Oracle Receivables Accounting

Flow of Accounting Information:
- If you are using Oracle Order Entry (without customizations), no accounting information is available until you run AutoInvoice. You pass the transactions to Oracle Receivables using the Receivables Interface. You then run AutoInvoice which creates the actual transactions and uses AutoAccounting to derive the segment values for the GL Accounts. If you are using Oracle Projects the account segment values are derived by a Projects’ process also called AutoAccounting and passed as values to Oracle Receivables via the Streamline process, also using AutoInvoice.



- Whether you are manually entering your receipts or processing them through AutoLockbox, the accounting information is automatically determined by Oracle Receivables when you create and apply the receipts (not when it is still a "QuickCash" batch). The values used are based on the setup values for the bank where the receipts were deposited and the invoices they are paying.

General Ledger Interface:- You pass accounting information from Oracle Receivables to Oracle General Ledger using the General Ledger Interface. If you have properly set up Oracle Receivables, you should never have to create manual journal entries in your General Ledger and the two systems should always be in sync.

- When you invoke the General Ledger Interface process, you initiate multiple programs that:
Finds all of the records for the period you specified that have not yet been passed to the General Ledger;
1. Determines if the debits equal the credits;
2. Passes the data to GL for editing; and
3. Marks the records as having been passed (so they will not pass twice).

- If you have specified that you want the Journal Import to also run, this process verifies that the individual segments and combinations of segments are valid. Only when the Journal Import completes successfully are the Journals available for posting.

Tips:
1. Always run the General Ledger Interface using the starting date of the period through the last day of the period. This is applicable no matter when you are running the process or if you know you will never have activity for that date, since sometimes the system uses dates other than the dates you expect.
2. Depending on which patches you have applied, you may or may not see the Unposted Items Report. If this report does run, always check each page to ensure that you have no items that could not be passed to the General Ledger. If anything besides headings appears, work with your IT department to resolve (since this is usually caused by a bug).
Verify that the amounts in the General Ledger Interface Report are reasonable and that the debits equal the credits.
3. Verify that the Journal Import has a status of "SUCCESS." If not, you had a problem that will need to be resolved or none of the items in the batch will be available for posting. Generally you have a problem if an account was valid when the activity was created, as you know, you cannot save with invalid values but, someone has since disabled either a segment or the combination. An example of this is your Accounts Receivable account that may have been valid when the invoice was originally created but it is not longer valid, and a receipt was just applied against it. When you apply a receipt to an invoice it always causes an offsetting entry against the original Accounts Receivable account.
Should this occur, then
1. Re-enable the segment or combination;
2. Re-run the Journal Import (in GL -- be sure to include the applicable id);
3. Create a manual journal entry (also in GL) to move the activity from the bad account to the proper account (this is my one exception to never creating manual journal entries); and
4. Re-disable the segment or combination.
By making the corrections in this way you are able to keep your GL in sync with your AR activity and you have an audit trial of what you did to make the correction. You have the option to correct in the Import Corrections form (in GL), but you lose the audit trail of what you did and why. Note what you did and why and storing the notes in a handy binder so you will be prepared when the auditors ask why you did what you did.

Journal Entries Reports: The Journal Entries reports are the best way to verify the actual accounting for Oracle Receivables’ activities and the only way to view the accounting for the foreign currency gains and losses. There are actually four reports that give you varying levels of details regarding the journal entries you will be creating or have already created. These reports may be run at anytime before or after you run the General Ledger Interface. Your options are: Detail by Account (very large), Summary by Account, Detail by Category (also large) and Summary by Category.

Tip: Run the Summary by Category and review to insure that there are no invalid or illogical accounts, prior to running the General Ledger Interface. If you find funny accounts, you can correct or create offsetting entries prior to posting. Run the Detail by Category (just for that category and account) to see which specific activities used the funny account. Correct the activity if possible. If not possible (i.e., adjustment), create an offsetting entry using the proper account.
Tip: If you run this report for Unposted Items only, you must leave the Posted Date range blank or nothing will appear on the report.

Period Close Procedures:
Tip:Never have more than one AR period open at one time. There have been problems with entries appearing partially in one period and partially in another. Also, you may accidentally enter activities in a period other than the period you intended.
Create a checklist to insure that you always know where you are and what you have to do next, so you will not forget anything.
Balance your AR activity to the Aging:

Old Aging Balance -----(Aged Trial Balance - 7 Buckets by Account)
________________________________________________
+ New Invoices -------Transaction Register
+ Debit Memos ------- Transaction Register
+ Chargebacks --------Transaction Register
- Credit Memos ------ Transaction Register
- Receipts Applied ---- Unapplied Receipts Register
+/- Adjustments ------Adjustment Register
- Items Not Aged ----- Invoice Exceptions Report
____________________________________
New Aging Balance --- Aged Trial Balance - 7 Buckets by Account

Also balance your AR activity to your GL activity using the Journal Entries Report - Summary by Category and the Account Analysis report (in GL). Note any manual journal entries that used "your" accounts.

Accounting Details
The GL Accounts may or may not appear on the form (depending on what you are doing) but almost every activity you perform has an accounting impact. In order to understand this impact it is necessary to know:
1) what accounts are impacted by each transaction;
2) what are the related set ups;
3) what you may change and/or override and what is out of your control.

AutoAccounting : AutoAccounting a very powerful setup feature that tells Oracle Receivables how to determine the individual segment values for your Transactions (invoices, debit memos, credit memos, chargebacks and commitments) using the rules that you specify. You may use this feature when creating Transactions manually or through AutoInvoice. The types of accounts impacted by AutoAccounting include:
- (Accounts) Receivable
- Revenue
- Tax
- Freight
- Unearned Revenue (for deferred revenue recognition)
- Unbilled Receivable (for deferred receivables recognition)
- AutoInvoice Clearing (for problems with extended amount)
- Possible sources of this information are the values you set up for the following:
- Transaction Types
- Salesreps
- Standard Lines (Items or Memo Lines)
- Taxes
- And/or hard coded values.

