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Encumbrance Accounting in Procure to Pay (Doc ID 2099907.1)

In this Document

Abstract
History
Details
Basic Definitions
Commitment
Obligation
Period-End Accruals and Perpetual/Online Accruals
Encumbrance Reversal
Active Encumbrance
Funds Check Level
Budgetary Control Group
Receipt Accrual Method
Funds Available Inquiry
Setup
Ledger Setup - Budgetary Control
Budget Account Combination - Funds Check Level
Ledger Setup - Reserve for Encumbrance RFE Account
Operating Unit Setup - Financial Encumbrance Options
Budget Account Sources
Other Accounts
Expense Charge Account
Receiving Inspection Account
Expense A/P Accrual Account
Purchase Price Variance Account
Inventory A/P Accrual Account
Liability Account
Encumbrance Accounting Process Flow
Expense Purchase - Accrues At Period End
Expense Purchase - Accrues At Receipt
Inventory Purchase
Shop Floor Purchase
Encumbrance Effect of Various Actions

Procure to Pay Encumbrance Data Model

Troubleshooting and Helpful Notes
Summary
References

APPLIES TO:

Oracle Enterprise Asset Management - Version 12.1.3 and later

Oracle Public Sector Financials - Version 12.1.3 and later
Oracle Cost Management - Version 12.1.3 and later
Oracle General Ledger - Version 12.1.3 and later
Oracle Purchasing - Version 12.1.3 and later
Information in this document applies to any platform.

ABSTRACT

This is a brief overview of encumbrance accounting for Procure to Pay P2P process flow.

HISTORY

Author: Vanha Le
Create Date: 25-JAN-2016
Update Date: 15-MAR-2017
Expire Date: 01-APR-2025 (ignore after this date)

DETAILS

In an encumbrance accounting environment, the system automatically creates encumbrances from requisitions, purchase orders and other transactions originating in feeder

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systems such as Purchasing, Payables, and Cost Management.

This document details the encumbrance accounting of various transactions and scenario with a brief overview of setup and definitions.

Refer to the User's Guide of each product for detail setup.

Basic Definitions

Commitment

Commitment is the encumbrance of a Requisition.

Obligation

Obligation is the encumbrance of a Standard Purchase Order. Obligation is also recorded for Blanket Release, Planned Purchase Order, and Scheduled Release.

Period-End Accruals and Perpetual/Online Accruals

Period-End Accruals refers to the method of accruing PO Receipts at period end.

Perpetual/Online Accruals refers to the method of accruing PO Receipts at receipt.

Depending on the method of accrual of each purchase document shipment, encumbrance is relieved either at receipt delivery or at invoicing.

When using Period-End Accruals, purchase order encumbrance is reversed when the invoice(s) matched to the purchase order is validated.
When using Online Accruals, purchase order encumbrance is reversed when goods are delivered to their final destination, either by a delivery or a direct receipt.

Encumbrance Reversal

Encumbrance reversal/relief is driven by whether a PO shipment accrues at receipt or at period end.

If PO shipment accrues at receipt, encumbrance reversal is processed by Cost Management when receiving completes delivery into Expense, Inventory, or Shop Floor and the
transaction fully costed.
If PO shipment accrues at period end, encumbrance reversal is processed by Account Payables when the matched invoice is validated.

Also Please note that at the end of the period when Receipt_Accrual_period_end program is run the portion of encumbrance for the period relating to Goods Received but Not
Invoiced(GRNI) is Reversed and appears under Accounting Line Type in RCV_RECEIVING_SUB_LEDGER as Encumbrance Reversal. When Create Accounting Receiving is run
there is Reversal of this Reversal in XLA tables and posted to GL at the Beginning of the next Period

Purchase to Inventory destination always accrues upon receipt.

Purchase to Expense destination accrual method depends on Accrue At Receipt flag at shipment level.

