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Accrual Process for Perpetual Accruals

Use perpetual accruals for expense purchases when you want to record uninvoiced receipt liabilities immediately upon receipt of goods. Receipts for inventory purchases are always accrued upon receipt. Other key points of perpetual accruals include:

Attention: If you accrue expense purchases on receipt, you must reconcile the entries in the A/P accrual accounts. In addition, if you also receive inventory, you need to use the Receiving Value By Destination Account Report to break out your receiving/inspection value by asset and expense.

Purchase Order Receipt to Receiving Inspection

When you receive material from a supplier into receiving inspection, Purchasing uses the quantity received and the purchase order price to update the purchase order and the receiving inspection account. The accounting entries for inventory receipts are:

Account Debit Credit
Receiving Inspection account @ PO price XX  
       Inventory A/P Accrual account @ PO price   XX

The accounting entries for expense destination receipts are:

Account Debit Credit
Receiving Inspection account @ PO price XX  
       Expense A/P Accrual account @ PO price   XX

Attention: For clarity, the accounting entries in this section refer to the Inventory A/P Accrual Account and the Expense A/P Accrual Account. These are the accounts you typically use as your purchase order distribution accrual accounts for inventory and expense destinations. You can use the Account Generator to define the business rules you want Purchasing to use to determine the actual purchase order distribution accrual account. Purchasing uses the accrual account on the purchase order distribution for all receipt accrual entries.

For expense destinations, the PO distribution accrual account is the Expense A/P Accrual Account set in the Purchasing Options window. For inventory destinations, the purchase order distribution accrual account is the Inventory A/P accrual account for the receiving organization. The accrual accounts are the liability accounts that offset the material and expense charge accounts. They represent all inventory and expense receipts not matched in Payables.

Delivery From Receiving Inspection to Inventory

With the Receiving Transactions window, you can move material from receiving inspection to inventory. See: Receiving Transactions.

For standard costing, when you enter a delivery transaction in Purchasing and move the items to inventory, Inventory generates a purchase price variance transaction. Inventory books this transaction as a period expense for the current accounting period. If the standard cost is greater than the purchase order price, then the purchase price variance is favorable. Inventory records the expense as a credit (negative expense). If the standard cost is less than the purchase order price, then the variance is unfavorable. Inventory records the expense as a debit (positive expense).

For average costing, when you enter a delivery transaction in Purchasing, you re-weight the average cost for the inventory organization with the incoming purchase order value. You do not have any purchase price variance for average costing.

Inventory uses the quantity and the purchase order price of the delivered item to update the receiving inspection account and the quantity, and the standard cost of the delivered item to update the subinventory balances. The accounting entries are:

Account Debit Credit
Subinventory accounts @ standard cost XX  
      Receiving Inspection account @ PO price   XX
      Debit/Credit Purchase Price Variance    

Delivery From Receiving Inspection to Expense Destinations

With the Receiving Transactions window, you can also move material from receiving inspection to expense destinations. See: Receiving Transactions.

When you enter a delivery transaction in Purchasing and move the items to an expense location, Purchasing uses the transaction quantity and the purchase order price of the delivered item to update the receiving inspection and expense charge account. The accounting entries are:

Account Debit Credit
PO distribution charge accounts @ PO price XX  
      Receiving Inspection account @ PO price   XX
Encumbrance @ PO price XX  
      Reserve for Encumbrance @ PO price   XX

Purchase Order Receipt to Inventory

You can use the Receipts window to receive material directly from a supplier to inventory. See: Managing Receipts. Please note that this section addresses inventory destinations only.

When you receive material from a supplier directly to inventory, Purchasing and Inventory perform the receipt and delivery transactions in one step.

Purchasing uses the quantity received and the purchase order price to update the purchase order and the receiving inspection account. The accounting entries are:

Account Debit Credit
Receiving Inspection account @ PO price XX  
      Inventory A/P Accrual account @ PO price   XX

Inventory uses the quantity and standard cost of the received item to update the receiving inspection and subinventory balances. The accounting entries are:

Account Debit Credit
Subinventory accounts @ standard cost XX  
      Receiving Inspection account @ PO price   XX
      Debit/Credit Purchase Price Variance    

If you use average costing, you re-weight the average cost at receipt and do not have any purchase price variance.

The Inventory A/P Accrual account is the liability account that offsets the material accounts, and represents all inventory receipts not matched in Payables.

Purchase Order Receipt to Expense Destinations

You can use the Receipts window to receive material directly from a supplier to the expense destination. See: Managing Receipts. Please note this section addresses expense destinations only.

When you receive material from a supplier directly to expense destinations, Purchasing performs the receipt and delivery transactions in one step.