You may get one segment value for one type of account from a different place than for another. See Appendix 1 for an example of a typical AutoAccounting setup.
You can use a similar worksheet to test the setup of your AutoAccounting rules. List your Accounting Flexfield segments in the left column. For each type of account select the source of each segment (based on the list of available sources) and fill in that box. Test your theory by listing what all the setup accounts would be for a Transaction Type, Salesrep, Item, Tax and Memo Line. Then use a white-board and fill in each segment, for each type of account, with the values from each of the related sources. Verify that the combinations are actually valid, if not, redesign how they will be set up or redefine your AutoAccounting rules. Once you are satisfied with the results, enter your AutoAccounting rules into your test system and start creating manual invoices. Verify that you have not created invalid account values as the defaults.
Tip: I prefer to assign all segments to sources versus using hard coded values. This seems more flexible for future changes.

Invoices: When you create an invoice either through AutoInvoice or manually, you take advantage of AutoAccounting to provide the default Accounting Flexfield values. For manual invoices you have the option to override the default values.
For a standard Invoice:
DR : AR (AutoAccounting - may override)
CR : Revenue (AutoAccounting - may override)
:Tax (AutoAccounting - may override)
:Freight (AutoAccounting - may override)

You may also create invoices with special accounting and invoicing rules that allow you to defer revenue recognition for the percentage and number of periods that you specify. The following is an example of an invoice created with deferred revenue recognition for $12,000 split evenly over 12 periods:

For invoices with deferred revenue: a) When first created:
DR : AR (AutoAccounting - may override) 12000
CR :Unearned Revenue (AutoAccounting) 1000
DR : Unearned Revenue (AutoAccounting) 12000
CR : Revenue (AutoAccounting - may override) 1000

b) For each of the next 11 periods:
DR : Unearned Revenue (AutoAccounting) 1000
CR : Revenue (AutoAccounting) 1000

If you are using deferred revenue recognition, you need to run the revenue recognition process for each period (Run Revenue Recognition) and runs automatically as part of the General Ledger Interface.

Tip: To reduce the time it takes to close the period, run Revenue Recognition prior to the time when you are actually closing (e.g., the night before the close). This will process the majority of the updates prior to the actual close.
Recurring Invoices (Transaction Copy) are treated like regular invoices, except they have different GL dates. Once you have created an invoice copy, it really is just another invoice with different dates.

Debit Memos: Debit memos work just like standard invoices (you even create them on the same forms) -- taking advantage of AutoAccounting but with overridable segments. If you defined Memo Lines for use with your debit memos, they will provide the default accounting segments if you have set up AutoAccounting to use Standard Lines values for your Revenue accounts.

Credit Memos And On Account Credits: There are two types of credit memos: credit memos that you create to offset an individual invoice are called "Credit Memos." Credit memos that impact a customer’s account but are not initially tied to a specific invoice are called "On-Account Credits." On-account credits may be tied to invoice(s) using the Receipts Applications window, at any time. The accounting for Credit Memos usually offsets the applicable accounts from the original invoice (if you set your System Profile option AR: Use Invoice Account For Credit Memo to "Yes"). Credit memos and on-account credits that are created using AutoInvoice take advantage of AutoAccounting and/or hard coded values. You may override the default values if you are entering manually.

Credit Memo tied to an invoice:
DR : Revenue (from the related invoice - may override)
: AR (from the related invoice - may override)
: Tax (from the related invoice - may override)
CR : Freight (from the related invoice - may override)

On-account credits take advantage of AutoAccounting and Standard Lines (Memo Lines) depending on how you set up your AutoAccounting rules for the default credit and debit GL Accounts. You may override the default values at entry time if you are entering manually.

DR : Revenue (Memo Line - may override)
CR : AR (AutoAccounting - may override)

When you apply an on-account credit to invoice(s), you debit the credit account you used when you created the on-account credit. The Accounts Receivable account for the invoice being offset is credited. You may not override these values.
DR : AR (from the On-Account Credit)
CR : AR (from the invoice)

Cash Receipts (Excluding Miscellaneous Receipts): The accounting for receipts, except for Miscellaneous Receipts, is totally controlled behind the scenes by Oracle Receivables. The GL Accounts are determined by the values you defined in Receipt Class for the batch.
NOTE: You have one Cash, Unapplied, On-Account, Unidentified, Earned Discount and Unearned Discount account for each bank and class, which does not allow you to split the Unapplied, etc. accounts for the applicable cost center or division.
You may set up different values for each bank and class that you use (especially important for the cash account). Or, you may share the GL Accounts for multiple bank accounts (i.e., the unapplied and discount accounts). The key accounts are:
- Your cash account (the default debit account for that bank account);

Tip: Often AP and AR share the same bank account but it is helpful to use a different but sequential GL account for each. This eases the reconciliation but you can roll together for FSG reporting.
- Your unapplied payments account (the default used until you match the payment to an invoice);
- Your on-account account (used to account for pre-payments until you apply them to invoice(s));
- Your unidentified account (used for receipts where you do not know which customer sent the receipt);
Tip: Often companies use the same GL Account for unapplied, on-account and unidentified. This is fine as long as: the account is not used for anything else and it is not an Accounts Receivable or cash account.
- Your earned and unearned discount accounts (used when a client pays invoices in accordance with the early payment terms. These are also often the same. Earned discounts are for payments made within the discount terms, unearned discounts are paid after the discount term but are allowed anyway.

When you match a receipt to an invoice, the cash account (debit) defaults from the Receipt Class for the Receipt batch. The Accounts Receivable account (credit) defaults from the invoice that is being paid.
NOTE: Even if you instantly match a payment to an open invoice, Oracle still creates credits and debits to the unapplied account.