In general, when there is an inventory item on the shipment, and the PO is an INVENTORY PO or SHOP FLOOR PO referencing an Enterprise Asset Management (EAM) Work
Order, accrual method is at receipt. This is by default and required.
In the case of expense, you can choose to accrue at receipt, or at period end.

Note: for expense items, if the Accrue Expense Items flag in the Purchasing Options window is set to Period End, the items cannot accrue upon receipt, and you cannot change
the shipment level default. If the Accrue Expense Items flag is set to At Receipt, the default is to accrue upon receipt, but you can change it to Period End.

Active Encumbrance

Active Encumbrance or open encumbrance is the difference between the amount encumbered for Purchase Order Distributions and their encumbrance reversals.

The system calculate this value with current data using the following formula:
Active Encumbrance = PO Encumbered Amount - Encumbrance Reversal by AP or CST

Funds Check Level

Funds check level is a budgetary control option to control the severity of budgetary control checks.
You use a Funds Check level when setting budgetary control options for account ranges, for source and category combinations in budgetary control groups, and for summary
account templates in budget organizations.

There are three funds check levels:

- None/Not set: for no funds checking or funds reservation.

- Advisory: for online notification when transactions fail funds checking. The system still reserves funds for transactions even when no funds are available.
- Absolute: to prohibit you from reserving funds for a transaction unless funds are available.

Budgetary Control Group

Use budgetary control group to

- Enforce budgetary control options by transaction type, then assign options to combinations of source and category.
- Control Tolerance Amounts and Override Amounts for journal entry sources and categories.
- Modify funds check level, from Advisory to None, Advisory to Absolute, Absolute to use Tolerance and Override Amount.

Define Budgetary control group using navigation: GL > Budget > Define > Controls.
Once Budgetary control group is defined, attach it to site or user using profile options "Budgetary Control Group" and "PO:Override Funds Reservation".

Receipt Accrual Method

The setting for Accrual default is in:

Purchasing Super User > Setup > Organizations > Purchasing Options, under Receipt Accounting setup:

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For Inventory and Shop Floor destination purchase document, Encumbrance Reversal takes place when the destination Inventory Organization is setup to allow encumbrance
reversal.

You enable encumbrance reversal for Inventory Organization in Inventory Organization setup form.

Inventory Super User > Setup > Organizations > Parameters, Costing Information tab:

For each purchase document, you can view the Accrue At Receipt flag at the shipment level.
In the core Purchasing form, it is in Shipments form, More tab, Accrue At Receipt check box.
In the web form, it is in the detail of the Schedules, under Billing, field Accrue at Receipt.

At the table level, you can check the document's accrue at receipt flag with this queries:

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For standard PO:

SELECT h.segment1 po_number,

l.line_num,
s.shipment_num,
s.accrue_on_receipt_flag
FROM po_headers_all h,
po_lines_all l,
po_line_locations_all s
WHERE s.po_header_id = h.po_header_id
AND s.po_header_id = l.po_header_id
AND h.segment1 = '&SPO_number'
AND h.org_id = &org_id;

Funds Available Inquiry

Funds Available Inquiry displays the Budget, Encumbrance, Actual, and Funds Available net balances for the accounts.

To view detail values for each period, click Tools > Period Balances.

To view encumbrance transactions for each period, click Tools > Encumbrance Lines.

Note:

Funds Available Inquiry only display Inventory and WIP encumbrance and encumbrance reversal transactions - those with Source = Cost Management and Category =
Inventory or WIP - after the transactions have been accounted, transferred to GL, and posted in GL.

Setup

Ledger Setup - Budgetary Control

The Ledger must have Enable Budgetary Control check box selected.

General Ledger > Setup > Accounting Setup Manager > Accounting Setups, Advanced Options, Budgetary Control section:

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Budget Account Combination - Funds Check Level

The budget account combination must be Enabled, Allow Posting, Allow Budgeting.
The accounts also need to enable encumbrance accounting on accounts in the Define Budget Organizations window in General Ledger.

