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An Oracle White Paper

May 2014

Encumbrance Accounting in the Procure to PayFlow: Best Practices


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Encumbrance Accounting in the Procure to Pay Flow: Best Practices

Executive Overview ..................................................................................................... 3

Introduction ................................................................................................................. 4

Encumbrance Accounting – Procure-to-Pay Overall Process Flow ............................ 6

Encumbrance Accounting – Procure to Pay with Journal Entries ............................... 7

Creating Budgets .................................................................................................... 7

Purchase Requisitions Approval and Reserve ........................................................ 9

Purchase Order Reservation & Approval .............................................................. 10

Changes to PO: Increase quantity or price through Revision ............................... 11

Changes to PO: Decrease Quantity or Price through Revision............................. 12

Cancellation of Quantities/Lines/Shipments in a Purchase Order ........................ 13

Receipt of Goods/Services .................................................................................... 13

Invoice Matched to PO .......................................................................................... 14

Invoice Payment .................................................................................................... 16

Technical Overview ................................................................................................... 17

Conclusion ................................................................................................................ 18

Appendix: Setup Overview ........................................................................................ 19

Setup in Oracle General Ledger ........................................................................... 19

Setup in Oracle Purchasing, Oracle Payables and Oracle Cost Management ..... 25

Setup in Oracle Inventory ...................................................................................... 26

Appendix: Common Customer Issues and their resolution ....................................... 29

Appendix: Important Tables used by Encumbrance Accounting ............................... 38

Appendix: Reference Documents / Notes related to Encumbrances ........................ 39


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Table of figures:

Figure 1: Setting up Budget for Encumbrance Accounting .................................................... 8 Figure 2: Funds Availability after Budget Creation .................................................................. 8 Figure 3: Budget Position after Commitment ........................................................................... 9 Figure 4: Budget Position after Obligation.............................................................................. 11 Figure 5: Budget Position after PO Amount increase ........................................................... 12

Figure 6: Budget Position after Invoice Matching ................................................................. 16

Figure 7: Encumbrance Accounting Technical Overview .................................................... 17 Figure 8: Enable Budgetary Control ......................................................................................... 19 Figure 9: Sub-ledger Accounting Method................................................................................ 20 Figure 10: Define Budget ........................................................................................................... 21 Figure 11: Define Budget Organization ................................................................................... 21 Figure 12: Account Ranges ........................................................................................................ 22 Figure 13: Budgetary Control Options .................................................................................... 22 Figure 14: Budgetary Control Group ....................................................................................... 23 Figure 15: Profile for Budgetary Control Group .................................................................... 23 Figure 16: Open Encumbrance Year........................................................................................ 24 Figure 17: Define Encumbrance Types ................................................................................... 24 Figure 18: Define Financial Encumbrance Options .............................................................. 25

Figure 19: Enable Encumbrance in Oracle Purchasing and Oracle Payables .................... 26 Figure 20: Costing Information ................................................................................................ 27 Figure 21: Organization Parameters - Other Accounts ......................................................... 27


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Executive Overview

Most organizations understand the need to use budgetary controls in their business processes. Budgetary

controls ensure that unnecessary and maverick spending is minimized or curtailed. Budgetary controls

ensure proper approvals for legitimate expenses and users do not overshoot the budgets specified for

their activities. It is a very useful tool to avoid unnecessary business transactions and expenses.

Encumbrance Accounting in Oracle e-Business Suite integrates the entire budgetary control lifecycle and

enables better control over expenditures incurred in organizations. With Encumbrance Accounting,

organizations can monitor the amount of money they spend, ensure that departments don't exceed their

budgets or are immediately notified if they do. It can also help predict cash flow balances more

effectively.

This paper will help users understand the concept of Encumbrance Accounting and how it can be set up

and used within Oracle e-Business Suite. The main focus of this white paper is to explain the

Encumbrance Accounting process from a Procure to Pay perspective.

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Introduction

Encumbrance Accounting is a widely used business practice for managing expenses and ensures that

departments stay within budgetary expenditure targets. Encumbrance Accounting per se is a much wider

concept than a simple budgetary control. Encumbrance Accounting helps organizations stay within

budgets, so that it is easy for users and organizations to identify and report various business transactions

and how they impact cash flows. This white paper provides an overview of the Encumbrance

Accounting process used in Oracle E-Business Suite.

What is Encumbrance?

Encumbrance is a commitment to pay in the future, although the goods or services have been ordered,

however, they have not been received yet.

For a company, Encumbrance reserves the money for paying for goods or services in the future; the

amount is called Encumbrance. And the amount(s) will subsequently become expenditure when goods

and services are received.

What is Encumbrance Accounting?

Encumbrance Accounting is also known as Commitment Accounting. It deals with accounting for

expenses from the time that the intent to incur that expenditure becomes clear, that is, the commitment

to incur the expenditure becomes certain. Usually, the majority of spend in an organization happens in

the procurement process; when purchase requests are created and approved, there is a greater degree of

certainty about incurring that expense over a certain period. Encumbrance Accounting ensures that this

expense is accounted for, against the sanctioned budget, when the request is approved. This implies thatfunds are set aside in accounting for meeting this expense which is not liable to be paid unless the

requests are received and billed. Encumbrance Accounting also ensures that a reduced budget is

available for other competing purchase requests. When the budget is completely utilized, it is no longer

possible to create fresh purchase requests.

What is Encumbrance Accounting in Oracle e-Business Suite?