Payment applied to an invoice without discount terms:DR : Cash (Receipt Class)
: Unapplied (Receipt Class)
CR : Unapplied (Receipt Class)
: AR (from the invoice)

Payment applied to an invoice with discount terms:DR : Cash (Receipt Class)
: Unapplied (Receipt Class)
: Discount (Receipt Class) 
CR : Unapplied (Receipt Class)
: AR (from the invoice)

When you leave a receipt as unapplied:DR : Cash (Receipt Class)
CR : Unapplied (Receipt Class)

When you identify a receipt is as a pre-payment or deposit:DR : Cash (Receipt Class)
CR : On-Account (Receipt Class)

For unidentified receipts:DR : Cash (Receipt Class)
CR : Unidentified (Receipt Class)

When you apply unapplied, on-account or unidentified receipts, the accounting is determined by the original status. The accounts used are based on the accounts you currently are using for the Receipt Class. The Accounts Receivable account still comes from the invoice.
DR : Unapplied (Receipt Class)
On-Account (Receipt Class)
or Unidentified (Receipt Class)
CR : AR (from the invoice)

When you unapply a receipt, the accounting is just the opposite of the application accounting. You debit the AR account for the original invoice and credit the unapplied account based on the current unapplied account for the Receipt Class:
DR : AR (from the invoice)
CR : Unapplied (Receipt Class)

When you reverse a receipt, you have two possible options: re-open the invoices you previously paid or create a debit memo for the amount of the reversed payment. If you re-open the invoices, the system offsets the accounts used when you originally applied the payment (from the invoice and the cash account). Note that this process also impacts the unapplied account.

DR : Unapplied (Receipt Class)
: AR (from the invoice)
CR : Cash (Receipt Class)
: Unapplied (Receipt Class)

If you create a debit memo, you credit the original cash account but debit the Accounts Receivable Account for the Debit Memo type you selected. You may override the Accounts Receivable account when you enter the payment reversal.
DR : AR (Transaction Type - may override)
CR : Cash (Receipt Class)

Chargebacks: You create Chargebacks when you are applying cash to close the original invoice and create a new invoice for the amount that the customer short paid. By definition, there is a one to one relationship between a Chargeback and the original invoice. You need to set up values for Chargebacks in 3 places: Receivables Activity where you specify the "wash" account used when creating a Chargeback. Transaction Types where you specify the default AR account. A Memo Line ("Chargeback Line") is seeded by Oracle but it is just used for the line description when you print the Chargeback and has no accounting impact. The Accounts Receivable account for the new invoice is based on the Accounts Receivable account for the Chargeback but you may override it at entry item. Oracle credits the Accounts Receivable account for the original invoice (note that these two accounts may be different).

In the Category of Adjustment:DR : Chargeback Adjustment (Receivables Activity)
CR : 

In the Category of Adjustment (AR):
DR :
CR : AR (from the original invoice)

In the Category of Chargeback:DR :
CR : Chargeback Adjustment (Receivables Activity)

In the Category of Chargeback (AR):DR : AR (from the chargeback - you may override)
CR :

In the Category of Trade Receipts:DR : Cash (Receipt Class)
CR : 

In the Category of Trade Receipts (AR):DR : Unapplied (Receipt Class)
CR : AR (from the original invoice)
: Unapplied (Receipt Class)


Miscellaneous Receipts: Miscellaneous Receipts are any receipts that are not for open receivables. Examples include Cobra payments, T-shirt sales, utility refunds, and returns on investments. Due to the nature of this activity, you may need to credit any account within the chart of accounts. The Distribution Window in the Receipts form allows you to do just that. You may run into an Account Security Rule set up to restrict usage of accounts by application. If you find that you may not use an account that you need, work with your System Administrator to change the Account Security Rules.
You may pre-define the credit accounts that you usually use to speed entry (using Receivables Activity) but you also have the flexibility to override the values at entry time. You also have the ability to split a single receipt into multiple accounts (you may also pre-define those accounts using Distribution Sets).
If you will always be splitting the accounts, you should define a Distribution Set. A distribution set is a name and one or more GL Accounts and percentages that you define. You must create a Receivable Activity that refers to the Distribution Set.
When you enter Miscellaneous Receipts, you refer to the Receivables Activities that you defined above. However, you may override the default GL Accounts, the individual segments, the percentages and/or the amounts. The cash account used defaults based on the Receipt Class for the bank you specified on the Batch Screen, and you may not override or view the value.

DR : Cash (Receipt Class)
CR : Miscellaneous Account(s) (Receivables Activity or Distribution Set - may override)


Receivable Adjustments: Receivable Adjustments are generally write-offs, or changes to the invoice balance due for over- or under-payment by the customer, or the addition of finance charges. Pre-define commonly used adjustment types using the Receivables Activity form. This speeds entry, but you may override the default values as you enter the adjustments. NOTE: Always define a GL Account and not a Distribution Set when you define Receivable Activities for adjustments.

Tip: When entering an adjustment, never use an Accounts Receivable Account. Oracle Receivables already automatically offsets the AR account for the invoice being adjusted and you will create a wash entry.

A Receivables Adjustment is always applied to a specific invoice so it impacts the Accounts Receivable account for that invoice. Receivables adjustments may either be positive (debit AR, and increase the invoice balance) or negative (credit AR and decrease the invoice balance). Examples include:

Add a finance charge (note that this is a positive adjustment that increases the balance due):
DR : AR (from the invoice)
CR : Finance Charges (Receivables Activity - may override)

Reduce the freight amount:
DR : Freight (Receivables Activity - may override)
CR : AR (from the invoice)

Write-off the invoice balance:DR : Cost of Doing Business (Receivables Activity - may override)
CR : AR (from the invoice)

You may use AutoAdjustments to perform mass cleanup of open invoices and on-account credits. The Accounts Receivable account credited is the Accounts Receivable account for the transaction. The account debited is based on the Receivables Activity you select when you submit the AutoAdjustment process. Note that ALL adjustments made during this process will use that exact same "write off" account even if the original invoices are for different companies, or cost centers. This may be a consideration in determining if you can actually utilize AutoAdjustments, or if you want to run multiple passes of AutoAdjustment by Transaction Type and Adjustment Activity.

