Oracle Applications Accounting Review Session

Beverly Baker-Harris Sr. Project Manager Oracle

 What’s Important?

• Corporate Controllers and Accounting Managers are

commonly concerned about:
– Reducing the time to close the financial books
– Focusing on issues that have a material impact to operations
– Conformance to GAAP
– Improving the analysis and reporting of business activities
– Accounting controls to prevent fraud
– Wall Street’s reactions to financial results
 Reducing the time to close the financial books

• Focus on the bottlenecks

– What can be done before the end of the period?
– How can the quality of the data from sub ledgers, processed by
order processing, manufacturing and procurement personnel, be
improved?
– Are tasks being performed that result in immaterial adjustments?
– How can potential problems be identified and resolved before the
end of the period?
 Focusing on issues that have a material impact to
operations

• Such as:
– Firms that sell few (~<500) units or projects for fairly large
amounts of money require better accounting of returns, deferred
revenue and mis-ships since 1 unit represents 0.2% or more of
revenue.
– Changes to accounting policies which will result in substantial
one-time write-offs such as moving from LIFO to Standard
Costing.
– Changes to the timing of revenue recognition
 Conformance to GAAP

• General Accepted Accounting Principles (GAAP) are

guidelines, not laws, that companies are encouraged to
follow in their presentation of financial information.
• Establishment of GAAP is done by the public accounting
profession and the private sector. However, key influential
organizations include the Securities and Exchange
Commission (SEC), the American Institute of Certified
Public Accountants (AICPA), the International Accounting
Standards Board (IASB) and the Financial Accounting
Standards Board (FASB).
 GAAP Principles

 Going Concern. Financials are to be reported for a company as if it were to be

perpetually ‘in business’ as opposed to on the verge of liquidation. In the rare
case where liquidation appears likely, assets are revalued at liquidation values
and depreciation and amortization are no longer justifiable.
 Conservatism. ‘A prudent reaction to uncertainty to try to ensure that
uncertainty and risks inherent in business situations are adequately considered’
(SFAC No. 2) More succinctly, companies are encouraged to report financials
such that ‘possible errors in measurement be in the direction of understatement
rather than overstatement of net income and net assets.’ (APB Statement No. 4,
para. 171) Please note that this principle has been criticized because it conflicts
with the goal of providing a fair representation of a firm’s financial position.
 Realization Principle. Revenue should be recognized at the point at which it is
earned, when no significant remaining services or contingencies exist. (SFAC
No. 5)
 GAAP Principles

 Matching Principle. Expenses are matched with the revenues they generate.
When a is book sold at a local bookseller, the sale amount is accounted for as
revenue and the inventory value is accounted for as a corresponding cost of
goods sold expense. When an one-year extended warranty on an appliance is
sold by a retailer, the sale amount is split into 12 equal amounts. Ideally, at the
end of each month, 1/12th of the sale amount would be recognized as revenue
and any costs associated with the warranty matched and entered as cost of
services expenses. (SFAC No. 5)
 Periodic Allocation Principle. Some expenditures cannot readily be matched
to the revenues which they produce and must therefore have their costs
distributed over the useful lives. This is the case of both fixed and intangible
assets. For instance, in the case of a fixed asset with a three year life governed
by straight line depreciation, a depreciation charge of 1/36 th of that assets cost
would be recognized for each month over the three years.
 GAAP Principles

 Lower of Cost or Market. Inventory should be valued at the lower of its cost or
the current market value. Especially in technology manufacturing companies
where prices tend to decline over time, this provides a representation that is both
fairly accurate as well as conservative. From a tax perspective, since
revaluation of inventory typically results in an additional expense, this also
minimizes and defers sales tax liabilities.
 Consistency. Accounting procedures for a company should be the same from
period to period as far as it is possible. Changes to procedures and the impact
of such changes need to be clearly disclosed. This allows for meaningful
evaluation of trends in a company’s performance.
 Improving the analysis and reporting of business
activities

• Reports and analyses commonly in demand include:

– Product-line gross margin reporting
– Bookings, billings and backlog reporting
– Cash position reporting, for temporary transfer of funds to better
interest bearing accounts
– Budget vs. actual income statements and balance sheets
– Cash or funds flow statements
– Return on investment projections
– Tax reporting for submission of payments to the various state,
county and local jurisdictions
 Accounting controls to prevent fraud

• Common problem areas include:

