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Setting Up Inventory Accruals

If you use Purchasing and Inventory together, use the following steps to implement perpetual accruals for inventory item purchases:

Defining Expense Accrual Option

You need to specify whether you want to use period-end or perpetual accruals for your expense destination receipts. Set the Accrue Expense Items option in the Purchasing Options window to On Receipt if you want to accrue your expense receipts perpetually. Specify Period End if you want to accrue your receipts at period end. See: Defining Accrual Options

Defining Default Accounts

You need to define the following accounts before entering transactions in Purchasing and Inventory.

Receiving Account

Enter the general ledger account to record the current balance of material in receiving and inspection.

Use the Define Organization or Receiving Options window to set up this account. See: Defining Receiving Options.

Inventory A/P Accrual Account

Enter a general ledger account to accumulate the inventory accounts payable accrual for this organization. This is the account used by Purchasing to accrue your payable liability when you receive your 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. See: Defining Other Account Parameters

Expense A/P Accrual Account

Enter a general ledger account to accumulate the expense accounts payable accrual for your purchasing installation. This is the account used by Purchasing to accrue your accounts payable liability for expense items at time of receipt when your Expense Accrual Option is On 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. See: Defining Accrual Options.

Purchase Price Variance Account

Enter a general ledger account to accumulate purchase price variance for this organization. The purchase price variance account is usually an expense account. This is the variance that you record at the time you receive an item in inventory, and is the difference between the purchase order cost and an item's standard cost. Purchasing calculates purchase price variance as:

PPV = (PO unit price - standard unit cost) X quantity received

Purchase price variance is not used for average costing.

Use the Organization Parameters window to set this account. See: Inter-Organization Transfer Accounts.

Invoice Price Variance Account

Enter a general ledger account to accumulate invoice price variance for this organization. This is usually an expense account.

Invoice price variance is the difference between the purchase order price for an inventory item and the actual invoice price multiplied by the quantity invoiced. Purchasing uses this account on the PO distribution when the requisition or purchase order is created. When Payables matches and approves the invoice, Payables uses the invoice price variance account from the purchase order to record invoice price variance entries. In addition, if you have exchange rate variances, Payables also records invoice price variance for exchange rate gains and losses.

Use the Organization Parameters window to set this account. See: Inter-Organization Transfer Accounts.

Exchange Rate Gain or Loss Accounts

Enter general ledger accounts to accumulate exchange rate gains or losses for this organization. These are usually expense accounts.

Exchange rate gain or loss accounts are used to record the difference between the exchange rate used for the purchase order and the exchange rate used for the invoice.

Use the Accounting region of the Financials Options window to set up these accounts. See: Defining Financials Options.

Using the Account Generator to build accounts

In addition to the standard default accounts listed above, you can use the Account Generator to predefine a set of rules that allow Purchasing to build the following accounts for each purchase order distribution automatically:

See: Using the Account Generator in Oracle Purchasing.

Setting Up Your Period End Date

For the accrual report to balance to the general ledger, the last transaction (or accounting) date of each fiscal period has to be the same in Inventory, Purchasing, and Payables.

Creating Purchase Orders for Inventory Items

Some of the purchase orders you create are for items you want to move directly into your inventories. Some other purchase orders are for items you simply want to expense.

Purchasing ensures that you charge all inventory items you purchase to the Inventory A/P accrual account for the receiving organization. Each time you enter an item on a purchase order, Purchasing defaults the Inventory A/P accrual account corresponding to the organization you are ordering this item for on your distributions. You cannot override the distribution accrual account.

Purchasing also ensures that you use the correct invoice price variance account for the receiving organization. Each time you enter an item on a purchase order, Purchasing defaults the invoice price variance account corresponding to the organization you are ordering this item for on your distributions. You cannot override the distribution invoice variance account.

Inventory Funds Checking Methods

One way in which you can budget and funds check the inventory purchases you make for a given subinventory is by setting up an encumbrance (i.e. budget) account for the subinventory, and not reversing the encumbrance on receipt/delivery. This way, the encumbrance will accumulate as an actual and can be compared with the account budget for actual purchases to budget analysis. You cannot use the subinventory asset account in the funds available calculation (FA = Budget - Enc - Actuals), because this account will only contain the current value of the subinventory or the net of received and delivered items currently in the subinventory, and will not track to the accumulated purchases for the subinventory. To use this method of funds checking, you must set the Reverse Encumbrance flag in the Organization Parameters window to No. See: Inter-Organization Transfer Accounts.

An alternative method of funds checking inventory purchases is by setting up a summary account and performing a funds check against that summary account. To provide an accurate picture of the funds available, you need to take into account:

Funds available = Budget

less amount on open commitments/obligations (either for inventory, or for expense accounts within the department)

less current inventory value

less value of material 'expensed' to accounts with the department

The following example illustrates some of the transactions and their impact on the funds available:

Summary (Department X)
Subinventory Asset Account 'x1' Subinventory Encumbrance Account 'x2' Budget Account 'xbud' Department Expense 'xA' Department Expense 'xB' Department Expense 'xC'
Summary (Department Y)
Subinventory Asset Account 'y1' Subinventory Encumbrance Account 'y2' Budget Account 'ybud' Department Expense 'yA' Department Expense 'yB' Department Expense 'yC'

Note: If you want to use encumbrances and budgetary control for inventory transfers or issues to expense accounts, you can use internal requisitions.

If you are using Period End Accruals, the encumbrance reversals are created with the accrual entries for the month end. You should reverse these journal entries in the beginning of the next period.

If you are accruing on Receipt, the delivery transaction reverses the encumbrances (and creates the debit to the charge account and the credit to the receiving/inspection account).

Note: A direct receipt in purchasing performs both the debit and credit transactions.


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