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Section 1 Purpose, Scope and Application.....................3 Section 2 INTRODUCTION...............................................3 2.1 Encumbrance:.......................................................3 2.2 Encumbrance Accounting: .................................4 2.3 Usage: .................................................................4 2.4 Modules Involved in Oracle Application: .............4 2.5 Prerequisites: ......................................................4 Section 3 Top Level view of Encumbrance Flow ...........4 Section 4 Encumbrance Setup.......................................5 4.1 Oracle General Ledger..........................................5 4.1.1 Enable Budgetary Control for the SOB...........5 4.1.2 Assign for Reserve for Encumbrances Account to Set Of Books (SOB)...6 4.1.3 Open Encumbrance Year................................6 4.1.4 Define Budget.................................................7 4.1.5 Define Budget Organization...........................8 4.1.6 Define Encumbrance Types............................9 4.1.7 Define Budgetary Control Groups.................10 4.1.8 Assign Budgetary Control Groups.................12 4.2 Oracle Purchasing and Payables.........................13 4.2.1 Enable Encumbrance....................................14 Section 5 USAGE .........................................................16 5.0 Entering Budget..................................................16 5.1 Encumbrance Accounting Flow from Purchasing and Payables..................19 5.1.1 Purchasing....................................................19 ..............................................................................27 ..............................................................................29 5.1.2 Payables........................................................30 5.1.3 General Ledger.............................................35 5.2 Reviewing Encumbrances in GL..........................36 5.3 Encumbrance Accounting and Relief in Various Scenarios.........................36 5.4 Viewing Funds Available.....................................38 5.5 Year-End Carry-Forward of Encumbrance Processing.................................39 5.5.1 Year End Carry Forward Check List ............39 5.5.2 Year-End Carry Forward In Oracle General Ledger:..............................40 Section 6 Important Terms Used in Encumbrance Accounting............................40 Section 7 Important Tables Used for Encumbrance.....44
SECTION 2 INTRODUCTION
This section is basically to gives a broad idea about Encumbrance and Encumbrance Accounting. It also provides explanations to the word encumbrance, encumbrance accounting and how they are used in Oracle Applications and the modules involved.
2.1
Encumbrance:
Reservation of funds is known as encumbrance. The Thesaurus explains the meaning of encumbrance as burden or Load. The purposes of tracking encumbrances are as follows: Avoid overspending a budget To facilitate effective control and consumption of budget by pre-allocating budget amount To Predict cash outflow and as a general planning tool.
Encumbrance is a commitment to pay in the future for goods or services ordered by not yet received. The terms encumbrance and commitment are used interchangeably. The budget amount can be reduced by the amount of encumbrance as listed below. On creation where approval is not required. On Approval where the approval is required.
When the goods are received or services are obtained and the invoice is created and matched, then the encumbrance is released and the current year expenditure is accounted.
2.2
Encumbrance Accounting:
Encumbrance accounting is a form of budgetary control within Oracle Applications that enables a company to allocate funding for specific accounts. The funds checking feature which is an integral part of encumbrance accounting, checks for availability of funds on a particular accounting combination. The funds checking feature can be performed either at the entry level itself before committing the transaction or when the approval is made for the transaction. The approval process checks for the funds check level and the approval is made only when the transaction is passed with the funds check process.
2.3
Usage:
The complete use of capabilities of encumbrance accounting, users must enable the budgetary control flag for a set of books. When users enable the budgetary control flag, the system automatically creates encumbrances from requisitions, purchase orders and other transactions originating in feeder systems such as Purchasing and Payables. When users do not enable the budgetary control flag, they can still enter manual encumbrances via journal entry, but Users cannot generate encumbrances from requisitions and purchase orders. Users have two options for using encumbrance data to monitor overexpenditure of a budget. After actual and encumbrances have been posted, users can generate reports to show over expenditures. Users can also use funds checking to prevent overexpenditures before they occur.
