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Automatic Offsets and Pooled Accounts

Leigh Lindquist, Madeline Jones, Stephen Horgan, Tommy La Oracle Corporation


Abstract Improve your understanding of the purpose, functions, and limitations of automatic offsets and pooled accounts. Also, demonstrate the effect these options have on accounting transactions. Scope I. II. III. IV. V. VI. Purpose of Automatic Offsets Setting Up Automatic Offsets and Pooled Accounts Restrictions of Automatic Offsets Automatic Offsets and Invoices Automatic Offsets and Payments Automatic Offsets and Pooled Accounts Automatic Offsets was created for the government and higher education sectors where it is mandated by law that transactions be balanced to the balancing segment level. However, many companies may benefit from the option of having selfbalancing sets of accounts. For example, if you have a product segment in your account, Automatic Offsets would allow you to track cash and AP liability by product. Important: The level of detail that Automatic Offsets provides is only recommended either if it is mandated by law or if it is necessary to produce a balance sheet at a balancing segment level. There are restrictions associated with enabling Automatic Offsets. Be sure you understand the impact of Automatic Offsets before deciding to implement this feature. Alternatively, you can set up Intercompany Accounting in Oracle General Ledger so that General Ledger automatically creates the intercompany accounting entries necessary to balance a transaction at the balancing segment level. If you choose to use Intercompany Accounting rather than Automatic Offsets, your Payables transactions that cross multiple balancing segments will not balance at the balancing segment level until you transfer them to General Ledger and submit the Journal Import program. By enabling Automatic Offsets within Payables, Payables will automatically allocate the liability, discount taken, and gain and loss entries for a given invoice across multiple balancing segments, according to the balancing segments of the invoice distributions. If you pay an invoice from a pooled bank account, Payables will also automatically allocate the cash entry across multiple balancing segments, according to the balancing segments on the invoice distributions. If you pay from a non pooled bank account, Payables records the cash entry using the Cash Account you specify in the Banks window. Entries in accounts other than liability, cash, discount taken, or realized gain/loss must have manual journal entries made in

This paper is intended to give you an overview of the purpose and use of Automatic Offsets and Pooled Accounts. References For detailed information on automatic offsets and pooled accounts please refer to the following references. Oracle Payables Release 10SC User Guide: s pages 10:12-24 Oracle Payables Release 11 User Guide: s pages 10:12-24

I.

PURPOSE OF AUTOMATIC OFFSETS AND POOLED ACCOUNTS

If you enter invoices for expense or asset purchases for more than one balancing segment, you may want to use Automatic Offsets to keep your Payables transaction entries balanced at the balancing segment level. For an invoice, Payables creates offsetting liability distributions; for a payment, Payables creates offsetting cash and discount taken distributions. This helps to ensure that each set of accounts remains balanced by balancing segment.

your general ledger in order to keep the entries balanced at the balancing segment level. Automatic Offsets will not affect these accounts. If you do not enable Automatic Offsets, Payables records the liability, cash, discount taken, and gain and loss entries in the accounts you specify in the Payables Options and Banks windows. These accounts have one balancing segment each, so if you enter transactions that cross multiple balancing segments, you may want to consider using the Intercompany Accounting feature to balance these transactions during posting. Automatic offsets allows you to automatically balance invoice and payment distributions that cross balancing segments by creating offsetting entries for each balancing segment. To determine if automatic offsets is right for your company, you should consider the following information: 1) Do you need the level of detail automatic offsets provides, either because it is mandated by law, or because you need to produce a balance sheet that will balance at the segment level? 2) Are you aware of the restrictions that Automatic Offsets enforces? 3) Are you aware of the alternatives? You can set up Intercompany Accounting in Oracle General Ledger so that the General Ledger automatically creates the intercompany accounting entries necessary to balance a transaction at the balancing segment level. II. SETTING UP AUTOMATIC OFFSETS AND POOLED ACCOUNTS

Balancing Payables retains only the distribution balancing segment when it builds an s offsetting account. Companies typically find this level of detail sufficient. Detail Balancing Journal Entries Payables will supply General Ledger with the information needed to create detail balancing journal entries when you run Journal Import. Navigate to Setup=>Options=> Payables: Journal Entry Creation region and set the Liability, Discount Taken, Gain or Loss, and Cash Clearing transactions default to Audit . If you have elected to use Automatic Offsets, we recommend that you not enable Create Summarized Journal Entries located in the Journal Entry Creation Region of the Payables Options form. Rather, post your invoices and payments in detail when you submit the Transfer to General Ledger program. Payables will then create journal entries with your invoice and cash distributions in detail. This will allow you to drill down from a general ledger account balance to specific transactions in Payables. Prorate Discounts To prorate discounts across your invoice distributions when you pay an invoice that crosses multiple balancing segments, navigate to Setup=>Options=>Payables: Payment region and select System Account as your Discount Distribution Method. The balancing segment of your system Discount Taken account is replaced by the balancing segment from the offsetting invoice distribution when Payables builds the accounts for these entries. Pooled Account - To create a pooled account, navigate to Setup=>Payments=>Banks, select the Bank Accounts button; in the Payables Options region check the pooled account box.

