Before going into any
detail, let me take you into accounting world for a brief moment. Fundamentally
accounting is based on two methods : Cash Basis or Accrual Basis.
Accrual Basis Accounting
Under the accrual basis accounting, revenues and expenses are recognized as follows:
AR:
Accrual Basis Accounting
Under the accrual basis accounting, revenues and expenses are recognized as follows:
AR:
·
Revenue
recognition: Revenue is recognized when both of the following conditions are
met:
a. Revenue is earned.
b. Revenue is realized or realizable.
a. Revenue is earned.
b. Revenue is realized or realizable.
·
Revenue is
earned when products are delivered or services are provided.
·
Realized means cash is
received.
·
Realizable means it is
reasonable to expect that cash will be received in the future.
AP:
·
Expense recognition:
Expense is recognized in the period in which related revenue is recognized
(Matching Principle).
Cash Basis Accounting
Under the cash basis accounting, revenues and expenses are recognized as follows:
AR:
Under the cash basis accounting, revenues and expenses are recognized as follows:
AR:
·
Revenue recognition:
Revenue is recognized when cash is received.
AP:
·
Expense recognition:
Expense is recognized when cash is paid.
Timing
differences in recognizing revenues and expenses:
1.
Accrued Revenue:
Revenue is recognized before cash is received.
2.
Accrued Expense:
Expense is recognized before cash is paid.
3.
Deferred Revenue:
Revenue is recognized after cash is received.
4.
Deferred Expense:
Expense is recognized after cash is paid.
Options
in
11i To
Options in 12
Till 11i the only way we represent this accounting method is by choosing accounting method in Payables Options in AP and System Options in AR. But in R12 you can see in that these options are gone from the system options of AP and AR. That is where subledger accounting comes in.
Part of the global release concept in R12, accounting methods have to be much more flexible and generation of accounting entries should be configurable.
As we know accounting is the end product of transctions and financial statements are end products of accounting. Also there is a need to seperate transaction from accounting. An accounting clerk who creates an invoice has nothing to do what accounting is behind that transaction. It is the duty of the management to decide accounting behind this transaction.
Subledger Accounting is taking us in that direction.
Purpose of Subledger Accounting
The end product of Subledger Accounting Setups is a Subledger Accounting Method that can be assigned to one or more ledgers in GL. All accounting in different subledger applications is subject to the rules defined in this accounting method.
In 11i, as mentioned earlier, the only way to choose accounting method we chose is AR and AP system options setup (Cash Vs Accrual). We used start in GL setting up the Set of books and then define the organization information like Legal Entity and Operating units and so on. And then define these accounting methods for each operating unit. As you can see operations and accounting are so closely meshed with each other. But in R12 it is not the same. In this release it is now configurable in Subledger Accounting setups taking this away from system options of individual products.
Till 11i the only way we represent this accounting method is by choosing accounting method in Payables Options in AP and System Options in AR. But in R12 you can see in that these options are gone from the system options of AP and AR. That is where subledger accounting comes in.
Part of the global release concept in R12, accounting methods have to be much more flexible and generation of accounting entries should be configurable.
As we know accounting is the end product of transctions and financial statements are end products of accounting. Also there is a need to seperate transaction from accounting. An accounting clerk who creates an invoice has nothing to do what accounting is behind that transaction. It is the duty of the management to decide accounting behind this transaction.
Subledger Accounting is taking us in that direction.
Purpose of Subledger Accounting
The end product of Subledger Accounting Setups is a Subledger Accounting Method that can be assigned to one or more ledgers in GL. All accounting in different subledger applications is subject to the rules defined in this accounting method.
In 11i, as mentioned earlier, the only way to choose accounting method we chose is AR and AP system options setup (Cash Vs Accrual). We used start in GL setting up the Set of books and then define the organization information like Legal Entity and Operating units and so on. And then define these accounting methods for each operating unit. As you can see operations and accounting are so closely meshed with each other. But in R12 it is not the same. In this release it is now configurable in Subledger Accounting setups taking this away from system options of individual products.
subledger accounting setups
Out of the box, Oracle
seeds accounting rules for all applications. If you are satisfied with the
Oracle’s seeded rules, there is no need to change any setup and you can use
those existing rules (Accounting Method for Accrual is Standard Accrual and for
Cash is Standard Cash). This screenshot here shows you the difference between
the Accrual Basis of accounting and Cash Basis of Accounting. As you can see
here, per rules, there is no accounting created when invoice is created under
cash basis (no revenue is recognized until cash is received) but accounting is
created when cash is realized. Invoice is accounted as soon it is
completed under Accrual Method. This is configurable here where as in 11i we
did not have a choice!.
If you choose this accounting method, accounting works exactly the way it works in previous releases.
Subledger Accounting as a gatekeeper of Reconciliation
R11i Transfer to GL
If you choose this accounting method, accounting works exactly the way it works in previous releases.
Subledger Accounting as a gatekeeper of Reconciliation
R11i Transfer to GL
R12 Transfer to GL
Starting R12 all
accounting entries are generated and passed through subledger accounting
application instead of directly going to GL. Hence reconciliation is already
done between source to Subledger Accounting and Subledger Accounting to GL,
reducing huge amount of time spent on reconciliation. Since these entries have
to flow through the subledger accounting application, there is a need to map
the source application accounting entries to subledger accounting. That is key
for the setups.
Mapping a transaction to Subledger Accounting Setup
AR Invoice Accounting
Let us take a simple example. Whenever you create an AR Invoice following accounting takes place.
Invoice Accounting in AR
Let us take a simple example. Whenever you create an AR Invoice following accounting takes place.
Invoice Accounting in AR
Taking a step back and
thinking through, this transaction is happening in AR for the Invoice Creation
event….
Subledger Accounting Setup Model
Now we map the source
(AR Invoices) to Subledger Accounting as shown here. So to conclude
Journal Line Types are nothing but accounting line types (Receivable or Revenue).
Event Classes identify a transaction type (Invoice Vs Credit Memo).
These two are assembled using Accounting Derivation Rules and Sources.
All these together make up Application Accounting Definition for Receivables.
Different Application Accounting Definitions together make up a Subledger Accounting Method.
Journal Line Types are nothing but accounting line types (Receivable or Revenue).
Event Classes identify a transaction type (Invoice Vs Credit Memo).
These two are assembled using Accounting Derivation Rules and Sources.
All these together make up Application Accounting Definition for Receivables.
Different Application Accounting Definitions together make up a Subledger Accounting Method.