2.4
2.5
Prerequisites:
The pre-requisites to enable encumbrance are as follows: Installation of required modules Creation of Set of Books in General Ledger Create a Encumbrance Calendar Assign the Set of Books in the other modules (Purchasing and Payables) Enable Budgetary Control in SOB.
Description: Figure 1 displays the top-level view of encumbrance flow. Accounting Entries such as Reserving / Relieving encumbrances are listed below: When performing reserve on documents in Purchasing such as requisition, PO, Agreements and so on. When Approving an Invoice in AP When Creating the Journal Entries in GL. The table GL_BC_PACKETS is used to store the encumbrance transactions. Each row is created with a packet_id that stores values such as balance_type, encumbrance_type and so on. The values in these columns can be used to identify the nature of the encumbrance (Requisition / purchase order).
4.1
Oracle General Ledger 4.1.1 Enable Budgetary Control for the SOB
Navigation: Setup -> Financials -> Books Alternative Region: Budgetary Control Options Flag the Enable Budgetary Control Check Box
On selecting the check box requires users to enter the code combination for Reserve for Encumbrance Account column, which is available on this region.
4.1.2 Assign for Reserve for Encumbrances Account to Set Of Books (SOB)
Navigation: Setup -> Financials -> Books Alternative Region: Budgetary Control Options Assign the Code Combination for the Reserve for Encumbrance Account
project-to-date encumbrance balances forward through the last period of the latest open encumbrance year.
Description: Figure3 displays the Open and Close Periods window. The window has been discussed in point no. 4.1.3
Users must select the appropriate period to enter the budget. Users can have the budget opened for a maximum of 60 periods and there is no such restriction available for number of years.
Description: Figure 4 displays the Define Budget window. This window has been discussed in point no. 4.1.4
information and then navigate to the ranges and define the ranges for the budget organization. For further information, refer Oracle General User Guide. While defining the Account Ranges, set the appropriate Funds Check level for each Account Range Users choose.
Description: Figure 5 displays the Define Budget Organization window. The above window is discussion in point no. 4.1.5
The funds checking feature allow / reject the transaction based on the availability of funds based on the setup as listed below: Absolute: Allows only when the funds are available Advisory: Allows the transaction with a warning when the funds are not available None: No funds checking is performed and thereby allows the transaction to commit whether or not the funds are available.
Description: Figure 6 displays the Encumbrance Types window. The above window is discussed in point no. 4.1.6
Source, Category, Funds Check Level, Tolerance %, Amount, Override Amount and so on.
Description: Figure 7 displays the Budgetary Control Groups window. The above window is discussed in point no. 4.1.7
Description: Figure 8 displays the System Profile Values window. The above window is discussed in point no. 4.1.8
4.2
Navigation Payables: Setup -> Options ->Financial Go to Encumbrance Region. Select the required encumbrance types as defined in step 4.1.6.
Description: Figure 9 displays the Financials Options window. The above window is discussed in point no. 4.2.1
SECTION 5 USAGE
This section gives an idea to the users on how the encumbrance entries have to be created and the flow of encumbrances from other modules. This section deals with the following. Entering Budget Encumbrance Accounting Flow from Purchasing and Payables Reviewing Encumbrances in GL Encumbrances Accounting and Relief in Various Scenarios Viewing Funds Available YearEnd Encumbrance Processing
5.0
Entering Budget
Budget entries can be entered either through the Enter Budget Amounts form or through the Enter Budget Journals form
Navigations: BudgetsEnterJournals
Figure 10: The above figure shows the budget journals form with an amount of 10000 entered against account 01-130-7230-0000-000 for the month of Jan-03
Figure 11: The above figure shows the Funds available for the Account 01-1307230-0000-000 for the month of Jan-03 after the budget journal was created
5.1
5.1.1 Purchasing
Encumbrance can start from Purchasing. To have the full cycle of encumbrance, we need to create the following
5.1.1.1
Requisition