Payables will automatically create balancing entries for your invoice and payment transactions when you enable Automatic Offsets. To use this feature, navigate to Setup=>Options=>Payables: Accounting region and select either Account or Balancing as your Automatic Offset Method. Account Payables retains all segments but the distribution account segment when it builds an s offsetting account. Use this option if you want all of your accounts to preserve the same level of distribution detail.

III.

RESTRICTIONS OF AUTOMATIC OFFSETS

If you enable Automatic Offsets, you cannot use any of the following Payables options: Allow Adjustments to Paid Invoices - When an invoice is paid or partially paid, you cannot adjust any accounting information on the invoice. Payables prevents you from updating or reversing any of the invoice distributions for paid or partially

paid invoices because Payables has already created the payment distributions based on the current invoice accounting lines. Navigation: Setup=>Options=>Payables: Invoice Region Allow Adjustments to Paid Invoices Allow Reconciliation Accounting - If you enable Automatic Offsets, Payables will not create reconciliation accounting entries, however, you can still clear payments using Oracle Cash Management. Navigation: Setup=>Options=>Payables: Accounting Region Allow Reconciliation Accounting Automatic Withholding Tax - You cannot use Automatic Withholding Tax if you have enabled Automatic Offsets in Payables. Navigation: Setup=>Options=>Payables: Withholding Tax Region Use Withholding Tax

When you use Automatic Offsets and submit Approval for an invoice, Payables automatically builds the offsetting liability account for each invoice distribution on the basis of the default liability account for the invoice, which defaults from the supplier site. You can override this default during invoice entry. Payables gives you a choice of two different methods for building your offsetting accounts on the basis of this default: Account or Balancing. As previously mentioned, if you select Balancing as your Automatic Offset Method, Payables takes the default liability account for the invoice, substitutes the balancing segment from the invoice distribution and uses that as the distribution s offsetting liability account. Example: You enable Automatic Offsets using the Balancing method, and your Accounting Flexfield structure is Balancing SegmentCost CenterAccount. Your default liability account for supplier site ABC is 1000002000. You enter an invoice for this site and distribute it as follows: DR 1001004100 $60 DR 2002014200 $40

IV.

AUTOMATIC OFFSETS AND INVOICE PROCESSING

Payables automatically records the following liability account offsets when you approve the invoice: CR 1000002000 $60 CR 2000002000 $40 If you select Account as your Automatic Offset Method, Payables takes the account used for the invoice distribution and substitutes the account segment from the default liability account for the invoice, preserving all other segment values. Example: You enable Automatic Offsets using the Account method, and your Accounting Flexfield structure is Balancing SegmentCost CenterAccount. Your default liability account for supplier site ABC is 1000002000. You enter an invoice for this site and distribute it as follows: DR 1001004100 $60 DR 2002014200 $40 Payables automatically records the following liability account offsets when you approve the invoice:

When Automatic Offsets is used, Payables automatically allocates an invoice liability s amount across multiple balancing segments according to the balancing segments on the invoice distributions. This ensures that invoices always balance by balancing segment. Payables creates the liability distributions when you submit the invoice for Approval. You can review the liability distributions on the Expense Distribution Detail Report. If you don't use Automatic Offsets, Payables records the invoice liability using the liability account on the invoice, which defaults from the supplier site. When you distribute invoice distributions across multiple balancing segments, the invoice will not balance by balancing segment. However, General Ledger can automatically create intercompany balancing entries when you post the invoice if you have enabled the Balance Intercompany Journals option for your set of books. (Navigation: GL responsibility Setup=>Financial=>Books=>Define).

CR 1001002000 $60 CR 2002012000 $40 If you adjust the liability account or an invoice distribution account for an unpaid invoice, you must resubmit Approval to pay or post the invoice. At that point payables automatically adjusts the balancing liability distributions created by Automatic Offsets. Note: When an invoice is paid or partially paid, you can't adjust any accounting information on the invoice. You will be prevented from reversing or updating any of the invoice distributions for paid or partially paid invoices because Payables has already created the payment distributions based on the current invoice accounting lines. When you enter invoices with tax, freight or miscellaneous charges, you may want to prorate these expenses in the Distributions window of the Invoice Workbench to ensure that the expenses are distributed across the other invoice distributions. If you have a prepayment that crosses multiple balancing segments, you must split it up into the appropriate number of prepayments, since Payables does not support multiple distributions for prepayments. If you use Automatic Offsets, Payables automatically creates liability distributions based on your chosen Automatic Offset Method, just as it does for any other invoice. If you use Automatic Offsets and have chosen System Account as your Discount Distribution Method in the Payables Options window, Payables prorates the entire discount amount across your invoice distributions when you pay an invoice that crosses multiple balancing segments. The balancing segment from the offsetting invoice distribution replaces the balancing segment of your system Discount Taken account when Payables builds the accounts for these entries. V. AUTOMATIC OFFSETS AND PAYMENTS PROCESSING

