Encumbrance Accounting & Oracle e-business suite

Leverage features of Encumbrance Accounting in Oracle e-business suite

Tarun Wasan
Accenture
UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Agenda
Encumbrance - Concept Encumbrance Footprint Accounting Cycle Encumbrance in Sub Ledgers Encumbrance Year End Reports and Inquiry Q&A
UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

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UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

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UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Oracle e-business suite an Integrated Application

Seamless and tight integration between modules Common data shared across application modules :- personnel information from HRMS shared with financials Integration with external applications through Open Interfaces - interface with customer data base, - Third party data capture systems, - standardised downloads for reporting Integrated with Internet based application
Supply Chain Procurement Service Human Resources Financials Order Management Marketing

Information In A Single Database

Sales

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Encumbrance?
Reservation of funds is known as encumbrances. The primary purpose of tracking encumbrances is to avoid overspending a budget.

Encumbrance accounting = To control spending against budgeted amounts. To record anticipated expenses / Liabilities as soon as they happen. Encumbrance Journals Increase / Decrease the funds available balance.

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Oracle Payroll

Oracle Assets

Oracle Accounts Payables

Payroll Activity

Oracle Sales And Marketing

Depreciation Asset Transaction Set of Books Exchange Rates Invoices Payments Set of Books Exchange Rates

Set of Books Exchange Rates GL Periods For Forecating

Oracle Receivables

Set of Books Exchange Rates Invoices Cash Receipts Adjustments Commissions Approved

Oracle General Ledger

Journals

External Systems

Oracle Sales Compensation

Set of Books Exchange Rates Set of Books Exchange Rates Set of Books Exchange Rates COGS Inventory Activity WIP Activity

Set of Books Exchange Rates

Accrued Receipts

Oracle Order Entry

Oracle Inventory

Oracle Purchasing

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Oracle e-business suite Encumbrance footprint

Accounts Payables
Journal Entries Inventory/ WIP activity Journal Entries Invoices Payments Journal Entries Additions/Retirements Depreciation Adjustments

Fixed Assets

GENERAL LEDGER

Journal Entries Payroll

Inventory

Human Resources
Journal Entries Accrued Receipts Journal Entries Revenue Labor Costs Usage Costs

Accounts Receivables

Journal Entries Invoices Receipts

Purchasing

Project Accounting

No Encumbrance Enabled

UKOUG 2004

Encumbrance Enabled

Encumbrance Accounting & Oracle e-business suite

Encumbrance Cycle
Enable Budgetary Control and Create Budgets Year end Encumbrance

Open Encumbrance Year

Review Funds Available

Enter Manually/ Mass Allocations Create Encumbrances Import - Purchasing & Payables Reserve Funds Post Encumbrances

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Funds Available
Budget Balances

Actual Balances

Oracle General Ledger

Oracle E-Business Suite

Encumbrance Balances
The following equation always holds true:Funds Available = Budget (Actual + Encumbrance)

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

In Payables 4) Enter invoice 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. PO distributions lines will be copied to Invoice distributions. Approve invoice. 5) Transfer to GL Select the Payables Transfer to General Ledger. Complete parameters and submit request. This will transfer all journal lines created in AP to GL. In General Ledger 6) Review actual and encumbrance journal entries. To complete the process 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. This program creates the entries that represent the movement form Obligation to commitment to other. This will result in un-posted entries in GL. The entries should be debit to the expense account and credit to the payables control (liability) account. Find the journal and select Review Journal. The entry at this point is a single sided credit entry to the expense account. The debit entry is to the encumbrance account that has been defined in the set of books : Reserve for encumbrances account will be created at posting.

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Encumbrance in Oracle Purchasing

Use Requisition Encumbrance: If enabled, Purchasing creates journal entries and transfers them to General Ledger to encumber funds for purchase requisitions. Encumbrance Type: If Use Requisition Encumbrance is enabled, select an encumbrance type by which you can identify your requisition encumbrance journal entries.

Reserve at Completion: If enabled, this indicates whether you want requisition preparer to have the option to reserve funds. If you do not enable this option, only requisition approvers will have the option to reserve funds.
Use PO Encumbrance: Enable this option to encumber funds for purchase orders, purchase order and receipt matched invoices, and basic invoices (not matched). Purchasing encumbers funds for purchase orders and Payables encumbers funds for variances during Payables Invoice Validation for purchase order and receipt matched invoices. If a nonpurchase order matched invoice is entered, Payables will encumber funds for it during Payables Invoice Validation. All Payables encumbrances are reversed when you create accounting entries. If Use Requisition Encumbrance is enabled, this must also enable this option. PO Encumbrance Type. A purchase order encumbrance type by which you can identify your purchase order encumbrance journal entries. Invoice Encumbrance Type. If you use purchase order encumbrance, select an invoice encumbrance type by which you can identify your invoice encumbrance journal entries. Ideally a unique encumbrance type should be 2004 to distinguish Requisition, PO and UKOUG used Invoice encumbrance journal entries.