Users can enter, approve and reserve Funds for Requisition. Navigation: Requisitions -> Requisitions. Create a requisition, reserve and approve the requisition. When approved users can do a funds check in GL and this should be in requisition phase, provided requisition is the type of encumbrance Users have attached at requisition level in Financial options. Reserving the requisition kicks of the funds checker program and encumbrance line gets created in the table GL_BC_PACKETS. The encumbrance journal entries get created when the program Create Journal Entries is run from GL. The data in GL_BC_PACKETS table would get deleted, only when the Create Journal Program in GL is run and the journal gets posted. The Transaction Created can have the following feature Balance Type = E (Encumbrance)
Expense DR 1000
Expense CR
RFE DR
RFE CR 1000
Figure 12 shows the requisition for RS 1000 with the distribution form showing that the charge and budget are to account 01-1307230-0000-000
Figure 13: Checking encumbrance balance through Funds Available Form after creating a Requisition in Purchasing
Figure 13 shows the encumbrance balance of 1000 after creating the requisition and reserving the same
5.1.1.2
Purchase Order
Users can create, approve and reserve Funds for Purchase Order from requisition Navigation: Auto Create Find your requisition, Select the requisition and go to automatic. Make sure that the supplier information is entered and select create. This creates the PO. Complete, reserve and approve the PO. When approved users can do a funds check and this should be in PO phase, assuming PO encumbrance is the type attached at PO level. No journal entries are created at this stage but similar to the previous step Users can create encumbrance entries by Create Journal Entry program. While using PO Encumbrance, users cannot change price, quantity, shipment or currency once a PO has been reserved and approved, the only way to deal with such a situation is to cancel the existing PO and create a new one when a PO is cancelled system takes care of adjusting encumbrance. The encumbrance created on Requisition is relived when the PO encumbrance is created and Funds are reserved for the PO. NOTE: The important point over here is that if a user creates the PO manually, it can lead to the duplication of reservation of funds for the same transaction. This is because system treats PO as a separate transaction and the user can end up having double reservation for the same transaction one at requisition level and other at PO level. Hence it is suggested to use only Auto Create mode to create a PO, while using Encumbrance Accounting. The Transaction Created can have the following feature: Balance Type = E (Encumbrance)
Encumbrance Type = PO (Purchase Order) CCID Accounting = CCID given in PO Distribution when the journal gets posted in General Ledger
Expense CR
RFE DR
1000
1000
Figure 14: Auto-create a Purchase order for the requisition that was created earlier
Figure 14 shows the PO which has been created for the requisition and it is not accrued at the time of Receipt
Figure 15: Checking the encumbrance balance after Auto-creating the Purchase order
Figure 15 shows the Funds Available after creating the PO. The encumbrance amount has moved from Requisition to PO
5.1.1.3
Receiving Receipts
On receipt of the goods, the entries are made as follows: Navigation: Receiving Receipts Query the PO. Mark as receipt and save. Depending on the routing users may have to deliver it. Once the goods are received system creates Journal entries for the Receiving transaction. At this point PO encumbrance is relieved. Otherwise, it gets relieved when Users post the invoice from payables to GL in Accrual basis of Accounting. In case of Cash basis of accounting PO encumbrance gets relieved when Users post payment information from Payables. The PO encumbrance is getting relieved based on the setup the user has made, depending on whether the period-end or on-line accrual is selected. If on-line accrual method is selected, the PO encumbrance can be relieved when the goods are received. In case of period-end accrual, we need run the period-end accrual process. NOTE: Important reports that can be used to track the encumbrance entries are: 1. Requisition Distribution Detail Report. 2. Purchase Order Distribution Detail Report. 3. Encumbrance Detail Report. The Transaction created can have the following feature:
Exp Dr 1000
Exp CR
RFE DR
RFE CR 1000
REC DR
REC ACC DR
REC ACC CR
1000 1000
1000 1000
Figure 17 does not show any accounting entries because the accrue at receipt is not enabled for this PO 2548
Figure 18 shows Receipt Transaction Summary with accounting entries when the Accrue at receipt option is enabled.
5.1.2 Payables
Once the Goods are received and matched against the Purchase Order, the next step is to create an invoice for the Goods received. Invoice can be created at the following scenarios.
