Accounting methods in oracle r12

Accounting methods in oracle r12

Accounting method is the 4^th c in GL ledger setup. We know that, In Oracle 11i, Ledger is the combination of 3C’s. 3c’s means Chart of Account, GL Calendar and Currency but in oracle r12, Ledger is the combination of 4 c’s.  The 4^th c is accounting method. We need to provide the accounting method while creating the Ledger in oracle r12. Accounting method is one of the mandatory setup in ledgers. Accounting method in oracle helps to define the accounting for the subledger transactions which do transfers from subledger to GL. Based on the accounting method, system create the distributions of these transactions in XLA and in GL. Here below is the  detail Explanation of Accounting methods in oracle r12.

As below this is the Ledger Window/Screen where we do specify the Accounting methods in oracle r12.

What is Accounting Method in oracle.

Accounting Method helps to process the sub-ledger transaction distribution/ accounting in Oracle. Based on the Accounting method, oracle select the sub-ledger transactions and create the accounting in xla and post to gl. Accounting Method helps to decide the accounting type for any organization in oracle r12.

4 Types of Accounting Method In Oracle r12.

Standard Accrual

Standard Cash

Accrual with Encumbrance Accounting

Cash with Encumbrance Accounting 

Standard Accrual:-

Standard accrual accounting method helps to prepare more complete and accurate reporting of a company's assets, liabilities, equity, and earnings during each accounting period. Standard Accrual accounting method works different for payables and receivables. In receivables, Standard Accrual method, records the revenue when they are earned even if the customer will pay 30 days later. At the time that the revenues are earned the company will credit a revenue account and will debit the asset account Accounts Receivable. When the customer pays 30 days after the revenues were earned, the company will debit Cash and will credit Accounts Receivable.

In Payables, Standard Accrual method records the expenses when they occur even if payment will take place 30 days later. For example, Oracle system will create the accounting for the AP invoice as an expense even that invoice is un paid in the system.

Standard Cash Accounting Method: -

Cash accounting is totally opposite from the Accrual accounting method. In Cash accounting method , payment receipts are recorded during the period they are received, and expenses are recorded in the period in which they are actually paid. In other words, revenues and expenses are recorded when cash is received and paid, respectively. Cash accounting is also called cash-basis accounting.  If we do compare with accrual, then System will create the accounting at the time or invoice creation but in this Cash accounting method , system will not create the accounting if that invoice is paid.

• Cash accounting is simple and straightforward. Transactions are recorded only when money goes in or out of an account.
• Cash accounting doesn't work as well for larger companies or companies with a large inventory because it can obscure the true financial position

Accrual with Encumbrance Accounting: - 

Accrual with Encumbrance Accounting is more similar like accrual accounting but in this system also creates the encumbrance reserve accounting entry. This accounting method, we do use when we want to enable the budget feature in oracle r12 and system should validate the budget for the gl account while booking any expenses in system. This accounting method we normally use for budget control feature. In this method , system create the normal accrual accounting with Encumbrance Accounting. For each event system create 4 lines of accounting. 2 for Accrual and 2 for encumbrance accounting.

For example, when an invoice is approved, there could be both an ‘Invoice Approved’ and a ‘Budgetary Control Invoice Approved’ accounting event.
First the encumbrance accounting is created, then the transactions are checked against the funds available. The encumbrance accounting feature is separated from the budgetary control feature and is created by the Subledger Accounting engine.

Cash with Encumbrance Accounting: 

Cash with Encumbrance Accounting is also similar like cash accounting but in this accounting method , system also create the Encumbrance Accounting with actual cash based accounting.

Encumbrance Accounting Concept :-

If you enable the PO Encumbrance Financials option, Purchasing and Payables create encumbrances and encumbrances against the budgets you define in General Ledger. The following equation always holds true:

Funds Available = Budget - Actuals - Encumbrances