You can also assign budgetary control options to a range of accounts using the Define Budget Organizations window.
The following Funds Check Level options are available:

None - Do not perform budgetary control for the Accounting Flexfields in the range.
Advisory - Check or reserve funds for the Accounting Flexfields in the range. General Ledger reserves funds whether or not there are funds available. If sufficient funds are not
available, you will receive a warning message.
Absolute - Check or reserve funds for the Accounting Flexfields in the range. General Ledger reserves funds only if sufficient funds are available.

General Ledger > Budgets > Define > Organization:

*When there is no Budgetary Control setup for a range of accounts, it means the funds check level is None.

Ledger Setup - Reserve for Encumbrance RFE Account

Reserve for Encumbrance is defined for each ledger.

When you post encumbrance transactions, General Ledger automatically posts offset amounts to this account.

General Ledger > Setup > Accounting Setup Manager > Accounting Setups, Advanced Options, Budgetary Control section:

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Operating Unit Setup - Financial Encumbrance Options

Purchasing Super User or Payables Super User > Setup > Organizations > Financial Options, Encumbrance tab.

Use Requisition Encumbrance - Enable the check box for Oracle Purchasing to create encumbrances for requisitions automatically. If you encumber requisitions, you must also
encumber purchase orders.
Reserve at Completion - Enable the check box to allow requestors to reserve funds for requisitions before submitting them or obtaining approval of them.
Use PO Encumbrance - Enable the check box for Oracle Purchasing to automatically create encumbrances for purchase orders.

Budget Account Sources

The following matrix describes the source fields that the Account Generator references to build the budget based on the distribution destination type. The Account Generator
start to locate the budget account identified in the matrix with a 1. If this reference account is unavailable, the Account Generator tries the source indicated as 2 and so on until
it locates a reference account.

Order of
Destination Type Budget Account Source
Default
ALL - PO created from
Budget account is copied from Requisition
Requisition

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Order of
Destination Type Budget Account Source
Default
EXPENSE Budget account is the same as the Item Expense / Expense charge account

Budget account is Subinventory's Encumbrance Account. Inventory > Setup > Organizations > Subinventory, Encumbrance
INVENTORY 1
Account
Budget account is Organization Item's Encumbrance Account. Inventory > Items > Organization Items > Purchasing tab,
INVENTORY 2
Encumbrance Account
Budget account is Destination Organization's Encumbrance Account. Inventory > Setup > Organizations > Parameters, Other
INVENTORY 3
Accounts tab, Encumbrance Account
Budget account is WIP Accounting Class's Encumbrance Account. Work In Process > Setup > WIP Accounting Classes,
SHOP FLOOR 1
Encumbrance
Budget account is Organization Item's Encumbrance Account. Inventory > Items > Organization Items > Purchasing tab,
SHOP FLOOR 2
Encumbrance Account
Budget account is Destination Organization's Encumbrance Account. Inventory > Setup > Organizations > Parameters, Other
SHOP FLOOR 3
Accounts tab, Encumbrance Account

Other Accounts

Expense Charge Account

See note 1067139.1 - How Does The Account Generator Default The Accounts In Oracle Purchasing? under "Default Charge Account Sources"

Receiving Inspection Account

This account is also called Receiving Inventory Account. Setup using Purchasing Super User > Setup > Organizations > Receiving Options, field "Receiving Inventory Account"

Expense A/P Accrual Account

See note 1067139.1 - How Does The Account Generator Default The Accounts In Oracle Purchasing? under "Default Accrual Account Sources"

Purchase Price Variance Account

See note 1067139.1 - How Does The Account Generator Default The Accounts In Oracle Purchasing? under "Default Variance Account Sources"

Inventory A/P Accrual Account

Setup using Inventory Super User > Setup > Organization > Parameters, Other Accounts tab, field "Inventory AP Accrual"

Liability Account

The Liability Account and description for a supplier site's invoices. The supplier default is the Financials option for the Liability Account. When you create the default Liability
Account, Payables defaults this Liability Account to each supplier you
enter. You can override this default. When you enter an invoice, Payables automatically defaults the supplier site's Liability Account to the invoice. You can also override this
default.