5.1.2.1
Navigation: Invoices -> Entry -> Invoices This is applicable where no purchase order is created. For example, where the invoice has to be created for the services rendered (Audit Fees). There is no separate step to reserve funds in AP unlike in PO. In AP, Validation process takes care of the funds reservation. If the invoice is created and matched with PO and the amount matched is equals to PO, then the encumbrance type can be reclassified from PO to INV and no additional entries are generated. Payable also creates encumbrance when users successfully approve an invoice having a quantity or price variance with the matched PO. If Users match an invoice to a PO, Payable automatically creates an entry in GL to reverse the PO encumbrance and the Invoice Encumbrance comes into picture Encumbrance Entries are created when an invoice is validated and approved. The actual entries are created when we transfer to GL through Payables Transfer to GL program and imports the journals into GL. This will bring two entries, the Actual and the Invoice encumbrance relief You need to run the Create Journal Entry program to bring in the PO Encumbrance relief and the Invoice encumbrance lines into GL
Select the Account Combination at the header level, as in the Assignments window in the Budget Organization. If budgetary control group is used, create a budgetary control group with the source Payables and Category as Manual.
5.1.2.2
Navigation: Invoices -> Entry -> Invoices Complete by entering invoice number, date and amount. Navigate to match and in the Find Window the PO number is displayed. Flag the lines and select Match. You can flag multiple PO lines to match with the Invoice. The PO distributions lines can be copied to the Invoice distributions. Users can approve the invoice. When approved the funds is checked automatically by the system. The Transaction Created can have the following features: Balance Type = E (Encumbrance)
Docume nt PO Enc Relief Invoice Enc create Inv Enc Relief Charge Accnt
Exp Dr
Exp CR
RFE DR
RFE CR
AP Accrual DR
AP Accrual CR
1000 1000
1000 1000
1000 1000
1000 1000
Figure 19 shows the Invoice that has been created by Matching PO 2548 and is also validated. It also shows the accounting entries created at the time of PO
Figure 20: Funds Available after creating Invoice but before running the AP Transfer to GL process and doing the Journal Import
Figure 20 shows the Funds Available after creating the Invoice. The encumbrance amount has moved from PO to Invoice
Figure 21: Funds Available after creating Invoice and running the AP Transfer to GL process and doing the Journal Import
Figure 21 shows the Invoice after it was approved and transferred to GL using the AP transfer to GL process. This brings in the actual entry and relieves the encumbrance for the transaction.
5.1.2.3
Navigation: Other -> Request -> Run Select the Payables Transfer to General Ledger. Complete parameters and submit request.
5.1.3.1
Navigation: Journals -> Encumbrance The source of the journal can be Encumbrance, which cannot be modified. Choose the appropriate category and enter the journals.
5.2
Reviewing Encumbrances in GL
Reviewing Encumbrance entries can be done as listed below: Create Journal Entries Form by querying the specific journal Navigation Path: Journals -> Enter Create Encumbrance Form by querying the specific journal Navigation Path: Journals -> Encumbrance Account Inquiry Window Navigation Path: Inquiry -> Account Select the Primary Balance Type as Encumbrance and then select the encumbrance type if required. Provide required selection criteria and from the view output. Users can further drill down to the Journal level and then further to the sub-ledger details. Journals Inquiry Window Navigation Path: Inquiry -> Journals If only the encumbrance journals are to be inquired, without giving any other criteria, click on the more button on the Find Journals window and select the Balance Type as Encumbrance.