Foreign Currency Gains and Losses: Transactions that are not in your base currency may cause gains or losses to occur due to fluctuations in the exchange rates. This is automatically accounted for by Oracle Receivables. When you enter the Transaction, the applicable exchange rate for the date you enter it is stored with the transaction. When you enter the related receipt the applicable exchange rate for the date you enter the receipt is stored with the receipt. The gain or loss is determined based on the difference in the value of the money (in your base currency) between when the invoice was created and when the receipt was created. The gain and loss accounts are derived based on the values in your System Options and how you set up Flexbuilder. Note that most companies use the default setup for Flexbuilder. Note that there is no gain or loss if you apply an adjustment since both the adjustment and the invoice use the same rate. You can predict Gains and Losses using the Projected Gains/Losses Report. You can only view the gain/loss accounting activity by running the Journal Entries Report.

Gain - now worth more:DR : Cash (Receipt Class at the receipt rate)
: Unapplied (Receipt Class at the receipt rate)
CR : AR (from the invoice at the invoice rate)
: Unapplied (Receipt Class at the receipt rate)
: Gain (System Options - difference between the invoice and receipt values)

Loss - now worth less:
DR : Cash (Receipt Class at the receipt rate)
: Unapplied (Receipt Class at the receipt rate)
: Loss (System Options - difference between the invoice and receipt values)
CR : AR (from the invoice at the invoice rate)
:Unapplied (Receipt Class at the receipt rate)

Accounting fundamentals for Techies

Accounting fundamentals for Techies

This post is answer of reader's query which was pending from long time.

To elaborate in details , lets take sample case with two items.

Accounting fundamentals for Techies : Encumbrance

Before start of this topic you should be clear on these term;

• Encumbrance
  This is your any pre-expenditure, such as a purchase order, which will lead to a charge against an account.
• CommitmentA journal entry you make to record an anticipated expenditure, as indicated by approval of a requisition.
• Obligation
  An encumbrance you record when you turn a requisition into a purchase order.

 So...What Are Commitments?
Commitments are obligations for future expenditures made , and this should be for an employee or vendor PO's. Commitments are tracked to help departments forecast their expenditures so that they do not exceed their budget available.

If you are using encumbrance you can get answer of these two question.

• How much do I have left to spend?
• Alert me if spending too much from allocated budget.

How much I left to spend , will be based out of these formula

Funds Available = Budget - Actual - Encumbrances.

budget is always unaltered, Encumbrances is reversed when matching to AP invoice.

 Oracle Vanilla encumbrance accounting -Briefing

Oracle encumbrance accounting feature is supported by a process called funds reservation, which is implemented in the General Ledger as a user-exit or spawned program.

What is required if enabled Purchase Orders and Purchase Requisitions to first undergo a funds check when they are submitted. The system checks the line amount(s) of the requested purchase against the budget for the GL account(s) and alerts the user if that PO or Req. will exceed the funds on the account.This process of verification of available funds based on pre-defined summary templates.

Journals are then recorded in a special table called GL_BC_PACKETS, where they will sit temporarily before being converted by a concurrent process called “Program – Create journal” into permanent encumbrance journals.

The modules capable of initiating such transactions are the purchasing module for the creation of three documents, Standard Purchase Order, Requisition and Purchase Order Releases and the Accounts Payable module for the different invoices. It is possible to control the type of encumbrance created by these modules via the set-up of the applications.

The benefit of the encumbrance accounting feature is the ability to have the system control the expenditure budget from the General Ledger, reducing the risks of potential over expenditure.

This is often a legislated requirement for public organizations.

The transactional flow has funds reservation being performed through the GL_BC_PACKETS table when reserving funds for purchasing documents, and through the GL_INTERFACE table for receipt accruals which can be either On Receipt or at Period End. The funds checker process takes place whenever funds reservation and/or adjustment is made.

After transactions have taken place in Purchasing, it will become necessary to run the Create Journals program in GL. This program essentially sweeps through the GL_BC_PACKETS table and creates journals for the entries as entered.

Essentially this process allows the different manager to understand their “funds available” based on the following formula.

Funds Available = Budget – Actual – Encumbrance

The Oracle system has the ability to control this formula per fiscal period using the different balances tracked within GL_BALANCES (Essentially the General Ledger) by PTD (Period To Date), QTD (Quarter To Date), YTD (Year To Date),PJTD (Project To Date).

If you are coming from other Products like SAP or SUN , let clear these two terms in Oracle context in Project module specific.

• Actual Transactions - Actual transactions are recorded project costs. Which may includes labor, expense report, usage, burden, and miscellaneous costs.
• Commitment Transactions - Commitment transactions are anticipated project costs. Such examples include purchase requisitions and purchase orders or contract commitments.

Basic Oracle Process

The basic process flow for encumbrance accounting activity related to Oracle Purchasing typically is as follows:

1. Create a requisition.
2. Approve and reserve funds for the requisition.
3. AutoCreate requisition onto a purchase order.
4. Approve and reserve PO (which automatically reverses the requisition funds reservation)
5. Receive against the purchase order (either period-end or online accruals) and the funds are reversed for the amount received and entered against the charge account.

Take a note, funds reversal also occur when documents are cancelled or finally closed.

Requisitions, when autocreated onto a purchase order, have their funds reversed either when the PO is approved and reserved or when the requisition line(s) are rejected or returned.

Oracle Product associated with encumbrance

• General Ledger
• Purchasing
• Payables
• Projects
• Grants

Next will see Accounting Treatment in encumbrance.

Understanding “Cash Flow Statement”

Lets start with the basic concept ;

Why Is Cash So Important?"

Cash is the necessary element which runs the business. We need to know where the cash comes from (sources, or inflows) and where it is spent (uses or outflows).

• Most of bills, Salaries, etc are paid in cash
• Most vendors are paid in cash
  • Even on a “good day,” the small business will owe its debts in 30 days
  • Those purchasing products/services from the small business though will have 90 days to pay their debts.

What is Cash Flow?

• CF Statement is a 'flow' statement.
• CF Statement indicates changes that took place between tow successive Balance Sheets.
• The statement of cash flows provides a thorough explanation of the changes that occurred in a firm's cash balance during the entire accounting period.
• The statement of cash flows reports cash receipts and payments of a company during a given period for operating, financing, and investing activities.
• Cash includes cash and cash equivalents.