Encumbrance Accounting Process Flow

Typically, the encumbrance flows from the requisition to the purchase order to record the encumbrance, then on to receipt/invoice to relieve encumbrance, converting
encumbrance to actual expense.

Depending on the type of purchase, and the accrual methods, encumbrance entries, and their journals are recorded accordingly by the system.

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Expense Purchase - Accrues At Period End

When an expense purchase accrues at Period End, Payables post encumbrance reversal. After invoice activity, the system generates encumbrance reversal entry for obligation
together with invoices encumbrance entries. This process is sometimes called "Encumbrance becomes Actual."

GL Encumbrance Journal
Action Encumbrance Accounting Actual Accounting
Detail
Journal Source: Purchasing
Category: Requisitions
DR Commitment1
Encumbrance Type:
Reserve Requisition1
Commitment
CR RFE1

DR RFE1

Journal Source: Purchasing

Category: Requisitions
CR Commitment1
Encumbrance Type:
Commitment
Autocreate PO1 and Reserve PO
Journal Source: Purchasing
Category: Purchases
DR Obligation
Encumbrance Type:
Obligation

CR RFE

Receive/Deliver

DR RFE DR Item Expense

Journal Source: Payables

Category: Purchase Invoices
CR Obligation CR Liability
Encumbrance Type:
Invoice
Obligation
Journal Source: Payables
DR Actual Category: Purchase Invoices
Encumbrance Type: Invoices

CR RFE

DR Liability
Payment
CR Cash

DR RFE2 DR Expense

Source: Cost Management

CR Obligation2 (GRNI amount for last day Category: Receiving CR Expense A/P
of period) Encumbrance Type: Accrual
Close Period - Run Receipt Accruals - Period-End and Open Next Obligation
Period (there exists GRNI*) Journal Source: Cost
*GRNI = Goods Received Not Invoiced Management
DR Obligation2 (GRNI amount for first day
Category: Receiving DR Expense A/P Accrual
of next period)
Encumbrance Type:
Obligation
CR RFE2 CR Expense

1 These entries exist only when entering Requisition and creating requisition into PO

2 Encumbrance Journal Entry Batches are unbalanced in General Ledger. General Ledger automatically offsets the Reserve for Encumbrance account with the balance of your encumbrance batch.

Expense Purchase - Accrues At Receipt

When an expense purchase accrues at receipt, Cost Management post encumbrance reversal. Create Accounting - Receiving processes and transfers the transactions to General
Ledger. Once the journal are posted in GL, they will be displayed in Funds Available Inquiry form.

Encumbrance
Action GL Encumbrance Journal Detail Actual Accounting
Accounting
Journal Source: Purchasing
DR Commitment1 Category: Requisitions
Reserve Requisition Encumbrance Type: Commitment
CR RFE1

Autocreate PO1 and Reserve DR RFE1

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Encumbrance
Action GL Encumbrance Journal Detail Actual Accounting
Accounting
Journal Source: Purchasing
CR Commitment1 Category: Requisitions
Encumbrance Type: Commitment
PO Journal Source: Purchasing
DR Obligation Category: Purchases
Encumbrance Type: Obligation

CR RFE

DR Receiving
Inspection
Receive
CR Expense A/P Accrual

DR RFE

Journal Source: Cost Management

CR Obligation Category: Receiving
Encumbrance Type: Obligation
Journal Source: Cost Management
Deliver Category: Receiving
Balance Type: Actual
DR Actual2 DR Expense
Account: Expense Charge Account
(this is the same as Budget Account for Expense
destination type purchase)2
CR Receiving
CR Receiving Inspection
Inspection2

DR Expense A/P Accrual

Invoice
CR Liability

DR Liability
Payment
CR Cash

1 These entries exist only when entering Requisition and autocreating Requisition into PO

2 These entries are the same as the actual entries. When Cost Management source journals are posted in GL, Funds Available Inquiry will display these Actual Journal. This is displayed under Encumbrance Accounting in this document
to demonstrate the process of Obligation "becomes" Actual after receipt delivery in this scenario

Inventory Purchase

Inventory Purchase always accrues at receipt.