Encumbrance Accounting ensures that money or budgets are set aside for meeting anticipated future

expenses. There may be multiple scenarios in the procurement process that use Encumbrance

Accounting: creation of purchase orders with backing purchase requisitions, creation of purchase orders

without a backing requisition, directly accounting for an invoice and paying it, without a backingpurchase order, etc. Encumbrance Accounting in Oracle e-Business Suite ensures that the money is

correctly set aside and appropriately accounted for during the entire procurement lifecycle.

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Oracle Encumbrance Accounting Terms

The following terms are widely used while discussing Encumbrance Accounting, in this whitepaper.

COMMITMENT

Commitment implies the commitment to spend money in the future. In Oracle e-Business Suite, it

denotes reserving and accounting for money committed to be spent on a Purchase Requisition

document. Commitment happens on the approval of a Purchase Request document.

OBLIGATION

Obligation is the obligation on the part of an issuer of a purchase order or a contract to pay an amount

to a vendor, as per the terms and conditions and supply schedules of the purchase order or contract. In

Oracle e-Business Suite, it denotes reserving and accounting for money that will be required to pay for

goods and services contracted through a purchase order / agreement type of document. Obligation

takes place on the approval of a Purchase Order / Agreement.

ENCUMBRANCE ENTRY

An encumbrance entry is a journal entry that is created when you reserve a requisition or a PO or create

an unmatched invoice – the type of encumbrance created is either a Commitment or Obligation.

Encumbrance journal entries are always created using the functional currency (that is, the currency of

the default operating unit).

BUDGET ACCOUNTS

These are accounts against which amounts are specified in a Budget that is created. These budgetary

Accounts can be specified at the summary level or detail level.

FUNDS AVAILABLE:

Funds Available = Budget – (Actual Expenses + Encumbrances)

Funds available are the amount of Funds, available to be encumbered. It is the difference between the

amount you 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. Users can use the

Funds Check feature in purchase requisitions and purchase orders to review the available funds.

Benefits of Encumbrance Accounting

Using Encumbrance Accounting, the following benefits are available:

•

Enforces Control: Encumbrance Accounting works together with budgetary control,monitors spending by departments, avoids overspending and enforces controls.

• Increases Visibility: Encumbrance Accounting enables users to pre-allocate the

budget amount, track expenditure, and increase spends transparency.

• Accelerates Planning Process: Encumbrance Accounting is used to predict cash

outflow and is also used as a planning tool to accelerate the planning process.

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Encumbrance Accounting – Procure-to-Pay Overall Process Flow

Encumbrance Accounting is closely integrated with the entire Procure-to-Pay (P2P) flow. It starts with a

purchase requisition and ends when actual expenditure is booked against an invoice. Encumbrance

Accounting in the Procure-to-Pay process is depicted in the diagram as follows:

Encumbrances flow throughout the procurement process; that is, from the intention to buy goods orservices, to procuring and receiving the goods or services, to the final step of incurring the actual

expenditure and making the payment. The following stages are basic Encumbrance Accounting activity

in the procure-to-pay process:

• Creating and Approving a Purchase Requisition (Commitment Stage)

• Creating and Approving a Purchase Order (Obligation Stage)

• Creating and Approving Receipts / Invoices (Actual Stage)

This is business major processes for company buying goods or services. Along with that, Encumbrances

liquidate from one stage to the next.

An example for this business flow is as follows:

Business Transaction Budget

Remaining

Commitment Obligation Actual

Budget Allocated for Expenditure -

$10000

10000 - - -

Purchase Requisition (PR) created for $

2000

10000 - - -

PR Approved 8000 2000 - -

PR Auto-created to Purchase Order (PO) 8000 2000 - -

Purchase Order Value changed from$2000 to $ 2500

8000 2000 - -

Purchase Order Approved 7500 (2000) - 2500 -

Invoiced received and matched against

PO for $ 1000

7500 - (1000)

1500

1000

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Initially, assume that a budget amount of $10000 is allocated for certain expenditure. Notice that when a

Purchase Requisition is created, there is no impact on Encumbrance. The commitment is recorded when

the Purchase Requisition is approved. If there are multiple approvers, it gets recorded at the time of the

final approval for the document. Once the commitment is created, it is not liquidated until the

Obligation is recorded.

Obligations are recorded when a Purchase Order is approved. Again, if there are multiple approvers, the

obligation is recorded at the time of the final approval for the PO. The obligation is always created for

the PO amount, irrespective of the backing commitments. While recording the obligation, any backing

commitments created through the backing PRs are liquidated. When receipts are created or invoice is

matched against a PO, the obligation is liquidated and the actual expenditure is recorded.

Encumbrance Accounting – Procure to Pay with Journal Entries

In the following section, we will focus on the following flows:

• Creation of Budgets

• Purchase Requisition Approval & Reserve

• Purchase Order Approval & Reserve

• PO Changes: Increase or Decrease of Qty

• PO Changes: Cancellation of Quantities/Lines/Shipments

• Receipt of Goods/Services

• Invoice Matched to PO

• Payment to PO Vendor.

Creating Budgets

Encumbrance Accounting always works together with budgetary control. At the beginning of a fiscal

year, enterprises estimate how much they are going to spend in the future, based on business plans for

the forthcoming year. The planned expenditures under various heads is estimated and used to create

budgets. Enterprises can use this budget amount to compare it to actual expenditure at any time in order

to track and monitor actual spending.

In Oracle e-Business Suite, users can create budgets using the following steps:

1. Login and select an appropriate General Ledger responsibility.

2. Navigate to General Ledger > Budget > Enter > Journals

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Figure 1: Setting up Budget for Encumbrance Accounting

3. Enter a budget amount for specific accounts for each period.

Figure 2: Funds Availability after Budget CreationNavigating to the Funds Availability Inquiry window, the budgets would now reflect as created. In this

example, the Budget was created for $20,000.