Cash Flow & Accrual method of accounting

Cash Flows, although related to net income, are not same. This is because of the accrual methodof accounting. As we know,under accrual accounting, a transaction is recognized on the income statement when the earnings process is completed, that is , when the goods and /or services have been delivered or performed or an expense has been incurred.

..that mean ...Cash Flow Statement

• Cash flow statements ARE NOT budgets
• Cash flow statements are concerned only with ACTUAL cash inflows and outflows .

An Example of the Difference Between Budgets and Cash Flows

If you take a “Prepaid insurance” for a year costing $3,000 – or $250 a month

1. A budget will account for 12 equal installments of $250
2. A cash flow statement will recognize a 1-time only outflow of $3,000.
3. You can also see more details inflows and Outflows attributes at the end.

Why do we need CFS as financial reporting?

• Balance Sheet & P&L A/c is not sufficient in term of pure financial Reporting.
• It shows the relationship of net income to changes in cash balances.
• It reports past cash flows as an aid to:
  • Predicting future cash flows
  • Evaluating the way management generates and uses cash
  • Determining a company's ability to pay interest and dividends and to pay debts when they are due
• It identifies changes in the mix of productive assets.
• The statement of cash flows, along with the income statement, explains why balance sheet items have changed during the period.
• Some time , there is legal rules to provide the cash Flow statement.

Do you know ..What is Float?

Float refers to the difference in time between when the check is deposited and cash is received.

This makes a significant impact of your CFS.

Statements of Cash Flow

A statement of cash flow is one of several financial statements that public companies construct and share with their stake holders. In general this statement will include a formula or calculation that considers:

Cash and Cash Equivalents (Beginning)
+ Cash from Operations
- Cash Flows from Investing Activities
+ Cash Flows from Financing Activities
= Cash and Cash Equivalents (Ending)

Its all about Relation ship

This is family pack of financial reporting. The relationship among the balance sheet, income statement, and statement of cash flows:

CASH FLOW CLASSIFICATIONS- Activities Affecting Cash

Cash Activities are divided into three main categories

• Operating activities - transactions that affect the income statement ..these are mostly used for Normal day-to-day activities
  • Cash effects of revenue and expense transactions
    • Deal with the income statement accounts
    • Included interest paid (on debt) and income taxes (to the government) which enters in the determination of net income
    • Cash receipts from sales of good and services,miscellaneous income
    • Cash payments for inventory, wages, insurance, utilities,rent
    • Changes in current asset and liability accounts from the prior year.
• Investing activities - activities that involve (1) providing and collecting cash as a lender or as an owner of securities and (2) acquiring and disposing of plant, property, equipment, and other long-term productive assets ...like changes in long term assets and investment
• Financing activities - activities that include obtaining resources as a borrower or issuer of securities and repaying creditors and owners..and these are basically changes in equity and non Operating Liabilities

 Operating Activities

Cash Inflows are typically Understood as

• Cash Receipts from sale of goods/rendering of services
• Cash Received from royalties, fees, commission, etc.
• Other operating receipts

where the cash outflow can be best understood as:

• Cash payments to suppliers for Goods/services
• Cash payments to employees
• Interest and taxes paid
• Other operating cash payments

Investing Activities

Cash Inflows are typically Understood as

• Sale of property, plant, and equipment
• Sale of securities that are not cash equivalents
• Receipt of loan repayments

where the cash outflow can be best understood as:

• Purchase of property, plant, equipment
• Purchase of securities that are not cash equivalents
• Making loans

Financing Activities

Cash Inflows are typically Understood as

• Borrowing cash from creditors
• Issuing equity shares
• Issuing debt securities

where the cash outflow can be best understood as:

• Repayment of amounts borrowed
• Repurchase of equity shares
• Payment of dividends

How To Develop an Accurate Initial Cash Flow Projection

• Contact vendors/suppliers and ask about payment terms
• Check with credit card companies and get information about when the accounts will be processed as well as what the percentages are.

Developing a Cash Flow Statement

• The cash flow statement of a small business is different than that of a corporation
• Corporation will have operating, investing, and financing sections to their Statement of Cash Flows
• The small business is only interested in the cash flows resulting from operations
  • Operations signifies all the cash flows in/out of the business…
• A cash flow statement will maintain an accurate representation of the overall cash position if used effectively
• A cash flow statement begins with expenses
  Examples of possible expenses
  • Salaries
  • Cost of Goods Sold
  • Taxes
  • Office Supplies (often underestimated)
  • Rent
  • Most important to account for EVERY expense…you have defined in system.
• Begin accounting for revenues once done with all expenses
• If possible, the company should separate their revenues into separate categories
  It will help focus the business on which sectors of its revenues are important and will influence the operations of the business…

Do you know Who can utilize information processed by the SCF?

These is utilized by Management,Investors

Cash Flow Statement in Oracle Financials?

• Important to know, there is no seeded report that cater the need for Cash Flow.
• Most of cash flow statement is prepared by account department.
• We can achieve CFS by using OFA.
• We can also generate CFS by FSG, but it is bit difficult, unless until, the format is not very simple.
• you can pull the reports based out of data in the GL_BALANCES table.

Understanding “Profit and Loss (P&L)” from Techies Mind

• In accounting world, an Income Statement is called as "Profit and Loss Report". In addition, the word Revenue is often used in place of the word Income. An Income Statement is used to inform you about the income earned, expenses incurred, and the total profit or loss in a particular period. Two common periods for creating an income statement are monthly and annually.
• This report summarizes all Income (or sales), the amounts that have been or will be received from customers for goods delivered or services rendered to them, and all expenses, the costs that have arisen in generating revenues.
• Normally Income Accounts accounts are used to track income earned during the process of operating your business. The income of a business comes from sales to customers or fees for services or both. Some of the common names for income accounts are: Income from Sales, Income from Freight, Income from misc. sources as property, shares.
• As discussed in last post Balance Sheet is a ‘position’ statement whereas Profit & Loss Account is a ‘flow’ statement.
• The need of P & L report is enforced because of companies Act, which enforce to produce Balance sheet and P&L account.
• A Balance Sheet as on the last day of the financial year
• A Profit & Loss Account for the financial year.

