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:
Actual journal entries are created for the amount of the receipt liabilities, debiting the receiving inspection account and crediting the expense accrual liability account.
Accrual journal entries are created when you enter receiving transactions. Purchasing creates adjusting journal entries if you correct your receiving transactions.
Perpetual accrual entries do not need to be reversed at the start of a new accounting period.
If you are using encumbrance accounting, purchase order encumbrance is relieved when the goods are delivered to their final destination, either by a delivery or a direct receipt.
Attention: If you accrue expense purchases at the time of 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.
When you receive material from a supplier into receiving inspection, Purchasing uses the quantity received; the purchase order price; nonrecoverable tax if any; and, if the purchase order is in a foreign currency, exchange rate, to update the accrual and the receiving inspection account. (If the purchase order is in a foreign currency, the exchange rate comes from the receipt if the Invoice Match Option in the purchase order Shipments window is Receipt and from the purchase order if the Invoice Match Option is Purchase Order.) The accounting entries for inventory receipts are:
| Account | Debit | Credit |
|---|---|---|
| Receiving Inspection account at PO price | XX | |
| Inventory A/P Accrual account at PO price | XX |
The accounting entries for expense destination receipts are:
| Account | Debit | Credit |
|---|---|---|
| Receiving Inspection account at PO price | XX | |
| Expense A/P Accrual account at 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.
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, the system recalculates the average cost for the inventory organization with the incoming purchase order value. You do not have any purchase price variance for average costing.
For periodic costing, when you enter a delivery transaction in Purchasing, the system recalculates the periodic average cost for the period based on the periodic acquisition cost. See: Processing Periodic Acquisition Costs.
Inventory uses the quantity; the purchase order price; nonrecoverable tax if any; and, if the purchase order is in a foreign currency, exchange rate, of the delivered item to update the receiving inspection account and the quantity. Inventory uses the standard cost of the delivered item to update the subinventory balances. The standard cost is in the functional currency. The accounting entries are:
| Account | Debit | Credit |
|---|---|---|
| Subinventory accounts at standard cost | XX | |
| Receiving Inspection account at PO price | XX | |
| Debit/Credit Purchase Price Variance |
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; the purchase order price; nonrecoverable tax if any; and, if the purchase order is in a foreign currency, exchange rate, of the delivered item to update the receiving inspection and expense charge account. (If the purchase order is in a foreign currency, the exchange rate comes from the receipt if the Invoice Match Option in the purchase order Shipments window is Receipt and from the purchase order if the Invoice Match Option is Purchase Order.) The accounting entries are:
| Account | Debit | Credit |
|---|---|---|
| PO distribution charge accounts at PO price | XX | |
| Receiving Inspection account at PO price | XX | |
| Encumbrance at PO price | XX | |
| Reserve for Encumbrance at PO price | XX |
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; the purchase order price; nonrecoverable tax if any; and, if the purchase order is in a foreign currency, exchange rate, to update the accrual and the receiving inspection account. (If the purchase order is in a foreign currency, the exchange rate comes from the receipt if the Invoice Match Option in the purchase order Shipments window is Receipt and from the purchase order if the Invoice Match Option is Purchase Order.) The accounting entries are:
| Account | Debit | Credit |
|---|---|---|
| Receiving Inspection account at PO price | XX | |
| Inventory A/P Accrual account at 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 at standard cost | XX | |
| Receiving Inspection account at PO price | XX | |
| Debit/Credit Purchase Price Variance |
If you use average costing, the system recalculates the average cost at receipt, and you 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.
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; the purchase order price; nonrecoverable tax if any; and, if the purchase order is in a foreign currency, exchange rate, to update the accrual and the receiving inspection account. (If the purchase order is in a foreign currency, the exchange rate comes from the receipt if the Invoice Match Option in the purchase order Shipments window is Receipt and from the purchase order if the Invoice Match Option is Purchase Order.) The accounting entries are:
| Account | Debit | Credit |
|---|---|---|
| Receiving Inspection account at PO price | XX | |
| Expense A/P Accrual account at PO price | XX |
Purchasing uses the quantity received; the purchase order price; nonrecoverable tax if any; and, if the purchase order is in a foreign currency, exchange rate, to update the receiving inspection and expense accounts. (If the purchase order is in a foreign currency, the exchange rate comes from the receipt if the Invoice Match Option in the purchase order Shipments window is Receipt and from the purchase order if the Invoice Match Option is Purchase Order.) The accounting entries are:
| Account | Debit | Credit |
|---|---|---|
| PO distribution charge accounts at PO price | XX | |
| Receiving Inspection account at PO price | XX | |
| Reserve for Encumbrance at PO price | XX | |
| Encumbrance at PO price | XX |
In Payables, when you are matching an invoice to a purchasing document, if the Invoice Match Option in the purchase order Shipments window is Purchase Order, then you match each invoice distribution to a purchase order distribution. If the Invoice Match Option is Receipt, then you match each invoice distribution to a purchase order distribution for the received transaction. You can set up Payables to ensure that you pay only for the quantity you received.
If you accrue at receipt, and if you use encumbrance, then during the Payables Approval process, Payables makes any encumbrance adjustments for price and exchange rate variances, including nonrecoverable tax, between the invoice and the purchase order (or receipt, if the invoice is matched to a receipt). Also, if your encumbrance types are different for purchase orders and invoices, then Payables creates appropriate entries. For details on how Payables calculates variance amounts, see: Invoice Variances. To see the accounts that Payables uses to record the variances, see: Variance Accounts
When Payables records the accounting entries for the invoice, any variances are recorded as actuals and the encumbrances are reversed. Payables then credits the Liability account for the full amount of the invoice, and debits the accrual account for the remaining amount (invoice price - invoice price variance - exchange rate variance).
Attention: Normally, you charge the original expense account for any invoice price variances. 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.
Note that Purchasing uses the functional currency for your ledger 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 it creates accounting entries for the invoice. If the conversion rate differs between the purchase order (or the receipt, if the Invoice Match Option in the purchase order Shipments window is Receipt) and the invoice, then the conversion difference is recorded as an Exchange Rate Variance. Separate accounts are defined for exchange rate gains and losses, which record currency gains and losses within Payables, for example, between invoice time and payment time.
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.
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.
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.
Before reconciling your transactions with your general ledger account balances, you should perform the following steps:
Identify the period you want to reconcile and close.
Enter all receiving transactions for goods and services you received during the period.
Enter and match all invoices you received during the period for your receipt accrual entries.
Perform the GL Transfer in Inventory and reconcile your Inventory Purchase Price Variance and A/P Accrual entries.
Identify the period-end balances of the following accounts in your general ledger:
Purchase Price Variance
A/P Accrual Account
Inventory Accounts
Reconcile the balance of the Purchase Price Variance account using the Purchase Price Variance Report (detailed below).
Identify the Invoice Price Variances amount and Accrued Receipts amounts in the A/P Accrual Account (detailed below).
Manually remove the Invoice Price Variance amount from the A/P Accrual Account using your general ledger (prior release IPV only).
Close your accounts payable period corresponding to the purchasing period for your receipts accrual entries. See: Controlling the Status of AP Accounting Periods.
Perform period-end accruals steps for purchasing and one-time items as described in the following section.
Close the period in Purchasing, (You do not need to reverse any journal entry batch in the following period). See: Controlling Purchasing Periods.
Close your Inventory period after review. See: Maintaining Accounting Periods.
Close your General Ledger period after review.