The next section describes how these budgets will be used and encumbrances created or liquidated in

various scenarios.

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Purchase Requisitions Approval and Reserve

The following example outlines Encumbrance Accounting for recording commitments. The user intends

to buy some office stationery this month. The estimated amount is approximately $ 3,000.

Steps:

User creates a Purchase Requisition (PR) for $3,000. User ensures that the correct distribution account is

selected for the PR line.

• The user performs the Funds Check action to ensure that sufficient funds are available

for reserving the money required for this purchase, against the Budget.

• The user submits the document for approval and the approver approves the

document. The following are the accounting details:

Event Type Requisition Reserve

Encumbrance Type CommitmentBalance Type Encumbrance

Journal Entry Date Encumbrance Date as provided in the PR distribution

DEBIT Budget Account from PR Distribution $3,000

CREDIT Reserve for Encumbrance (Commitment) $3,000

Note: If there are multiple PR distributions for the PR line, each distribution is debited separately with

corresponding credit on the Encumbrance Date specified in the respective PR distributions.

The remaining budgetary funds are as follows:

Figure 3: Budget Position after Commitment

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Purchase Order Reservation & Approval

After the Requisition is approved, the user can place the Purchase Requisition details in a Purchase

Order (PO) document.

Steps:

• The user uses Autocreate process to create the Purchase Order document from the

Purchase Requisition.

• The user submits the PO document for approval and the Approver approves the


Event Type Requisition Un-Reserve

Encumbrance Type Commitment

Balance Type Encumbrance

Journal Entry Date Encumbrance Date as provided in the PO distribution

DEBIT Reserve for Encumbrance (Commitment) $3,000

CREDIT Budget Account from PR Distribution $3,000

Event Type Purchase Order Reserve

Encumbrance Type Obligation



DEBIT Budget Account from PO Distribution $3,000

CREDIT Reserve for Encumbrance – (Obligation) $3,000

Note: If the user creates the PO manually without the referenced PR, it can lead to the

duplication of reservation of funds for the same transaction. Further, if the PO line distribution

amount changes from $3,000 to $3,500, the commitment un-reserve will take place for $3,000

(backing PR distribution amount) and PO reserve will happen for $3500.

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The budgetary funds remaining will now reflect as:

Figure 4: Budget Position after Obligation

Changes to PO: Increase quantity or price through Revision

After the PO is approved, it is likely that the PO quantities / prices / amounts may be changed. A PO

revision is created in such situations in order to update these changes in the PO. The following example

explains the process of increased PO line amount. This action would also have a bearing on

Encumbrance Accounting:

Steps:

• The user updates the PO and creates a new revision to change the line / shipment’s

quantity, price, amount etc. In this example, the user changes the quantity / price toreflect in an increased amount of $500.

• The user submits the PO revision for approval and the approver approves the


Event Type Purchase Order Reserve




of the PO Revision

DEBIT Budget Account from PO Distribution $500

CREDIT Reserve for Encumbrance – (Obligation) $500

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The Budgetary funds remaining will now reflect as follows:

Figure 5: Budget Position after PO Amount increase

Changes to PO: Decrease Quantity or Price through Revision

This example explains the process of decreasing PO line amount. Again, this action would have a

bearing on Encumbrance Accounting:

Steps:

• The user updates the PO and creates a new revision to change the line / shipment’s

quantity, price, amount etc. In this example, the user changes the quantity / price to

reflect in a decreased amount of $500.

• The user submits the PO revision for approval and the approver approves thedocument. The following are the accounting details:

Event Type Purchase Order Un-Reserve




of the PO Revision

DEBIT Reserve for Encumbrance (Obligation) $500

CREDIT Budget Account from PO Distribution $500

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Cancellation of Quantities/Lines/Shipments in a Purchase Order

It is possible that line/shipment quantities can be cancelled in a Purchase Order for various reasons.

These cancel actions also has an impact on Encumbrance Accounting:

Steps:

• The user selects the approved PO and cancels a line or shipment, using the Cancel action. In

the original example, assuming that the PO is cancelled for $1,800, the following will be the

accounting entries:

Event Type Purchase Order Un-Reserve




of the PO Revision for Cancellation

DEBIT Reserve for Encumbrance (Obligation) $1,800

CREDIT Budget Account from PO Distribution $1,800

Receipt of Goods/Services

When goods or services in a Purchase Order line are received, and if the Accrue on Receipt flag is set to

“YES”, there will be Encumbrance liquidations on Accounting for the receipt, leading to liquidation of

Encumbrances. Since the accounting takes place at the time of receipt, the encumbrances are liquidated

and the actual amounts are booked. The following outlines the Accounting impact:

Steps:

• The user creates a receipt for $3,000, which is the full value of goods received against the PO.

• A Receive transaction is created when the receipt is saved. The accounting entry is:

Event Type Receipt into Receiving Inspection

Encumbrance Type

Balance Type Actual

Journal Entry Date Receipt Date

DEBIT Receiving Inspection A/c $3,000

CREDIT AP Accrual (Liability) A/c $3,000

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When goods are delivered to the respective location, the following entries are created:

Event Type Delivery to Expense Location

Encumbrance Type

Balance Type Actual

Journal Entry Date Date of Delivery

DEBIT Charge Account from PO Distribution $3,000

CREDIT Receiving Inspection A/c $3,000

Event Type Delivery to Expense Location

Encumbrance Type Obligation Reversal


Journal Entry Date Date of Delivery


CREDIT Budget Account from PO Distribution $3,000

Note: When there are period end accruals, the journal entries are quite similar to the flow described

earlier, with minor variations. The Actual and Encumbrance entries are reversed in the next period until

accounting occurs with Invoice Accounting.