– Accounts Payable. The individual processing and signing off
payments should not be the same individual entering supplier invoices
to be paid.
– Scrap and Excess/Obsolete Inventory. Signoff of the scrapping of
inventory needs to be done by someone other than the individual who
initiated the request.
– Incentive Pricing Programs. At many companies, sales
representatives frequently do not collect ‘trade-ins’ tied to discounted
pricing. Consequently, the sales representative gets his commission,
the customer gets a good price and a ‘free’ but old unit, and the
company loses revenue while potentially losing an additional booking.
 Wall Street’s reactions to financial results

• Predictable and growing earnings result in a better share

price than unpredictable but growing earnings.
• Unpredictability = risk which investors want to be
compensated for.
• To ‘smooth’ earnings, many firms utilize reserves and
extraordinary gains/losses to make their firms appear to be
such predictable revenue and earnings engines.
 The Accounting Mentality

• Individuals working in the field of accounting tend to be:

– Detail oriented
– Plain-speaking
– Boring
– Annoyed at lazy people in order processing and manufacturing
who make messes but don’t clean them up
• While most accountants and financial analysts are very
knowledgeable about their company and how they
currently do business, most lack a diverse set of
experiences from which to draw and help make decisions.
 Key Accounting Decisions in an ERP
Implementation

• Chart of Accounts Structure

• Multi-Organization Structure
• Revenue Recognition Process
• Tax Calculation and Reporting
• Payroll, Internal or via an Outside Service
• Costing Method (for inventory)
• Business Forms and Envelopes
• Intercompany Transaction Process
• Bank Services
• International Requirements
 Chart of Accounts Structure

 The Chart of Accounts structure determines the General

Ledger (GL) reporting capabilities, is needed to define a set
of books, and is consequently a prerequisite to setting up
almost all modules.
 The structure consists of a series of segments used to track
different accounting dimensions and is also known as the
Accounting Flexfield.
 Example structure: XX-YYYYY-ZZZ
– XX – COMPANIES
– YYYYY – ACCOUNTS
– ZZZ – COST CENTERS
 Chart of Accounts Structure

 All structures have a “Balancing” segment, a “Cost Center”

segment and a “Natural Account” segment.
 “Balancing” is typically the Company segment.
 “Cost Center” is typically the Department Segment. It is used
to track departmental expenditures.
 “Natural” account segment is used to classify each transaction
amount or balance as an asset, liability, owners equity, revenue
or expense.
 Chart of Accounts Structure

 Other common segment types include:

 Product line -- Includes services, service lines, products
(allows for a quick summation of product or service revenue
and expense amounts)
 Sales channel -- Typically utilized by consumer product
manufacturers or service providers who sell via direct,
distributor, retail channels
 Project – Basic project reporting
 Geographical entity -- Typically used by firms competing in
geographically niche markets such as cellular phone
companies
 Multiple segments allow for reporting across each of these
key dimensions.
 Chart of Accounts Related Issues

• Summary Accounts and Rollup Groups.

– Magnify transaction processing and disk space requirements for faster
inquiry and reporting. Companies should be discouraged from using
this functionality.
• Dependent Segments.
– Limit reporting, allocation and consolidation ability since programs
and reports cannot be run to consider the context of dependent
segment. Can be used but company needs to be aware of this
limitation.
• Dynamic Insertion.
– Allows for the validation of code combinations based on rules.
Encouraged to avoid manual entry of each combination.
 Multi-Organization Structure

• From a financial standpoint, “multi-org” refers to the

segregation of accounting transactions into autonomous
units. For instance, company A’s purchase orders,
invoices, payments and cash receipts are completely
separated from company B’s invoices, payments and cash
receipts. Company B employees, unless they have a
Company A responsibility, cannot process Company A
transactions.
 Revenue Recognition Process

• When does the client currently recognize revenue?