Profit and Loss A/C

What you suppose to remeber is :

• P&L A/c is also called ‘Income Statement’.
• Income is calculated as the difference between revenues and expenses.
  • Revenues: from operations
  • Expenses: specific product/service/period
• Accountants have agreed to use the accrual basis of accounting rather than the cash basis

The term Revenue and expense

• Revenues - gross increases in owners’ equity arising from business operations/delivery goods-services to customers
• Expenses - decreases in owners’ equity that arise because goods or services are delivered to customers

In term of accounting, this can be described as:

Revenue Account :This is the income account. Whenever a revenue account balance is changed, it leads to a change in the Assets / Liabilities account. Revenue account is not a control account, it’s treated as an operative account. At the beginning of a new accounting cycle, this account is turned to zero. Entire balance is transferred to the retained earnings account.

Expense Account : This is the operations expenditure account. Whenever an expenditure account balance is changed, it leads to a change in the Assets / Liabilities account. This account behaves just like the Owner’s equity account as an increase in this account essentially means a decrease in owner’s equity. Expense account is not a control account, it’s treated as an operative account. At the beginning of a new accounting cycle, this account is turned to zero. Entire balance is transferred to the retained earnings account.

Spliting the above , the balance sheet can be drived on the basis of these. You can see the details in one of last post.

where as Profit and Loss report can be best build and understand as:

Profit and Loss A/c Concept

Profit and Loss can be based out of these basic concept as discussed in one of my post .

ACCOUNTING PERIOD

• Expenditure during A/c period which are also expenses of that period.
• Expenditure during the A/c period which will become expense only in future periods
• Expenditure during the previous A/c period which will become expenses during the current A/c period
• Expense of the current A/c period which have not yet been paid

REALIZATION CONCEPT

What is important here is

• ‘point of time’ or revenues earned
• recognition of revenues

ACCRUAL CONCEPT

Normally companies measure there profits by change in Owners’ equity , revenues increases OE, expenses decreases OE

MATCHING EXPENSES WITH REVENUE

• Income (profit) - the excess of revenues over expenses
  • Revenues - Expenses = Profit
• Retained earnings - additional owners’ equity generated by income or profits
  • Revenues increase owners’ equity.
  • Expenses decrease owners’ equity.

Balance sheet and P&L- Driven by Transaction

In last post we have seen BS provides a snapshot of an entity’s financial position at an instant in time., where as P&L A/c provides a moving picture of events over a span of time and explains the changes that have taken place between BS dates. This can be best described as below figure.

Understanding “Balance Sheet” from Techies Mind

Do you know one of Key Financial Report aka Balance Sheet is a basically ‘position’ statement, which describes the financial position of assets & liabilities of

• your company/firm
• as on a particular date

If you take any accounting book, this can be best defined as "a statement of the financial position of an enterprise as at a given date, which exhibits assets, liabilities, capital, etc."

Why Balance Sheet Required?

Obvious question why this is required? the Only reason is because the the legal rules (Companies Act) enforce companies to publish such report.

• A Balance Sheet as on the last day of the financial year
• A Profit & Loss Account for the financial year.

In accounting world , balance sheet should reflect ‘true and fair view’ in term ofshareholder equity .

Balance sheet - techies definition

Assets and Liabilities are continuously changing with Business activity. To understand the financial position of the Business, it is necessary to ‘FREEZE’ the values of financial components at a certain point in time. These values, or Balances, are used to construct a balance sheet which shows how the owner’s equity is represented by the various categories of assets and liabilities.

Do this have any Structure?

Yes, If you see different accounting book, we will find two different form of Balance sheet,

• Horizontal
• Vertical

The only difference between these two are required to give the corresponding amounts for the preceding financial year (‘Comparatives’) for all the items shown in the balance sheet.

A typical Balance sheet can be best represented as:

This is based out of accounting equation, which I have discussed in one of old post :

Assets = Owner’s Equity + Outside Liabilities

A = OE + OL

in the world of double entry system, the rule of thumb is "In the double-entry accounting system, every transaction is recorded by equal amounts of debits and credits"

A (DEBIT)= OE + OL(CREDIT)

If you analyze the above sheet in term of accounting equation , this can be best understood as:

Is there any limitation for Balance sheet?

Yes, there are (adopted from Jep Robertson Notes)

• As most most assets and liabilities are based out of historical cost.
• Judgments and estimates are used in determining many of the items.
• The balance sheet does not report items that can not be objectively determined.
• It does not report information regarding off-balance sheet financing.

Where is my Balance sheet report within Oracle

Balance sheet reports in Oracle are one of the FSG report which need to fine tune base out of the customer requirement, and this can be executed from the report section within GL responsibility.

A bit on IFRS

Sometime back, I was talking to one of my accountant friend who pointed me some recent changes in IFRS ,and provided some link for the awareness and to understand the impact in EBS suite. I am not going to put the details, rather will walk through some information which is good to have with ERP consultant who is dealing with Financial products.

What is IFRS?

IFRS,International Financial Reporting Standards (IFRS), together with International Accounting Standards (IAS), are a "principles-based " set of standards that establish broad rules rather than dictating specific accounting treatments. From 1973 to 2001, IAS were issued by the International Accounting Standards Committee (IASC). In April 2001 the International Accounting Standards Board (IASB) adopted all IAS and began developing new standards called IFRS.

IFRS are used in many parts of the world, including the European Union, Hong Kong, Australia, Russia, South Africa, Singapore and Pakistan. Nearly 100 countries currently require or permit the use of, or have a policy of convergence with, IFRSs. Here is list of countries which adopted IFRS.

What is meant IFRS for Oracle eBusiness consultant/ERP Consultant?

As we are quite aware GAAP which is so called Generally Accepted Accounting P rinciples for Shareholder Reporting.The term is not drafted by a legislature.

and ,in term of Accounting Principles this can be best understood as:

IFRS = Financial Reporting standards = Balance Definitions < /FONT >

which internally means more in term of "disclosure Requirements" and "Balance Definitions " for finance controller.