Note: For all the encumbrance journals created through the sub-ledger, the Reserve for Encumbrance line

will not be there before posting. General Ledger (GL) automatically creates the balancing amount to theReserve for Encumbrance account during posting. GL does the same with unbalancing manually entered

encumbrance journals.

Invoice Matched to PO

Invoices are received from Suppliers against PO lines for payment. For Inventory and Expense Item,

If the Accrue on Receipt flag is set to “YES”, The following are the accounting entries in such a

scenario:

Steps:

•

The user receives the invoice from the vendor for $3,000 and enters the invoice details inOracle Accounts Payables. A draft Invoice is created.

• The user matches the Invoice with the PO Shipment.

• The user does Invoice Accounting for the Invoice. The following are the accounting entries

that are generated:

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Event Type Invoice Match to PO

Encumbrance Type

Balance Type Actual Journal Entry Date GL Date specified on the Invoice Distribution

DEBIT AP Accrual (Liability) A/c $3,000

CREDIT Supplier Liability (Payables) A/c $3,000

For Expense Item, if user set “Accrual at Period-End”, then Invoice accounting has an impact on

Encumbrances and reversals. The following are the accounting entries in such a scenario:

• The user receives the invoice from the vendor for $3,000 and enters the invoice details in

Oracle Accounts Payables. A draft Invoice is created.

• The user matches the Invoice with the PO Shipment.

• The user does Invoice Accounting for the Invoice. The following are the accounting entries

that are generated:


Encumbrance Type

Balance Type Actual

Journal Entry Date GL Date specified on the Invoice Distribution

DEBIT AP Accrual (Liability) A/c $3,000

CREDIT Supplier Liability (Payables) A/c $3,000

• The user Run “Transfer Journal Entries to GL” Program in Oracle Payables. This action

generated the following journal entries:


Encumbrance Type Obligation Reversal


Journal Entry Date GL Date specified on the Invoice Distribution


CREDIT Budget Account from PO $3,000

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The remaining budgetary funds now reflect as below:

Figure 6: Budget Position after Invoice Matching

Invoice Payment

When the user makes a payment against an Invoice, the following accounting entry will be generated:

Event Type Invoice Payment

Encumbrance Type

Balance Type Actual

Journal Entry Date Payment Date

DEBIT Supplier Liability (Payables) A/c $3,000

CREDIT Cash Clearing/Cash/Bank A/c $3,000

Note: There are no Encumbrance journal entries during Payment, because the actual

expenditure is already accounted for, and the payment activity is used to liquidate theoutstanding liability against the vendor.

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Technical Overview

From a technical perspective, Encumbrance journal entries flow from Oracle Purchasing toOracle Sub-Ledger Accounting tables and then to the Oracle General Ledger tables.

The following flow chart explains the technical flow:

Figure 7: Encumbrance Accounting Technical Overview

1. When Reserving and Approving the PO, Encumbrance entries get generated in

GL_BC_PACKETS and the table PO_BC_DISTRIBUTIONS.

2. Receiving generates Encumbrance Entries that are processed in the GL_INTERFACE table.

When a PO has the Accrue on Receipt flag set to Y, the Receiving Transaction Processor

generates the accounting entries in RCV_RECEIVING_SUB_LEDGER upon Receipt and

Deliver of the PO.

3. Run the “Create Accounting-Receiving concurrent program to create journals that will insert

records in XLA_AE_HEADERS and XLA_AE_LINES. Meanwhile, this program will

generate another program called Create Accounting that will create the entries in

GL_INTERFACE.

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Conclusion

This paper provides an explanation of the complete Encumbrance Accounting process as it works in the

Procure-to-Pay flow. It separates the actual and budget amounts, and acts as a medium to control the

organization’s spending effectively. Encumbrance Accounting also ensures that the actual spend is

maintained within the allocated budget.

To conclude, Encumbrance Accounting in Oracle e-Business Suite:

• Improves the Period Close Processing by automatic encumbrance journal entries

• Increases the predictability of company’s performance by restraining actual spend within budget

• Gains better visibility into company’s worldwide operations by tracking every expenditure

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Appendix: Setup Overview

The Encumbrance Accounting function is based on effective and seamless integration between various

Oracle e-Business Suite modules such as Oracle General Ledger, Oracle Accounts Payables, Oracle Cost

Management, Oracle Purchasing and Oracle Inventory.

The steps for setting up and using Encumbrance Accounting consist of the following:

• Setup in Oracle General Ledger

• Setup in Oracle Purchasing and Payables

• Setup in Oracle Inventory

Setup in Oracle General Ledger

The following are the Encumbrance Accounting related setup steps to be carried out in Oracle General

Ledger.

Enable Budgetary Control

Encumbrance Accounting works together with Budgetary Control. The Budgetary Control flag needs to

be enabled in Oracle General Ledger. The system automatically creates encumbrances from requisitions,

purchase orders and other transactions as Purchasing and Payables. If the Budgetary Control flag is not

enabled, the encumbrance entries have to be entered manually in Oracle General Ledger, and the

Requisition, Purchase Order and Payables will not generate encumbrance related accounting entries.

The steps for enabling the Budgetary Control flag are as follows:

1. Log into Oracle e-Business Suite with an appropriate General Ledger responsibility.

2. Navigate to General Ledger > Setup > Financials > Accounting Setup Manager (ASM)

> Accounting Setups> Update Accounting Options > Advanced Options

Figure 8: Enable Budgetary Control

3. Select the check box Enable Budgetary Control. This will enable funds checking within

Oracle General Ledger, Oracle Payables, and Oracle Purchasing modules, and will

automatically create encumbrance entries from Oracle Purchasing and Oracle Payables.