Several software firms, under advisement from their
auditors, do not recognize revenue until the customer has
formally signed an acceptance letter.
• Most product companies, however, recognize revenue at
the time product is shipped.
• Please note that piling boxes onto a truck with the
knowledge that the truck will be parked in the parking lot
for a few days beyond period end should not result in the
recognition of revenue for that period.
 Receivables Tax Calculation and Reporting

• Most companies use either Vertex or Taxware to provide

tax data files which they then upload into Oracle’s tax
tables.
• Vertex and Taxware both have extensive tax engines with
better reporting than that provided within Oracle
Receivables. However, most clients do not elect to
purchase the complete tax engine due to the incremental
amount of value being offset by significantly higher costs.
• Integration between Oracle Receivables and these vendors’
packages is documented in the Open Interfaces Manual.
 Payables Tax Calculation and Reporting

• Most companies manually enter and define local sales

taxes for each of their plants or offices.
• In the case of companies that sometimes internally use the
goods that they manufacture, such as the case of a copier
maker pulling copiers from the warehouse and using them
in their sales department, use tax should be assessed upon
the pulling of such goods from stock.
 Payroll, Internal or via an Outside Service

• Payroll Services that will process a company’s time sheets,

generate payments and send a journal for inclusion in a
company’s general ledger include ADP/ProBusiness and
Ceridian.
• Some companies may be encouraged to use Oracle
Payroll. However, PeopleSoft has traditionally dominated
the ERP Payroll niche.
 Costing Method (for inventory)

• Standard costing
– Units are set at a standard cost level for accounting purposes.
Variances to these costs, such as a unit purchased for less than
standard, are tracked using Purchase Price Variance and Invoice
Price Variance accounts.
• Average costing
– Units and their costs are added to a unit and an inventory value
pool for their item type. When a unit is sold, the corresponding
proportional amount of the inventory value pool is recognized as
the cost of goods sold.
 Costing Method (for inventory)

• Last-in-first-out (LIFO)
– Preferred inventory costing method of natural resources and
commodity companies. In an economy of rising prices, creates a
LIFO reserve in which inventory is valued at less than market.
This LIFO reserve can be viewed as unrecognized income that has
been deferred to minimize taxes.
– Supported beginning in 11.5.2.
• First-in-first-out (FIFO)
– Supported beginning in 11.5.2.
• Actual Costing.
– Can be partly accommodated via Project Manufacturing.
 Business Forms and Envelopes

• Several vendors such as Adobe, Optio and SigForms are

promoting their business form software. Such software
allows their customers the ability to customize form logos
and fields.
• The volume of forms needs to be analyzed before
encouraging a business forms software.
• Functions with low transaction volumes are probably more
suited to having pre-printed forms with logos assigned and
proofed by the printer.
• Remember the Envelopes.
 Intercompany Transaction Process

• Determining the degree to which intercompany transactions

must be tracked is critical.
– For tracking using the subledgers, the companies can be suppliers and
customers of one another with reports indicating sales amounts
between each entity. Inventory organization transfers can also be
tracked. The result of these reports will be a consolidated journal entry
to segregate the intercompany activity from activity with external
entities.
– For tracking with Oracle General Ledger, the key is to be able to use
AutoAccounting to populate the revenue account combination, usually
using Sales Representative. This account combination would use a
segment to indicate the intercompany from and to entities of the
transaction. If this option is not available, customization is required.
 Bank Services

• When working with banks, make sure that you begin

coordinating activity well in advance before something is
required.
• Most clients, if they request any integration with banks at
all, request that a process be established to upload an
electronic bank statement into Oracle Cash Management to
eliminate typing in lines for bank reconciliation.
• Some clients also request that AutoLockbox statement
files be imported into Oracle Applications for cash receipt
recognition.
 International Requirements

• Foreign Exchange
– Revaluation occurs at month end for transactions entered in a
currency other than the functional currency of the set of books. A
currency exchange rate is substituted for the daily/user rate used at the
time of the transaction to value the transaction properly at month end.
– Translation occurs at month end for all transactions within a set of
books in preparation of consolidating the balances to those of a parent
set of books with a different currency.
• Taxes
• Documentation
• Reporting
 ‘Talking Shop’

• To initiate and maintain a discussion with accountants and

financial analysts, you should also have a sense of:
– Why and where accounting transactions take place in Oracle
Applications
– How the Oracle Applications tie together from an accounting
perspective
– Common accounting terms that you’re likely to encounter
 Accounting Transaction Flow Exercise

• Discuss basic fulfillment and procurement accounting

transaction flows.
• Discuss more advanced scenarios.
– Returns to Vendor (RTV)
– Customer Returns
– Project Accounting
– Service Billing
 Business Transaction Flow

