Financial accounting has two important Generally Accepted Accounting Principles (GAAP) that guide the statement of financial earnings:
Revenue recognition principle
Cost matching principle
The revenue recognition principle requires revenues to be recognized when a firm has performed all, or a substantial portion of services to be provided, and cash receipt is reasonably certain. The matching principle requires that cash outlays associated directly with revenues are expensed in the period in which the firm recognizes the revenue.
The Oracle E-Business Suite supports this matching principle by synchronizing the recognition of cost of goods sold (COGS) with the revenue recognized in Oracle Receivables for shipments made in Oracle Order Management, or other order fulfillment systems. With this feature, sales order revenue and the associated COGS are recognized in the same period. In addition, when sales order revenue is only partially recognized, the associated COGS is recognized in the same proportion.
When you ship confirm one or more order lines in Oracle Order Management and then run the applicable Cost Management cost and accounting processes, the cost of goods sold associated with the sales order line is immediately debited to a Deferred COGS account pending the invoicing and recognition of the sales order revenue in Oracle Receivables. When Oracle Receivables recognizes all or part of the sales revenue associated with a sales order line, you run a cost process that calculates the percentage of total billed revenue recognized. Oracle Inventory then creates a cost recognition transaction that adjusts the Deferred COGS and regular COGS amount for the order line. The proportion of total shipment cost that is recognized as COGS will always match the proportion of total billable quantity that is recognized as revenue.
You can select the accounting date for which COGS for a ship only order is recognized by setting the profile option 'CST: Ship or Closure Date'. Profile option values include:
Sales Order Issue Date
OM order line closure date (default)
Refer to Profile Options and Security Functions.