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4. Assign an account for the Reserve for Encumbrance Account. Oracle General Ledger

automatically posts offset amounts to this account when encumbrance transactions are

posted.

5. Perform the same setup step for the secondary ledger if encumbrance needs to be used forsecondary ledger.

The following points are to be noted related to the Sub-Ledger Accounting Method:

• If encumbrance needs to be enabled, then the Sub-Ledger Accounting Method has to be set to

Encumbrance Accrual in case of Accrual basis accounting method or Encumbrance Cash

in case of cash basis accounting method for the ledger.

• If Encumbrance is not used, then the Sub-ledger Accounting Method has to be set as

Standard Accrual or Standard Cash for the ledger.

Figure 9: Sub-ledger Accounting Method

Define Budget

After enabling budgetary control for a ledger, the next step is to define a budget, to enter estimated

account balances for a specified range of periods. Use these estimated amounts to compare actual

balances, or to control actual and anticipated expenditures.

1. Log into Oracle E-Business Suite with an appropriate General Ledger responsibility.

2. Navigate to General Ledger > Budgets > Define > Budget

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Figure 10: Define Budget

3. Enter a budget name and description for a ledger, select the accounting period that will

collect estimated amounts for this budget.

Define Budget Organization After creating a budget, the next step is to define which organization and which account is to be used

for budgetary control. Budgetary Account Range and Organization are defined in Budget Organization

window:

1. Log into Oracle E-Business Suite with an appropriate General Ledger responsibility.

2. Navigate to General Ledger > Budget > Define > Organization

Figure 11: Define Budget Organization

3. Enter a Name and Description for the Budget Organization. Budget Organization is the

budget entity, to which the budgets are estimated.

4. Assign accounts for which the budgetary control is required for the given budget

organization.

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Figure 12: Account Ranges

5. Set the appropriate Funds Check level for each Account Range. For the Funding Budget

field, select the budget which was defined on Define Budget to link the account range withthe budget.

Figure 13: Budgetary Control Options

Define Budgetary Control Groups

The next step is to define the budgetary control rules in Budgetary Control Group Window.

1. Log into Oracle e-Business Suite with an appropriate General Ledger responsibility.

2. Navigate to General Ledger > Budgets > Define > Controls.

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Figure 14: Budgetary Control Group

3. Enter a name for the budgetary control group. Select journal sources, categories, funds check

level, and related details. If Tolerance is set as Advisory, then the budgetary control will allow

overriding of the spend amount, even if it’s more than the budget amount. Assign Budgetary Control Groups

Users can also create multiple budgetary control groups for different budgetary control tolerances and

override insufficient funds. Every usage could have one default budgetary control group. The default

group is linked to a user in the System Profile window.

1. Log into Oracle E-Business Suite with the System Administrator responsibility.

2. Navigate to System Administrator >Profile > System.

Figure 15: Profile for Budgetary Control Group

3. Select Default Budgetary Control Group value for User.

Open Encumbrance Year

After enabling budgetary control for a Ledger, Encumbrance Accounting Period needs to be opened for

entering and posting encumbrance journal entries. Initial encumbrance year is opened automatically

when the first period of ledger is opened.

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The steps are similar to the steps to set up the Actual Accounting Period:

1. Log in to Oracle General Ledger with an appropriate General Ledger responsibility.

2. Navigate to General Ledger > Setup > Open/Close

Figure 16: Open Encumbrance Year

3. Click the Open Next Year button, and the next year will be opened. When you open an

encumbrance year, the user will always be able to enter and post encumbrance journals to any

period up to the latest open encumbrance year.

Define Encumbrance Types

The next step is to define Encumbrance Types. Encumbrance Types segregate funds reservation levels

for Purchase Requisitions, Purchase Orders, and Invoices. Users can classify and track expenditures

according to the reservation levels and can define as many additional encumbrance types as needed.

The setup steps are:

1. Login to Oracle General Ledger with an appropriate General Ledger responsibility.

2. Navigate to General Ledger > Setup > Journals > Encumbrances.

Figure 17: Define Encumbrance Types

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3. Enter the Encumbrance Types as needed.

In Oracle General Ledger, The seeded encumbrance types are:

• Commitment: An encumbrance for a purchase requisition.

• Obligation: An encumbrance for a purchase order.

Note: By default, Requisition encumbrance is Commitment, PO encumbrance is Obligation and invoice

encumbrance is Invoice. If any of these three encumbrance types are not enabled in GL > Setup >

Journal > Encumbrance, then the transaction document (PR/PO/Invoice) will display a budgetary

control exception and will fail funds check.

Setup in Oracle Purchasing, Oracle Payables and Oracle Cost Management

After setting up Encumbrance Accounting in Oracle General Ledger, you need to set up integrated

modules such as Oracle Purchasing, Oracle Payables and Oracle Cost Management to let the system

generate different encumbrance journal entries for different transactions.Define Financials Encumbrance Options

After defining Encumbrance Types, users need to enable Encumbrances for PR / PO / Invoices using

the Financial Options window:

1. Log in to Oracle Payables or Oracle Purchasing with an appropriate Payables/Purchasing

responsibility.

2. Navigate to Setup > Options > Financial Options> Encumbrance tab.

Figure 18: Define Financial Encumbrance Options

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3. Select the operating unit, in the Encumbrance tab - enable Use PO Encumbrance to enable

encumbrances for POs and Supplier invoices. Optionally enable Use Requisition Encumbrance

to encumber requisitions as well.