P a y to $

P a y r o ll
P e rs o n n e l

$
$
$
$

$
S u p p lie r s
A c c o u n ts P a y a b le
P u r c h a s in g

R e c e iv in g

In v e n to ry A c c o u n t in g

$
$

$
A c c o u n t s R e c e iv a b le
C u s t o m e r S e r v ic e M a n u f a c t u r in g P a c k a g in g S h ip p in g D is t r ib u t io n Bank

C u s to m e
r
 Fulfillment Process
Transaction A
WIP Receipt
Transaction B
Outside Processing
Transaction C
WIP Issue
Transaction D
COGS: E&O
In v e n to ry A c c o u n t in g

Transaction G
Transaction F Cash Receipt
Invoicing
$
$

A c c o u n t s R e c e iv a b le
C u s t o m e r S e r v ic e M a n u fa c tu r in g P a c k a g in g S h ip p in g D is t r ib u t io n Bank

Transaction E
Shipment

C u s to m e
r
 Fulfillment Transactions

Inventory Work In Process Payables Accrual Material Usage Variance COGS: E&O
50 (A) 50 (A) 160 (C) 60 (B) 40 (C) 40 (D)
25 (A) 25 (A)
25 (A) 25 (A)
120 (C) 60 (B)
40 (D)
80 (E)

Sales Receivables COGS Cash

100 (F) 100 (G) 100 (F) 80 (E) 100 (G)
 Fulfillment Narrative

• Transaction A: WIP Receipt

– In the example, three inventory components have been issued to
the WIP job. The first issue, valued at $50, is for 25 units at $2
each. The second and third issues, valued at $25 each, are for 25
units at $1 each and 5 units at $5 each respectively.
• Transaction B: Outside Processing
– A routing step in the job consists of these parts being issued out to
an outside processing vendor and returned. The expense, $60, of
having the parts be processed is added to the cost of the job.
 Fulfillment Narrative (continued)

• Transaction C: WIP Receipt

– At the end of the routing steps for the job, the stock is issued back
to inventory as completed units (6 units at $20 each) with
processing costs, both internal and external, being added to the
inventory value and any amounts over standard cost being accrued
via the Material Usage Variance Account ($40).
• Transaction D: COGS Excess and Obsolete
– Periodically, obsolete or excess inventory is written off. This
write-off ($40) is included as part of overall Cost of Goods Sold.
 Fulfillment Narrative (continued)

• Transaction E: Shipment
– Four units (at $20 each) are sold for $25 each. The four units are
shipped resulting in $80 being credited to Inventory and $80 being
debited to Cost of Goods Sold. This transaction does not take
place immediately in Oracle Inventory, but is queued up to be
processed by a transaction manager. When the transaction
manager processes the shipment record, the inventory is credited
and COGS booked on the inventory subledger.
 Fulfillment Narrative (continued)

• Transaction F: Invoicing
– The shipping of the units results in the transaction being
‘Receivables Interface Eligible’. Upon execution of the
Receivables Interface and barring any problems with the shipment
record, the shipping records are forwarded to Oracle Receivables
where they await processing via the AutoInvoice program. Once
AutoInvoice is run successfully, invoice transactions will be
available for modification and invoices can be printed.
– Please note that the timing of this transaction and the
corresponding costing transaction do NOT occur at the same time
as recommended by the Matching Principle (GAAP).
 Fulfillment Narrative (continued)

• Transaction G: Cash Receipt

– Upon receipt of the invoice, the customer (hopefully) pays in due
course. The customer payment is matched to the appropriate
invoice and registered as paid. This transaction results in a credit
to Receivables and a debit to Cash.
 Procurement Process
P a y to $

Transactions B & E P a y r o ll
P e rs o n n e l
Invoice Processing

$
$
$
$

$
S u p p lie r s
A c c o u n t s P a y a b le
P u r c h a s in g

Transactions C & F
Payment
R e c e iv in g Transaction

In v e n to ry A c c o u n t in g

Transaction A
Expense Receipt
Transaction D
Inventory Receipt $

Bank
 Procurement Process

Payables Accrual (Exp) Expense Payables Accrual (Inv) Inventory Discount Taken
200 (B) 200 (A) 200 (A) 130 (E) 130 (D) 150 (D) 2 (F)