Encumbrance Accounting & Oracle e-business suite

Purchasing Encumbrance
PeriodEnd Accruals and Encumbrance For periodend accruals when using encumbrances, Purchasing creates a reversing entry for the encumbered amount corresponding to an expense while creating an accrual entry for the receipt in the general ledger. When you accrue your receipts, Purchasing ensures that you do not duplicate entries for the period. At the beginning of the following period, you reverse the accrual entry for the expense and recreate the encumbrance entry you reversed in the previous period using General Ledger. If you use non-recoverable or partially recoverable tax, the Non-recoverable tax amount is included in your encumbrances.
Inventory and Perpetual Expense Accruals and Encumbrance For perpetual expense and inventory accruals, Purchasing and Inventory create a reversing entry for the encumbered amount at the time you deliver the goods to the final inventory or expense destination. When an invoice is matched to a purchase order and approved in Payables, it is not necessary for Payables to record an encumbrance for the expense. However, Payables will record an encumbrance for invoice price variance or exchange rate variance, if the variance exists.

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Requisition Encumbrance Cycle

Return to Requestor Final Close Req Credit Expense Debit RFE

Credit Expense Debit RFE Reject @ Approval

Control Cancel Req Reverse Expense Debit and RFE Credit -ve posting Create Req Submit for Approval Approve requisition Autocreate Requisition onto PO

Debit Expense Credit RFE

Credit Expense Debit RFE Approve PO Req Encumbrance Reversed Debit Expense Credit RFE PO Cancel PO Reverse Expense Debit and RFE Credit -ve posting
UKOUG 2004

Final Close PO Credit Expense Debit RFE

Encumbrance Accounting & Oracle e-business suite

Purchase Order Encumbrance Cycle

Requisition encumbrance are relieved when Requisitions are converted to PO. At this stage, the purchase order encumbrance cycle is initiated depending on the type of purchase order document raised.
Broadly, a purchase order document creates an encumbrance to debit expense and credit the reserve for encumbrance account. Blanket PO Contract PO Planned PO

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Blanket PO Encumbrance

Create Blanket PO Submit for Approval

Approve Blanket PO No Encumbrance Generated

Create a Blanket PO release

Approve Blanket PO Release Debit Expense Credit RFE

Contract PO Encumbrance

Create a Standard PO referencing Contract

Approve Standard PO Debit Expense Credit RFE

Create Contract PO Submit for Approval

Approve Contract PO No Encumbrance Generated

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Planned Purchase Order

Create a Planned PO submit for approval
Approve Planned PO Debit Expense Credit RFE Debit Expense Credit RFE RE Create a Planned PO scheduled release Approve scheduled release Credit Expense Debit RFE for release amount PPO Approve scheduled release Credit Expense Debit RFE

Cancel scheduled release Reverse Expense Debit and RFE Credit -ve posting
UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Relieving encumbrances

On receipt of goods or matching invoices against approved POs, Oracle accrues expenses and relieves PO encumbrance. Manual option to create or relieve encumbrance Create Encumbrance Journal directly in GL.

Accounting entries for the Encumbrance journal category record encumbrances, exchange rate variances, and invoice price variances.

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Budgetary Controls in Payables

If you use Oracle General Ledgers Budgetary Control feature, you can check funds before you save a transaction and you can have the Invoice Validation process automatically create encumbrances to reserve funds for your transactions. For example, when you enter an invoice, you can use the Funds Check program to check if you have available budgeted funds to pay for an invoice or invoice distribution. If you select absolute budgetary control in General Ledger, then Invoice Validation places an Insufficient Funds hold on any invoice that fails funds checking. If you use advisory budgetary control, Payables allows the invoice to pass Invoice Validation, even if it fails funds checking. During Invoice Validation, Payables creates encumbrances to reserve funds against the budgets you define in Oracle General Ledger. When you create the accounting entries for the transactions, it relieves the encumbrances. As the final step of budgetary control in Payables, if you enable Use PO Encumbrance in the Financials Options window, Oracle Purchasing automatically creates encumbrance entries to reserve funds for invoice expenditures against the budgets you define in Oracle General Ledger. Funds checking and budgetary control include non recoverable tax as part of the item cost to fully recognize the commitment because non recoverable tax becomes part of the acquisition cost of the item.
UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Encumbrance in Payables
Purchasing and Payables create encumbrances and encumbrance reversals against the budgets defined in General Ledger. Encumbrance with Accrual Basis Accounting The encumbrances Purchasing and Payables create depend on whether the invoice is purchase order matched and whether On Receipt (Perpetual) or Period End Accrual method is used. Unmatched Invoice: If you enable the Use PO Encumbrance Financials option and enter an unmatched invoice, Payables creates an expense encumbrance during invoice validation and reverses this encumbrance during creation of invoice accounting entries. Matched Invoice, On Receipt (Perpetual) Accrual If using On Receipt Accrual method for expense items in Purchasing, Purchasing creates an encumbrance for the goods when the purchase order is approved, then reverses that encumbrance when it records the actual expense at the time of delivery of goods. When the invoice is matched to a purchase order and validated in Payables, it is not necessary for Payables to record an encumbrance for the expense
UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Encumbrance in Payables
Matched Invoice, Period End Accrual: If you use the Period End Accrual method for your expense items in Purchasing, Payables reverses the PO encumbrances. When the invoice is matched to a purchase order and validated in Payables, Payables records an encumbrance for the expense only if the PO Encumbrance Type and the Invoice Encumbrance Type in the Financial Options window are the same. Payables creates an encumbrance for any quantity variance, invoice price variance, or exchange rate variance even if the PO Encumbrance Type and the Invoice Encumbrance Type are the same. Encumbrance with Cash Basis Accounting If you use the cash basis accounting method, Payables creates encumbrances during Invoice Validation and relieves them during create payment accounting entries. Payables prorates your encumbrance reversal based on the invoice payment amount. Payables reinstates the invoice encumbrance when payment is cancelled. Encumbrance with Combined Basis Accounting If you use the combined basis accounting method, Payables creates encumbrances for your primary accrual set of books only.
UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