Enable Encumbrance in Oracle Purchasing, Oracle Payables and Oracle Cost Management

Users need to associate Encumbrance Type to Journal Line Types. This step is done while defining Sub-

Ledger Accounting Method:

1. Log into Oracle Cost Management/Oracle Purchasing/Oracle Payables with an appropriate

Super User responsibility.

2. Navigate to Cost Management/Purchasing/Payables>Set up > SLA > Accounting Methods

Builder > Methods and Definition > Sub-Ledger Accounting Methods

Figure 19: Enable Encumbrance in Oracle Purchasing and Oracle Payables

3. For Oracle Purchasing, the seeded method is Purchasing Encumbrance Application

Accounting Definition. For Payables, it is Encumbrance Accrual or Encumbrance Cash

depending on the accounting method. Alternatively, users can define their own application

accounting definitions.

Setup in Oracle Inventory

Oracle Inventory and Oracle Purchasing provide a visible control of accrued liabilities for inventory

items. Oracle Purchasing automatically records the accrued liability for inventory items at the time of

receipt. The inventory expense is recorded at the time of delivery. In the Inventory OrganizationParameter window, users can determine whether encumbrance reversals are needed.

Enabling the 'Reverse Encumbrance' check box

1. Log into Oracle Inventory with an appropriate super user responsibility.

2. Navigation: Inventory > Setup > Organization > Parameters > Costing tab

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3. Select “Reverse Encumbrance” for reversal of encumbrances created in Oracle Purchasing.

Figure 20: Costing Information

Define the Encumbrance Account

For Inventory Destination bound purchased items, users also need to specify the Encumbrance Account

in the Organization Parameter window. The steps are as follows:

1. Login to Oracle Inventory with an appropriate super user responsibility.

2. Navigate to Inventory > Setup > Organization > Parameters > Other Accounts

Figure 21: Organization Parameters - Other Accounts

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3. Enter an account for Encumbrance. Requisitions and purchase orders for inventory purchases

will create commitments/obligations against the encumbrance account.

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Appendix: Common Customer Issues and their resolution

Oracle Encumbrance Accounting integrates seamlessly with Oracle Purchasing, Oracle Payables and

Oracle General Ledger. This section provides details of common issues frequently identified around

Encumbrance and Accrual Accounting and how they can be resolved.

Issue: Negative Encumbrance Occurs In Funds Inquiry Screen (Doc ID 949876.1)

Reproduction steps:

1. Login to Oracle Purchasing, create a PO and reserve this PO.

2. Login to Oracle General Ledger, Navigation: General Ledger > Journal > Inquiry > Funds.

The Encumbrance Amount is Negative.

Cause:

In Release 12 (R12), reversal of encumbrances happens automatically when the Create Accountingprocess is done with the end date as first date of the next period. Users need not perform the reversal of

encumbrance reversal as a separate process. However, reversal of encumbrances is needed for Periodic

Average Costing (PAC) usage, because PAC is not using Oracle Sub-Ledger Accounting. Hence in R12

with PAC, the encumbrance reversal entries should be reversed explicitly.

Resolution:

1. Identify whether missing reversal of encumbrance is the cause for negative encumbrance: Run

the script given below which will confirm that the reversal for the encumbrance reversal has not

been carried out in case of period end accruals.

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2. Get total amount against each account for the current year or quarter or period using this script.

3. Enter a manual encumbrance debit entry for the total amount. This should resolve the negative

encumbrance caused because of this issue.

Issue: Encumbrance Not Getting Converted To Actual for Purchase Orders (Doc ID

728064.1)

Steps to reproduce:

1. Log into Oracle Purchasing, Create a new PO, and set the PO for Accrue at Receipt and for

Inventory Destination. Approve & Reserve this PO.

2. Create a Receipt against this PO after receiving the ordered items.

3. Run Transfer to GL program to transfer journal entries to General Ledger

4. Log into Oracle General Ledger, Navigate to: General Ledger > Journal > Inquiry > Funds

You can notice that the Encumbrance Amount did not get converted to actual amount.

Cause:

1. The option Reverse Encumbrance is not enabled in Inventory > Set up > Organization >

Parameters > Costing tab, therefore encumbrance will not get reversed on performing the

receipt and delivery of PO to Inventory destination. The actual amount will get accounted on

the other side but the encumbrance does not get converted to actual amount.

2. If the budget account used in the PO and the Sub-inventory's Material Account / Expense

Account are not the same, the encumbrance reversal will happen for the budget account against

which the funds got reserved, however, actuals will not get accounted to the same budget

account. Instead Actuals will get accounted to the Sub-inventory's account. This will result inincorrect funds availability because the encumbrance does not get converted to Actuals.

Resolution:

For inventory destination POs:

1. When the deliver transaction is complete, verify Inventory > Transactions > Material

Transactions > Distributions to confirm the transaction is correctly considered for costing and

is accounted.

2. Submit the Create Accounting-Cost Management program immediately. Set the parameters

Transfer to GL as Yes and Post to GL as Yes.

3. Ensure that the Reverse Encumbrance flag is enabled in Inventory > Set up > Organization >Parameters > Costing tab.

4. Ensure that the encumbrance account against which the funds get reserved is same as the

Actual account that gets accounted on performing the PO receipt and delivery.

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5. For inventory asset items that use Average costing, Encumbrance Account and Material

Account defined in Inventory Organization parameters should be same.

6. For inventory asset items that use Standard Costing, Encumbrance Account and Material

Account defined for the sub-inventory should be same.

7. For Inventory expense items that use Standard Costing or Average Costing, Encumbrance

account defined for the item should be same as the expense account defined for the sub-

inventory.