When you use Automatic Offsets, Payables creates payment distributions for your cash and discount entries based on the Automatic Offset Method you choose in the Payables Options window. If Payables builds an invalid account, it places the Liab Acct Invalid hold on the invoice with the invalid payment distribution. You must correct the invalid payment distribution before you can post the payment. You can use the Payment Distributions Report to identify invalid payment distributions, and the Invalid GL Accounts window (Navigation: Payables responsibility Payments=>Invalid GL Accounts) to assign a correct account. When Automatic Offsets is used, Payables automatically creates cash, discount and gain/loss distributions for each balancing segment when you create a payment using a pooled bank account. This ensures that invoices always balance by balancing segment when paid from a pooled account. If you don't use Automatic Offsets or create a payment using a nonpooled bank account, Payables creates payment distributions using a single account of each type. When you distribute an invoice across multiple balancing segments, the invoice will not balance by balancing segment. However, General Ledger can automatically create balancing intercompany receivable/payable entries for transactions that do not balance by balancing segment if you have enabled the Balance Intercompany Journals option for your set of books. (Navigation: GL responsibility Setup=>Financial=>Books=>Define)

VI.

AUTOMATIC OFFSETS AND POOLED ACCOUNTS

You can use Automatic Offsets in both cash and accrual basis accounting. In cash basis books, the offsetting journal entries created during payment processing balance invoice distributions directly; in accrual basis books, they balance the offsetting liability entries created when you submit Approval for your invoices.

If you enable the Automatic Offsets and Pooled Account option, Payables creates a corresponding cash payment distribution for each liability distribution that you pay using a bank account with this option enabled. Payables uses the cash account you define for the bank account with the Automatic Offset Method you choose in the Payables Options window to create the cash payment distributions. If you enable Automatic Offsets, you can choose to pool any or all of your bank accounts. The cash in a pooled bank account is shared by multiple balancing segments; the cash in a nonpooled

bank account is associated with a single balancing segment. If you do not enable Automatic Offsets, you can only have nonpooled bank accounts. When you create a payment from a pooled bank account using Automatic Offsets, Payables automatically builds the cash account for each payment distribution on the basis of the bank account associated cash account. Payables uses s the Automatic Offset Method you specified when you enabled this feature in building these cash accounts. If you selected Balancing as your Automatic Offset Method, Payables takes the cash account associated with your pooled bank account, substitutes the balancing segment from the invoice distribution and uses that as the distribution s offsetting cash account. If you selected Account as your Automatic Offset Method, Payables takes the account used for the invoice distribution and substitutes the account segment from the cash account associated with your pooled bank account, preserving all other segment values. Example: You enable Automatic Offsets using the Balancing method, and your Accounting Flexfield structure is Balancing SegmentCost CenterAccount. Your default liability account for supplier site ABC is 1010002300. The default cash account for your Division A bank account, in which you have pooled funds for investment, is 1010001100. You enter an invoice for supplier site ABC and distribute it as follows: DR 1011004500 $60 DR 2002014610 $40 Payables records the following liability account offsets automatically when you approve the invoice: CR 1010002300 $60 CR 2000002300 $40 You post the invoice and pay it out of your Division A bank account. When you create the payment, Payables automatically creates the following entries: DR 1010002300 $60 DR 2000002300 $40 CR 1010001100 $60 CR 2000001100 $40

Example: You enable Automatic Offsets using the Account method, and your Accounting Flexfield structure is Balancing SegmentCost CenterAccount. Your default liability account for supplier site ABC is 1010002300. The default cash account for your Division A bank account, in which you have pooled funds for investment, is 1010001100. You enter an invoice for supplier site ABC and distribute it as follows: DR 1011004500 $60 DR 2002014610 $40 Payables records the following liability account offsets automatically when you approve the invoice: CR 1011002300 $60 CR 2002012300 $40 You post the invoice and pay it out of your Division A bank account. When you create the payment, Payables automatically creates the following entries: DR 1011002300 $60 DR 2002012300 $40 CR 1011001100 $60 CR 2002011100 $40 Attention: When you make a payment using a nonpooled bank account, Payables generates only a single cash offset even if Automatic Offsets is enabled. For payment distributions that cross balancing segments, you can either enter balancing entries manually, or set General Ledger up to create them automatically on posting.

Conclusions Automatic Offsets and Pooled Accounts are very useful options for keeping invoice and payment distributions that cross balancing segments in balance. However, enabling these option does restrict some functions in the system and there are alternatives. Review all of the costs and benefits of enabling these options before implementing. And make sure you continue to use the features correctly after implementing.

About the Authors Leigh Lindquist - Technical Analyst, Orlando, Fl

Madeline Jones. - Technical Analyst, Orlando, Fl. Stephen Horgan - Technical Analyst, Orlando, Fl Tommy La - Senior Technical Analyst, Orlando, Fl

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