IFRS - What it is for?

The Other things IFRS would do is:

• Providing a bookkeeping rules rather many of us have impression that they have some rule set for accounting
• It will do Shareholder Reporting , and this is important when :
  • A group of companies owned by a Public company
  • Not the individual companies
• It will also do external reporting
  • To your owners (investors, shareholders)
  • Through their stock markets
• Management Reporting
  • Maximize investors returns, measured only with IFRS
  • Segment Reporting disclosure

IFRS - What it is not for?

And more important it should be understand that IFRS is not meant for:

• Statutory Reporting
• Tax Reporting
• Regulatory reporting
• Subsidiary reporting

IFRS – How new is it?

• IASB has been around since 1980’s
• IAS/IFRS pretty much converged with the Americans
• If your ERP supports US GAAP, it supports IAS/IFRS
• Key premises (recognition, measurement):
  • Mark to Market when possible
  • Reality of the Balance Sheet – real assets, real liabilities
  • Income Statement analyses the change in wealth
  • Deep Disclosure: owners right to know

US GAAP vs. IFRS - A difference

While looking to some more information on internet ,I discovered a nice article from the site of Fulcrum Inquiry who pointed out the key differences(adopted) between the two standards in there one of the article .

Don’t worry about your ERP Side

• Maybe requires some reconfiguration, maybe requires some data analysis
• We have notice there is some big change in R12 AR to meet revenue recognition, R12 is partially on track for IFRS fitness in suite.
• The new R12 Global Architecture introduced the concept of ledgers which has capability of providing differing accounting representations; one ledger for example could conform to IFRS, another to local GAAP.
• From the Currency area we have already noticed some big changes like:
  • Balance level Translation or Remeasurement in Ledgers – within Ledger sets, run at one click
  • Balance & Activity level Translation or Remeasurement in Financial Consolidation Hub
  • Another is enhanced Revaluation [Functional Currency term dropped: conflicts with IAS 21 / FAS 52]

Those who are looking for some more insight about the changes suggested to referwhite paper mention in the last.

Some more from Oracle blog

• IFRS Bandwagon heading for US? Are you ready to board?

Keep watching this space for having some more thoughts and insight for IFRS from Oracle .

Netting : An Overview

My last two post was on netting , lot of people asked me to provide some more insight view for netting, so this post is meant to walk through ,the concept to someone not very familiar with accounting in real world...so here to go..(adopted)

When trading partners agree to offset their positions or obligations, they are netting. By doing so, they reduce a large number of individual positions or obligations to a smaller number of positions or obligations, and it is on this netted position that the two trading partners settle their outstanding obligations. Besides reducing transaction costs and communication expenses, netting is important because it reduces credit and liquidity risks, and ultimately systemic risk. For a non accounting personal risk can be best understood as :the risk of a trading partner not fulfilling his obligations in full on due date or at any time thereafter is a risk that affects all aspects of business.

Definition of Netting

In this method of reducing credit, settlement and other risks of financial contracts by aggregating (combining) two or more obligations to achieve a reduced net obligation.

• Netting rules a basic part of master agreements.
• Netting rules define precisely the netting of positions or claims between counter parties.

Benefits of Netting

Netting potentially address four major risk in financial area, there are

• Reduction of credit risk
• Reduction of settlement risk
• Reduction of liquidity risk
• Reduction of systemic risk

Types of Netting

• Payment Netting
• Novation Netting
• Close-Out Netting
• Multilateral Netting

Payment Netting

Also called “Settlement Netting” or Also called "Position or Accounting Netting".

On a payment date, each party will aggregate the amounts of a currency to be delivered by it, and only the difference in the aggregate amounts will be delivered by the party with the larger aggregate obligation.

This can be best understood as:

• Daily settlement or offsetting of several, due claims in the same currency
• Reduction of transaction costs, settlement risk and liquidity risk.
• No impact on credit risk.

Types of Payment Netting Agreements

• Master Agreement with a Payment Netting Clause
• Stand-Alone Payment Netting Agreement
• Informal, “ad hoc” agreement

Novation Netting

If the parties enter into a transaction which gives rise to an obligation for the same value date and in the same currency as an existing obligation, then the two obligations are cancelled and simultaneously replaced with a new obligation for the net amount.

• Settlement of not yet due claims in the same currency and the same maturity.
• Reduction of limit usage and credit risk.

Two Types of Novation Netting:

• Matched Pair Novation Netting
• “Comprehensive” Novation Netting

Matched Pair Novation Netting

Netting only occurs if the two transactions involve the same pair of currencies.

Example1: Matched Pair Novation Netting

Deal 1: Buy JPY / Sell USD
Deal 2: Buy USD / Sell EUR
Deal 3: Buy EUR / Sell JPY

No two deals involve the same currency pair, and therefore no netting under matched pair novation netting.

Example 2: Matched Pair Novation Netting

Example 3: Comprehensive Novation Netting

A Payment Netting vs Novation Netting

• Payment Netting reduces settlement risk, but does achieve netting for balance sheet or regulatory capital purposes because the transactions remain in gross.
• Contrast with Novation Netting, which achieves true netting through the cancellation of offsetting transactions and their replacement with a new, net transaction.

Close-Out Netting

Effective upon a default:

• Existing transactions are terminated
• Termination values are calculated
• Termination values are netted to arrive at a single net amount
• Recourse to credit support, if any

That mean:

• Settlement/offsetting of not yet due claims in different currencies in case of a default event or an early termination event of the contractual relationship.
• All outstanding gross obligations or payments are replaced by a single obligation or payment

Multilateral Netting

Bilateral Netting is between two parties.

Multilateral Netting involves netting among more than two parties, using a clearing-house or central exchange.

When it come to party , it may be two party interacting with third party. Th two party may be your other entity in the same instance, which do business internally, what we called Intercompany.