Purchasing uses the quantity received and the purchase order price to update the purchase order and the receiving inspection account. The accounting entries are:

Account Debit Credit
Receiving Inspection account @ PO price XX  
      Expense A/P Accrual account @ PO price   XX

Purchasing uses the quantity and purchase order price of the received item to update the receiving inspection and expense accounts. The accounting entries are:

Account Debit Credit
PO distribution charge accounts @ PO price XX  
      Receiving Inspection account @ PO price   XX
Encumbrance @ PO price XX  
      Reserve for Encumbrance @ PO price   XX

Match, Approve, and Post an Invoice

When you enter an invoice in Payables, you match each invoice line to a specific purchase order shipment in Purchasing. You can set up Payables to ensure that you pay only for the quantity you received. If you accrue your receipts online, Payables clears the PO distribution accrual account as part of the accounting transactions.

Inventory Receipts

Under standard costing, when you initially enter the purchase order receipt and delivery to inventory destinations in Purchasing, you credit the Inventory A/P Accrual Account for the amount of the receipt, debit the inventory at standard cost, and charge the difference to the purchase price variance. Encumbrance is reserved for the receipt quantity @ purchase order amount. When you match the invoice to the purchase order, Payables offsets the Inventory A/P Accrual Account for the quantity invoiced times the PO price, and records the supplier liability and the invoice price variance. Encumbrances are created or reversed depending on the positive (created) or negative (reversed) variances.

In general, invoice price variance is the difference between the purchase price and the invoice price paid for a purchase order receipt. Purchasing reports invoice variance. Upon invoice approval, Payables automatically records the invoice price variance to the invoice price variance account and, if appropriate, to the exchange rate variance account.

Account Debit Credit
AP accrual account @ PO price XX  
Invoice Price Variance account @ Invoice Quantity * (Invoice Price - PO Price) XX  
Encumbrance XX  
      A/P Liability @ (Invoice price * Invoice Quantity)   XX
      Reserve for Encumbrance   XX

If you have a foreign currency purchase order, Payables also records exchange rate gains and losses.

Expense Destination Receipts

When you initially enter the purchase order receipt and delivery to expense destinations in Purchasing, when your Expense Accrual Option is set to On Receipt, the net accounting entry credits the Expense A/P Accrual Account for the amount of the receipt and debits the PO distribution charge account at purchase order price. Encumbrance is reversed for the Receipt Quantity at the PO amount. When you match the invoice to the purchase order, Payables offsets the Expense A/P Accrual Account for the quantity invoiced times the PO price and records the supplier liability for the amount of the invoice. Encumbrances are created or reversed depending on the positive (encumbrance created) or negative (encumbrance reversed) variance.

Normally, you charge the original expense account for any invoice price variances. You do not record invoice price variances for expense purchases. Purchasing uses the Account Generator to set your purchase order distribution variance account to be the same as your purchase order charge account. If you want to record your invoice price variances to a separate account, use the Account Generator to define the business rules you use to determine the correct invoice price variance account.

Account Debit Credit
Expense A/P accrual account @ PO price XX  
PO distribution variance account (= PO distribution Charge Account) @ Invoice Quantity * (Invoice Price - PO Price) XX  
Encumbrance XX  
      A/P Liability @ (Invoice price * Invoice Quantity)   XX
      Reserve for Encumbrance   XX

Invoice Exchange Rate Variances

Note that Purchasing uses the functional currency for your set of books in all receiving accounting entries. Purchasing converts foreign currency purchase order prices to the functional currency using the currency conversion rate from the purchase order. Payables uses the currency and the conversion rate of the invoice when booking transactions to the general ledger. If the conversion rate differs between the purchase order and invoice, the conversion difference is recorded as an Exchange Rate Variance. Separate accounts are defined for exchange rate gains and losses.

Return to Supplier From Receiving

You use the Returns window to return material from receiving inspection or from inventory to a supplier. If you use receiving inspection and you have delivered the material into inventory, you must first return the goods to receiving before you can return to your supplier. For a return from inspection, Purchasing decreases the receiving inspection balance, and reverses the accounting entry created for the original receipt. See: Returns.

Return To Supplier From Inventory or Expense Destinations

When you do not use receiving inspection, the return to supplier transaction updates the same accounts as the direct receipt to the inventory or expense destination, with reverse transaction amounts.

Period-End Reconciliation Tasks

When you use perpetual inventories, you should balance your inventory accounts to your inventory value report. You should also review the general ledger journal transactions for inventory Purchase Price Variance and A/P Accrual Accounts. You should look for potential problems or errors such as transactions charged to the wrong account and duplicate transactions. This process is called the Inventory Reconciliation and Period Close Review. Purchasing and Inventory provide you with a set of reports you can use to reconcile your transactions with your general ledger account balances quickly and easily.

Period-End Checklist

Before reconciling your transactions with your general ledger account balances, you should perform the following steps:

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