PPV IPV Payables Cash

20 (D) 10 (E) 200 (C) 200 (B) 200 (C)
120 (F) 120 (E) 118 (F)
 Procurement Narrative
• Transaction A: Expense Receipt
– After a Purchase Order has been approved and sent out for a non-
manufacturing (MRO - Maintenance Repair Operations) expense or fixed
asset, the goods are services are provided and a subsequent liability for these
uninvoiced goods and services are booked ($200). This transaction results in
a credit to a Payables Accrual account a debit to an expense or asset account.
– In Oracle Applications, fixed asset purchases must debit either the CIP
clearing or the Asset clearing account to be later offset and allocated as part of
fixed assets MassAdditions processing.
– The accounting of this accrual does not take place immediately. Instead, the
accrual is perpetually increased by new receipts and decreased by new
supplier invoices. At month end, the sum of all receipts that have not been
invoiced is calculated and transferred to the General Ledger as a journal entry
from Oracle Purchasing.
 Procurement Narrative (continued)

• Transaction B: Invoice Processing

– The supplier invoice ($200) is received and processed resulting in
a debit to the Payables Accrual account and a credit to the
Payables Trade account.
• Transaction C: Payment Transaction
– The payment transaction ($200) debits the Payables Trade account
and credits the Cash account.
– Please note that the Payables Trade account being debited does not
vary for any given payment/bank account. Therefore, invoices
that are to be paid from the same account must have the same
Payables Trade account.
 Procurement Narrative (continued)
• Transaction D: Inventory Receipt
– An inventory receipt results in a credit to a Payables Accrual account and a
debit to the inventory account associated with the particular subinventory the
stock is receipted into.
– Unlike the case of an expense or fixed asset receipt, this accrual transaction
occurs at the time of the receipt and does not result in a month-end accrual
calculation and journal transfer.
– In the example, $150 worth of inventory has been received (according to our
standard costs) but the purchase order indicated a discounted price of $130
which is the Payables Accrual amount. To balance this discrepancy a third
account, the Purchase Price Variance Account (PPV), is credited $20.
– Please note that the Payables Accrual account for inventory is usually
different than the Payables Accrual account for expenses and assets to ease
reconciliation.
 Procurement Narrative (continued)

• Transaction E: Invoice Processing

– Invoices are commonly matched to receipt, purchase order and
inspection information. Discrepancies between the invoice
amount and the Payables Accrual/Purchase Order amount are
booked to an Invoice Price Variance (IPV) account. In our
example, the invoice received was for only $120 resulting in a
credit to Payables Trade of $120, a debit to Payables Accrual of
$130 and a credit to IPV of $10.
• Transaction F: Payment Transaction
– This results in a credit to cash of $120 and a debit to Payables
Trade of $120.
 Other Transactions

• Customer Return
– Results in a debit to sales and a credit to receivables as well as a debit to
inventory and a credit to COGS.
• Returns to Vendor (RTV)
– If never received, no accounting changes are in order.
– If received, the receipt needs to be reversed to credit
inventory/expense/asset and debit Payables Accrual.
• Miscellaneous Inventory Issue or Receipt
– Offsets a credit or debit to inventory with an account of user’s choosing.
– Very dangerous. Can make reconciliation of accounts difficult. We do
not recommend using this feature any more than absolutely necessary
(I.e. This is the option of last resort.)
 Other Transactions (continued)

• Standard Cost Adjustment

– Results in a change to inventory value offset by a change in a
designated cost of goods sold account.
• Credit Memo (Receivables)
– Debits receivables trade and credits revenue.
– Timing issue between credit memo and recognition of revenue at
time of original invoice may result in violation of the Matching
Principle. Whether this violation is material will depend on the
client situation.
 Other Transactions (continued)

• Credit Memo (Payables)

– Credits expenses and debits payables.
– While this also results in possible timing issues, such timing issues
are covered by the Conservatism Principle.
• Customer Deposits
– Debits cash and credits a liability account.
– This liability account is cleared when the deposit is applied to a
customer invoice.
• Prepayments
– Credits cash and debits an asset account.
– Cleared when applied to a supplier invoice.
 Average Costing

• In the example, standard costing was assumed.

• In the case of average costing, neither a PPV or IPV
account will ever be used, since there is no standard.
 Deferred Revenue

• An increasing number of companies are not recognizing

revenue at ship confirm. Instead they are recognizing
deferred revenue.
• Upon a later event, usually labeled customer acceptance,
the revenue is transferred from the deferred revenue
account to the sales account.
• While this may be handled by R11’s workflow features, to
date this has required a customization.
 Recap

• Session +/-s
• Handouts
• Next session