Encumbrance Reversal takes place when the destination inventory organization enable Encumbrance Reversal. Cost Management creates the encumbrance reversal when
creating distribution for the Inventory material transactions. Once these transaction are accounted, transferred and posted to GL, they will be displayed in Funds Available
Inquiry form.

Action Encumbrance Accounting GL Encumbrance Journal Detail Actual Accounting

Journal Source: Purchasing

DR Commitment1 Category: Requisitions
Reserve Requisition1 Encumbrance Type: Commitment
CR RFE1

DR RFE1

Journal Source: Purchasing

CR Commitment1 Category: Requisitions
Encumbrance Type: Commitment
Autocreate PO1 and Reserve PO
Journal Source: Purchasing
DR Obligation Category: Purchases
Encumbrance Type: Obligation

CR RFE

DR Receiving Inspection
Receive
CR Inventory A/P Accrual

DR RFE DR Material

Deliver Journal Source: Cost Management

CR Obligation Category: Inventory CR Receiving Inspection
Encumbrance Type: Obligation

Invoice DR Inventory A/P Accrual

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Action Encumbrance Accounting GL Encumbrance Journal Detail Actual Accounting

CR Liability

DR Liability
Payment
CR Cash

1 These entries exist only when you enter requisition and autocreate the requisition into PO

Shop Floor Purchase

Shop floor purchase always accrues at receipt.

When goods are received into Shop Floor, and the destination inventory organization enable Encumbrance Reversal, Cost Management creates the encumbrance reversal when
creating distribution for the WIP material transactions. Once these transaction are accounted, transferred and posted to GL, they will be displayed in Funds Available Inquiry
form.

Action Encumbrance Accounting GL Encumbrance Journal Detail Actual Accounting

Journal Source: Purchasing

DR Commitment1 Category: Requisitions
Reserve Requisition1 Encumbrance Type: Commitment
CR RFE1

DR RFE1

Journal Source: Purchasing

CR Commitment1 Category: Requisitions
Encumbrance Type: Commitment
Autocreate PO1 and Reserve PO
Journal Source: Purchasing
DR Obligation Category: Purchases
Encumbrance Type: Obligation

CR RFE

DR Receiving Inspection
Receive
CR Inventory A/P Accrual

DR RFE DR Work Order Material

Deliver Journal Source: Cost Management

CR Obligation Category: WIP CR Receiving Inspection
Encumbrance Type: Obligation

DR Inventory A/P Accrual

Invoice
CR Liability

DR Liability
Payment
CR Cash

1 These entries exist only when you enter requisition and autocreate the requisition into PO

Encumbrance Effect of Various Actions

Document Action Encumbrance Effect

Purchase Order Close, Close for Invoicing, Close for Receiving No effect

Outstanding encumbrance reversed as a negative DR

Purchase Order Cancel Period End: lesser of unbilled, undelivered

Accrue on Receipt: undelivered

Outstanding encumbrance reversed as CR

Purchase Order Finally Close Period End: unbilled

Accrue on Receipt: undelivered

Purchase Order Reject No encumbrance effect when a reserved PO is rejected

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Requisition Reject Encumbrance is reversed

Requisition Return Encumbrance is reversed

Procure to Pay Encumbrance Data Model

Troubleshooting and Helpful Notes

Note 1086669.1 - R11i/12: PO: FAQs - Encumbrance Accounting - Setup And Usage

Note 1384470.1 - R12: Vision Demo - How To Demonstrate The Encumbrance Flow In Oracle Purchasing

Note 1970384.1 - EBS Procurement Encumbrance Accounting Analyzer

SUMMARY

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