Multilateral netting is a settlement mechanism used by companies to pay for goods and services purchased from affiliated companies. The netting process consolidates
intercompany transactions and calculates settlement requirements internally instead of using external payment systems. Netting is typically used by companies with a number of affiliates in different countries. By netting, these companies reduce bank fees, currency conversion costs, bank balances and improve operating efficiency.

Will take this in some more details in another post.

Requirement Mapping with Existing Oracle EBS Product

Still these two processes are not fully enabled in Oracle EBS suite. Though first type of netting somehow mapped as Contra Charging in post 11i10 releases where as in R12 this functionality can be mapped as part of AP/AR netting, a new feature of R12.

Here is summarize list of the different types of netting and there corresponding netting.

Feel Free to comment or share any information.:)

Understanding Accounting from Techies Mind

Indeed, this is one of good area, where most of techies have lot of confusion and illusion about when accounting comes. Many of consultant came from Technical background and gradually moved into doing some techno -functional role or pure functional role, thus it is essestintial to understand the basic accounting and Guided principal .

Normally, there are two basic accounting methods available in the business world:

• Cash
• Accrual

And most of the ERP accounting products weather its SUN system, Oracle financial or SAP have functionality to capture on the basis of set up.

Then want is the difference:

Cash Basis Accounting
This is what "Based on Realization"

We Most of us use the cash method to keep track of our personal financial activities.

The cash method recognizes revenue when payment is received, and recognizes expenses when cash is paid out.

For example, our local grocery store's record is based on the cash method. Expenses are recorded when cash is paid out and revenue is recorded when cash or check deposits are received

If we summarize, under the cash basis accounting, revenues and expenses are recognized as follows:

• Revenue recognition: Revenue is recognized when cash is received.
• Expense recognition: Expense is recognized when cash is paid.

Take a note the word "cash" is not meant literally - it also covers payments by check, credit card, barter, etc.

Moreover it is not standard method in compliance with accountings matching principle.

Accrual Basis AccountingThis is what "Based on Recognition"

The accrual method of accounting requires that revenue be recognized and assigned to the accounting period in which it is earned. Similarly, expenses must be recognized and assigned to the accounting period in which they are incurred.

Then the underline question is what is accounting Period, Let explain like this normally a company tracks the summary of the accounting activity in time intervals, which we normally called as Accounting periods. These periods are usually a month long. It is also common for a company to create an annual statement of records. This annual period is also called a Fiscal or an Accounting Year.

In the accrual method relies on the principle of matching revenues and expenses. This principle says that the expenses for a period, which are the costs of doing business to earn income, should be compared to the revenues for the period, which are the income earned as the result of those expenses. In other words, the expenses for the period should accurately match up with the costs of producing revenue for the period.

Take a case:Company is doing a business and they have to pay sales commissions expense, so sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Similarly, Salary/Wage to employees are reported as an expense in the week/month when the employees worked and not in the week/month when the employees are paid. If a company agrees to give its employees 2-month equivalent salary of its 2006 revenues as a bonus on January 25, 2007, the company should report the bonus as an expense in 2006 and the amount unpaid at December 31, 2006 as a liability. This is most simple kind of matching principal normally has.

In general, there are two types of adjustments that need to be made at the end of the accounting period.

1. The first type of adjustment arises when more expense has been recorded than was actually incurred or earned during the accounting period.
2. Similarly, there may be revenue that was received but not actually earned during the accounting period. Also known as Un-earned Revenue.

The accrual method generates tax obligations before the cash has been collected (because revenue leads to tax and revenue is recognized against receivable and not against receipt of money).

If we summarize, under the accrual basis accounting, revenues and expenses are recognized as follows:

• Revenue recognition: Revenue is recognized when both of the following conditions are met:
  • Revenue is earned
    • i.e. when products are delivered or services are provided.
  • Revenue is realized or realizable.
    • i.e. either cash is received or it is reasonable to expect that cash will be received in the future.
• Expense recognition: Expense is recognized in the period in which related revenue is recognized (Matching Principle).

Timing differences in recognizing revenues and expensesVarious accounting books did mention four potential timing differences in recognizing revenues and expenses between these of two. Just to recap of those:

a. Accrued Revenue: Revenue is recognized before cash is received.
b. Accrued Expense: Expense is recognized before cash is paid.
c. Deferred Revenue: Revenue is recognized after cash is received.
d. Deferred Expense: Expense is recognized after cash is paid.

Compare with a Case to explain these two methods

Your company purchase a new Laptop on credit in May 2007 and pay $1,500 for it in July 2007, two months later.

Under the both case see how this makes a difference:

• Using the cash method accounting, you would record a $1,500 payment for the month of July, the month when the money is actually paid.
• Under the accrual method, you would record the $1,500 payment in May, when you take the Laptop and become obligated to pay for it.

Pros and cons of these Two accounting method
Maintence: The cash method is easier to maintain because you don't record income until you receive the cash, and you don't record an expense until the cash is paid, where as in the accrual method, you will typically record more transactions.

Cash-basis accounting defers all credit transactions to a later date. It is more conservative for the seller in that it does not record revenue until cash receipt. In a growing company, this results in a lower income compared to accrual-basis accounting.

Do you what is meant by GAAP?
No, I don't know, but knows most of ERP follows these. Lets explain this way:
The word"generally accepted accounting principles" (or "GAAP") consists of three important sets of rules:
(1) The basic accounting principles and guidelines,
(2) The detailed rules and standards issued by FASB(Financial Accounting Standards Board and its predecessor the Accounting Principles Board (APB)
(3) The generally accepted industry practices.

Normally Standard GAAP will have various guided Principal, such as

• Economic Entity Assumption
• Time Period Assumption
• Cost Principle
• Matching Principle
• Revenue Recognition Principle

Will take a seprate case of some of them to understand in better way.

If you want to know more about GAAP, weather US-GAAP, UK-GAAP , refer wikipedia

ERP/Oracle Financials
Oracle Financials have been developed to meet GAAP requirements as well as the special needs of different countries. For example, in Oracle Payables you can choose whether to record journal entries for invoices and payments on an accrual basis, a cash basis, or a combined basis where accrual journal entries are posted to one set of books and cash basis journal entries are sent to a second set of books.