5.3
Balance Type
= E (Encumbrance)
Encumbrance Type = REQ (Requisition) Accounting Account 5.3.1.2 Final Close of a Purchase Order First an Encumbrance is created as in step 5.1.1.3 for creation of the receipt and the encumbrance created on a PO as in 5.1.1.2 is reversed. The Transaction created can have the following feature Balance Type = E (Encumbrance) = Cr Dr Encumbrance / Charge Account Reserve for Encumbrance
Encumbrance Type = PO (Purchase Order) Accounting Account 5.3.1.3 Creating an Invoice and matched against a PO If the invoice is created and matched with PO and the amount matched equals to PO, then the encumbrance type can be reclassified from PO to INV and no additional entries are generated. 5.3.2 Without creating another Encumbrance Entry Encumbrance created once can be relieved without creating another encumbrance entry as explained above. This can be achieved as follows. 5.3.2.1 Canceling a Requisition The Transaction created can have the following features: Balance Type = E (Encumbrance) = Cr Dr Encumbrance / Charge Account Reserve for Encumbrance
Encumbrance Type = INV (Invoice) Accounting (-ve) Account (-ve) = Dr Encumbrance / Charge Account
5.3.2.2
Canceling a Purchase Order The Transaction created can have the following features: Balance Type = E (Encumbrance)
Rejecting the Receipt The following accounting entries are created on rejecting the receipt Accounting (-ve) = Dr Cr Encumbrance / Charge Account Accrual (-ve)
5.3.2.4
Canceling a matched / unmatched invoice For the Entry created and the invoices matched with exact amount of the purchase order, the balance type can be simply changed from INV to PO, as at the time of matching, only the balance type is changed and no entry is created. Where the matching is done for different amount and the variance account is created, and then the reversal can be as follows: Accounting (-ve) Account (-ve) = Dr Encumbrance / Charge Account
Cr Reserve for Encumbrance 5.3.3 Relieving Encumbrance Manually Users can also relieve encumbrances manually in General Ledger. To do so, Users must make an encumbrance entry. To relieve encumbrances manually: 1. Navigate to the Enter Encumbrances window. 2. Enter or query an encumbrance batch. 3. Choose More Actions. 4. Choose Reverse Batch. 5. Enter the Period to which to reverse the original encumbrance entry. The default period is the current accounting period. 6. Post the reversal batch to relieve the encumbrances.
5.4
the budgeted amount. Funds Availability can be viewed from the Funds Inquiry window.
Navigation Path:
5.5
Mass Cancel In Oracle Purchasing: Run Encumbrance Details Report to review purchase orders and requisitions behind encumbrances Define Mass Cancel for purchase orders Review Run Mass Cancel Listing to verify cancelled purchase orders Run Mass Cancel for purchase orders Define Mass Cancel for requisitions Review Run Mass Cancel Listing to verify cancelled requisitions Run Mass Cancel for requisitions
distribution lines from purchase order lines at the appropriate time and automatically relieves the purchase order encumbrance. Users can also relieve encumbrances manually in General Ledger. To do so, users must make a reversal encumbrance entry. The action of nullifying the encumbrance is called De-encumbering.
Following are different scenarios: a) Cancel a PO or a Requisition or an Invoice? b) Return or Reject a PO or a requisition c) Finally close a document Funds reversal occurs when documents are cancelled or finally closed. Negative debit entries are created to the respective accounts to nullify the encumbrance. When the above occurs reversing transactions occur which deencumbers the previously created encumbrance transactions. The encumbrance entries get relieved on reversal of the journal entries. When you make changes against the price or the quantity of the PO/Requisition. Users can make changes to a purchase order for which funds have already been reserved (or encumbered). Temporarily unreserving the document, making the desired changes, and reserving the document again can do this. The unreserved action takes place at the header level only; it affects all lines on a purchase order, and changes the document's status to Requires Reapproval. Note: Users have to make sure that the Unreserve Date falls within an open reserve period. Budget Accounts: Budget Accounts are defined as accounts against which pre-allocated amount or budget is specified. This could be at the Summary level or the detail level. Carry Forward Of Encumbrance Accounts: Perform yearend processing to identify outstanding purchase order and requisition encumbrances, to cancel some or all of these encumbrances, and to carry forward encumbrance, budget, and funds available balances into the new fiscal year. Users can carry forward encumbrances into the next fiscal year. Users can also carry forward an equivalent budget amount or funds available. If they do not carry forward encumbrances, they might want to cancel existing requisitions and purchase orders behind the encumbrances. Users can easily identify purchase orders and requisitions behind encumbrances. When Users carry forward yearend encumbrances, the Carry Forward rule specified determines how General Ledger calculates the amount to be carried forward. Note that General Ledger carries forward encumbrances, not as period activity, but as beginning balances. Users can choose one of the following Carry Forward rules:
Encumbrances Only: General Ledger calculates the year-to-date encumbrance balance as of the end of the year and carries that balance forward into the beginning balance of the first period of the next fiscal year. Encumbrances and Encumbered Budget: General Ledger calculates the year-to-date encumbrance balance as of the end of the year and carries forward that balance, plus an equivalent budget amount, into the beginning balance of the first period of the next fiscal year. Funds Available: General Ledger calculates the funds available as the yearto-date budget balance less year-to-date actual and encumbrance balances. General Ledger then carries forward that amount into the beginning balance of the first period of the next fiscal year. Users can print a preview report to view the effects of a year-end carry forward before Users initiate the carry forward process. If users do not use the Year End Carry Forward window to carry forward encumbrances at the end of the fiscal year, all encumbrances automatically go to zero. Users can execute yearend carry forward a number of times for different ranges of accounts and different encumbrance types. Encumbrance Reconciliation: Encumbrance journals created by sub-ledgers (Especially Payables & Purchasing) should be reconciled on a regular MONTHLY basis. Without monthly reconciliation, encumbrance issues are usually identified at an organization's year-end when funds and time are very limited. Encumbrance Reconciliation Tips: Payables encumbrances should clear to zero each period. Purchasing encumbrances in the ledger should balance to the Encumbrance Detail report in Purchasing.
If they do not: 1) Ensure that the Program - Create Journals and Payables Transfer to ledger have been run. Post all encumbrance entries. 2) Check for outstanding rows in the gl_bc_packets table. Please note that unposted entries in the ledger can NOT clear the gl_bc_packets table until they are posted. Funds Available: Funds Available = Budget (Actual Expenses + Encumbrances) Funds available are the amount of Funds, available to be encumbered. The difference between the amount that are authorized to spend and all actual and anticipated expenditures. In other words, funds available are the amount budgeted less actual expenses and encumbrances of all types. Oracle provides the facility to let users check funds available online for requisitions, purchase orders, and invoices. When a user enables budgetary control on the set of books and enables encumbrances on requisitions, purchase orders and or invoices this enables the functionality of the "funds checker" (a library owned by GL). This library
inserts records into the table gl_bc_packets whenever a calculation might affect the funds available. If Users do not use requisition encumbrance, then funds checker cannot kick off and there can be no records in gl_bc_packets. When Users inquire on funds available, the amount type Users specify determines how General Ledger calculates funds available. Table 1 displays how the system calculates the funds availability in different scenarios.
Amount Type
Periodto Date
Calculates funds available as the budgeted amount to date for the quarter, less actuals and encumbrances to date for the quarter. For example, Users budget $100 to an account for each of the three months in a quarter. The available amount for the second month of the quarter is $200. Calculates funds available as the budgeted amount to date for the quarter, less actuals and encumbrances to date for the quarter. For example, Users budget $100 to an account for each of the three months in a quarter. The available amount for the second month of the quarter is $200. Calculates funds available as the budgeted amount to date for the year, less actuals and encumbrances to date for the year. For example, Users budget $100 to an account for each of the 12 months. The available amount for the first half of the year is $600. Calculates funds available as the budgeted amount to date, less actuals and encumbrances to date.
YeartoDate Extended
Projectto Date
General Ledger Encumbrance - Setup and Usage August 2006 Author: Vaideeswaran Subramanian, ISC Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores, CA 94065 U.S.A. Worldwide Inquiries: Phone: +1.650.506.7000 Fax: +1.650.506.7200 www.oracle.com Oracle is a registered trademark of Oracle Corporation. Various product and service names referenced herein may be trademarks
of Oracle Corporation. All other product and service names mentioned may be trademarks of their respective owners. Copyright 2002 Oracle Corporation All rights reserved.