciliation_build
• Cst_reconciliation_summary
• Cst_ap_po_reconciliation
• Cst_misc_reconciliation
• Cst_write_offs
• Cst_write_off_details

For 11i:
• Po_accrual_reconcile_temp_all
• Po_accrual_write_offs_all
Account Generator – Defaulting of Accounts
• Requisition AG – poxwfrag.wft
• Purchase Order AG – poxwfpag.wft

Defaulting of Accounts:
• Inventory Asset items (Inventory flag = Y;Asset flag = Y;Costed
flag = Y) delivered to Inventory destination
• Inventory Expense items (Inventory flag = Y; Asset flag = N; Costed
flag = N) delivered to Inventory destination
• Inventory Expense items (Inventory flag = Y; Asset flag = N; Costed
flag = N) delivered to Expense destination
• Expense items (Inventory flag = N) delivered to Expense destination
• One time expense/Non-system defined item (category based) delivered to Expense destinati
on
 Any
Questions?
Thanks !!!
For more details, Refer to PO Accounting Master Note – 1138043.1