Summary of other common issues and recommended patches to resolve the issues:

Issues related to Encumbrance Journal:

Issue(s) Cause Patch to be applied to resolve

the issue

Encumbrance accounting

during over receipt return

creates negative balance

This is due to the wrong sign of variable

1_source_doc_quantity in PROCEDURE

Get_Quantity() in RCVVRUTB.pls.

Patch.10209325:R12.BOM.C

Reserve for encumbrance in

SLA- incorrect for PO when

some lines have no funds

Prior to this patch, the code had wrongly passed

Funds Check and set that BC event as 'Processed' ,

when one or more distribution failed Funds Check,

resulting in unbalanced GL entries getting created.

Patch.9100984:R12.PSA.A for

R12 &

Patch.9100984:R12.PSA.B

Wrong SLA status returned

to AP

If there were multiple lines passed to XLA and not

all of them fail with XLA_NO_JOURNAL error,

PSA passes the wrong status to AP


R12 &

Patch.9037877:R12.PSA.B for12.1

When an inventory item in

an encumbrance instance is

returned, accounting is

wrong

The journal for inventory encumbrance reversal

was missing the join to the accounting line type 15

causing number of records to return as many

accounting line types as there are in Inventory sub-

ledger 'mtl_transaction_accounts'

Patch.8914459:R12.BOM.A

Encumbrance accounting

event processed with the

actual journals

Unprocessed Budgetary events were processed

along with the Non-Budgetary events , resulting in

incorrect accounting in Costing during the Create

Accounting process

Patch.8423174:R12.XLA.A for

R12 &

Patch.8423174:R12.XLA.B for

12.1

Receipt accrual -period end

program missing billed amt

Code limitation in file CSTVRAPB.pls Patch.7661294:R12.BOM.A for

R12 &


PSA API returns incorrect Reversal Encumbrance amount calculation on PO Patch.7592825:R12.PSA.A for

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the issue

PO reverse encumbrance

amount

did not consider the exchange rate due to code

limitation

R12 &

Patch.8940136:R12.PSA.B for

12.1

PO reversed encumbered

amount calculation needs

to be fixed.

Code limitation in file psavapbb.pls Patch.7229803:R12.PSA.A

CST: Internal order to

expense not relieving the

encumbrance entry

Code limitation in file cstxlaaad.ldt Patch.6624738:R12.BOM.A

On receipt corrections the

budgetary entries to generalledger incorrect.

The actual line’s “Correct” transaction did not

populate the TC code

Patch.8904447

Internal requisition

encumbrance cancel

reversal batch

Encumbrance reversal accounting entries were not

being generated by the Periodic distribution

processor since total received quantity was counted

for all receipts like perpetual costing method rather

than computing total received quantity just before

the current receipt transaction as PAC is used

Patch.7031719

Encumbrance incorrect

after corrections made to

receipts

Code limitation in file RCVVRUTB.pls Patch.6683404

Inventory generates

incorrect Encumbrance

reversal. PR Encumbrance

is set to off in financials

Code was using purch_encumbrance_flag instead

of req_encumbrance_flag while checking for

encumbrance reversal

Patch.7127049

Journal import errors with

ecw1 ec10 for POs created

in foreign currency

Code limitation in file RCVVACCB.pls Patch.4153676

Completely relieve active

encumbrance during finally

close

Patch. 15987200:R2.PO.B

Approval Checkout of

requisition does not

encumber all the

distributions

Patch.7529281:R12.ICX.B

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the issue

Edit the Document without

Unreserve ER

Patch.15843459:R12.PRC_PF.B

Invalid Business Flow Prior

events error (BFLOW)

Patch. 6681444:R12.PO.B

When attempting to cancel

a PO with backing

req, without cancelling the

req, error was occurring

Patch. 16781315:R12.PO.B

View results does not show

any budgetary control

errors

Patch.12824154:R12.PO.B

Funds check error for a

foreign currency PO

Patch. 4229705:R12.PO.B

Issues related to Global Procurement Accounting

Issues Cause Patch Number

Receive transaction of

global procurement get

wrong currency rate

Code limitation in the following files:

CSTPACQS.pls

CSTPACQB.pls & CSTAPRB.pls

Patch.8684475:R12.BOM.A for

R12 and

Patch.8684475:R12.BOM.C for

12.1 (Controlled release)

Issues related to Budgetary Control Exceptions and Incorrect Funds Check Behavior


Not able to re-reserve an

adjust federal planned PO

Code limitation in file POXENC2B.pls Patch.10329412:R12.PO.B

BC API should work in

background mode for

concurrent requests

This issue occurred because of locking system in

PSA code, before the approval application tries to

reserve the document. At the time of reserve,

gl_bc_dual table gets locked in exclusive

NOWAIT mode. Because of this reason, if

processes for multiple documents tried to access

the table at the same time only one of them gets

the lock and rest returned with an exception


R12 &


12.1

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The funds verification fails

even when funds are

available.