When using Summary Template Budgetary Control 1. At Budget Organisation level have funds check at advisory / None 2. At Summary template level have absolute. 3. Therefore if insufficient funds exist for a particular account but the amount is still under the summary level you can proceed. E.g. Rent Rates = Water Total 3000 = 1000 1000 1000

Therefore as long as the invoice / PO is less than 3000 you can reserve the funds against any of the three accounts.

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Notes: -

1. Assign Reserve for Encumbrances account to your SOB 2. Enable Budgetary control for your SOB 3. Open Encumbrance year 4. Set up Budgets as per normal 5. Set up Budget Organisations ensuring that if you are using encumbrances and budgetary control for ranges of accounts:A.Automatic encumbrance accounting box (to create Journal entries from your Feeder systems (Payables / Purchasing) B.Select funds check level (Advisory / Absolute) C.Amount type D.Boundary E.Funding budget against which you want GL to check or reserve funds (Must be Journal entry budget type)
3. 4. 5. Enter Budget Journals Create Summary Journals to total ranges of accounts Enable Encumbrances in Payables financial options

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Year End Encumbrance Sub Ledger

Identify outstanding encumbrances in Purchasing to determine whether to cancel or carry forward. Review PO and Requisition encumbrances using a couple of standard reports: - Encumbrance Details Report - Open Encumbrance Balance with Transaction Detail Report - Define Mass Cancel criteria to select encumbrances to be cancelled - Run Mass Cancel - Post encumbrances after running Journal Import in GL - Review the Encumbrance Trial Balance Report in GL - Close last period of the current fiscal year.

- Open first period of the next fiscal year.

- Open next encumbrance year - Open next budget year. - Carry forward year end encumbrances
UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Year End Encumbrance General Ledger

General Ledger carries forward year end encumbrances into the following year as beginning balance. Choose from the following carry forward rules: 1.Encumbrance Only :- GL calculates the YTD encumbrance balances as at the end of a fiscal year and carries forward those balances as the beginning balance of the next fiscal. 2.Encumbrance and Encumbered Budgets :-GL calculates YTD encumbrance balances as at the end of a fiscal year and carries forward the encumbrance balance plus an equivalent budget amount, as beginning balance of the first period in the next fiscal year.

3.Funds Available :- GL calculates funds available as year to date budget balances less YTD actual and encumbrance balances. GL carries forward budget amounts equal to funds available at the end of the fiscal year as beginning balances of the first period of the next year.

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Budgetary Control, Funds Checking and Encumbrance

Questions often asked ?

Can encumbrance be enabled without allowing budgetary control for the set of books?
Automatic Encumbrance journals from the sub ledgers are only created when the budgetary control flag is enabled for the set of books.
If you make entries to an account that funds has been budgeted to, the summary level checking feature works. However, if you choose another account combination in the range and enter expenditures under the Summary Budget Amount, you receive an error message. Funds level check at the Budget Organization level should be set to ADVISORY or NONE if funds level checking of ABSOLUTE is done at the summary level. If you have absolute set at more than one level, then a transaction must pass all levels or it will fail.

Note: - Budgetary control / Funds check only works for those account ranges that have been defined in Budget Organisations with budgetary control / funds check levels defined. Even if no budget amounts have been assigned to these accounts budgetary control / funds check will still take place when an invoice is entered and approved. For those accounts / account ranges that have no encumbrance / funds check levels assigned to them, you will be able to create invoice distribution amounts against, whatever the amount, and it will approve the Invoice. Note: - If you create a budget org with segment values 0000 ZZZZ for all segments and apply budgetary controls / funds check levels you will have funds check for all accounts.

No drill downs on Encumbrance JVs from GL to sub ledgers

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Encumbrances Report
Standard Reports
Purchasing:
Requisition Distribution Detail Report Purchase Order Distribution Detail Report Encumbrance Detail Report

General Ledger:
Encumbrance Trial Balance Report General Ledger Report Accounts Analysis Report

Other Options:
FSG reports Online inquiry

UKOUG 2004

Encumbrance Accounting & Oracle e-business suite

Q &A?
Leverage features of Encumbrance Accounting in Oracle e-business suite

THANK YOU
Tarun Wasan email: tarun.wasan@accenture.com

UKOUG 2004