Special S rows are not inserted in

gl_bc_period_map table

for non federal customers resulting in inaccurate

calculation in file glbcma.lpc


R12 (Controlled release) &


12.1

RCA multiple entities SCM-

Purchasing 3-1081270271

Multiple entities are created for PO having many

distributions when funds check is done

distribution by distribution in some scenarios

Patch.9235968:R12.XLA.A for

R12 &

Patch.9235968:R12.XLA.B for

12.1 (Controlled release)

PSA rollup patch for critical

bug fixes and

enhancements

Consolidated fix for bugs related to PSA Patch.9100984:R12.PSA.A for

R12 &


12.1

Buyers unable to cancel

approved requisition lines

in iProcurement

Code limitation in file POXENC2B.pls Patch.7138036:R12.PO.A

Issue with fund check and

budgetary control during

PO funds reserve

For applications where AAD is not defined for

secondary ledger, it implies that product teams do

not want to account for secondary ledger during

funds reserve/check. However, SLA was stamping

the budgetary event in error status because

secondary ledger processing was not successful

Patch.6414911:R12.XLA.A

R12 invoice getting cantfunds check hold, cannot

find why

psa_funds_checker_pkg was invalid. The columnGL_ROW_NUMBER existed in table

GL_BC_PACKETS instead of gms_bc_packets

Patch.6196198:R12.PSA.A

Check funds not working in

language

In routine get_sla_notupgraded_flag the following

statement was used:

to_date(Fnd_Profile.Value_Wnps

('PSA_R12_UPGRADE_DATE'), 'DD-MON-

RRRR HH24:MI:SS'); MON is normally 3 bytes

for English. However it converted into > 3 bytes

for some languages which causes this plsql code to

fall over


POAPPRV fails with

attribute

advisory_warning_check

does not exist

Procedure SetItemAttrText() in

PO_REQAPPROVAL_ACTION.get_advisory_w

arning() was being called in case of a PO due to

code limitation in file POXWPA4B.pls

Patch.7109979

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This account doesn't

require funds check

Code limitation in file psafbcfb.pls Patch.5107441

PO is stuck in pre approved

state. issue with reserve

document

Code limitation in file gmsglfcb.pls Patch.6761361

Reserve action fails for

scheduled release for

planned PO having a

backing requisition

Code limitation in file POXENC2B.pls Patch.4455643

PO stuck pre-approved- no

funds available when using

USSGL/t-codes

Code limitation in file POXENC2B.pls Patch.4455643

PO stuck in pre-approved

approval status

Due to incorrect setup for ITG ( iProcurement

Connector) , exceptions were being raised in the

ITG code, which were being propagated to the PO

transaction causing the trigger to fire. Thus the PO

transaction was being rolled-back/errored out.

Patch.4895526

Better error message about

status of funds

Result code P29, P31, P35, P36, P37, P38 was

used for advisory and they were improper. In

Purchasing these were treated as Success.

Patch 6125623

Successive return of a

requisition line after one

line has already been

returned, failed if

encumbrance was enabled

Code limitation issue. Patch 5467527

Po_msg_null_message

when purchasing period

closed

Incorrect code that was part of get_period_info to

set the send_to_gl_flag to 'N' for all rows that

failed GL period checks.

Patch.7218243:R12.PRC_PF.A

Reserve action fails for

scheduled release for

planned PO having a

backing req.

PR distribution id was populated onto the

scheduled release distribution which was not

required.

Patch.4455643

Po stuck pre-approved - no

funds available when using

USSGL /t-codes

Code limitation issue. Patch.4285929

35

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Issues Related To R12 Create Accounting Process


Landed cost adjustment

account was not created

after run landed cost

adjustment

Code limitation in files cstxlaaad.ldt and

cstxlaemseed.ldt


Accounting program

(xlaaccup) completes in

error

When the source used in the create accounting program

is higher than 240 characters, the accounting program

errors out with the ORA-06502: PL/SQL: numeric or

value error: characters which is a limitation of XLA

accounting program


Costing single event

approach for expensedestination PO

Design issue between CST,PSA,XLA for encumbrance

accounting flow or Expense Destination POs accrued atreceipt and accrued at period end


for R12 &Patch.9600743:R12.BOM.C

for 12.1.1 and 12.1.2

Getting rvtth-

448:subroutine user-defined

exception error while

receiving expense

The view PSA_CST_XLA_UPG_V was not handling

Blanket Purchase Order Release properly. The Entity

code for Blanket Purchase Order Release is different


for R12 &

Patch.9711342:R12.PSA.B

for 12.1

Cannot add an existing

source to an existing event

class

The application_type_code in xla_subledgers for the

application 707 was incorrectly seeded


for R12 &


for 12.1

CST XLA seed data

incorrectly loaded causing

invalid AADS

Code limitation in file cstxlaemseed.ldt Patch.8872296:R12.BOM.C

XLAACCUP

xla_ae_header_pkg.setlinea

cctattrs errors

For the Event Retroactive Price Adjustment to Delivery

has the accounting attribute currency rate type attached

to source currency conversion rate so if the rate is more

than the varchar2 limit of rate type the create

accounting program fails


for R12 &


for 12.1

RCA: r12:create accounting

process does not drop

queue table

When there no events to be processed then in Create

Accounting program "accounting_program_batch"

procedure raises an exception "normal_termination"

where the queues are not being cleaned up


for R12 &

Patch.8284764:R12.XLA.B

for 12.1

Average costing: Sub-

Ledger journal entry does

Code limitation in files CSTACDPB.pls Patch.8243112:R12.BOM.A

36

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not balance in the entered

currency

Creating receipts for

upgraded PO's get rvtth-

448 error

This issue started due to the recent SLA enhancement

7193986.Because of this enhancement it is required to

clean XLA GTs between multiple calls to XLA API. As

PSA is cleaning only few XLA GTs, this issue was

raised


Unable to view create

accounting xml output.

The reference of P_LEDGER_NAME in the template

XLAACCPB00.rtf is not efficient


for R12 &

Patch.8295104:R12.XLA.B

for 12.1

Create accounting createsone-sided entries for logical

intercompany transactions

The logical sales issue to expense destination accountingentry is missing in Cost setup


R12:accounting program

ended with GLIBC

detected double free or

corruption

The cause of this issue was database core dump. It was

determined by the following error seen in the raw trace

of the Accounting Program concurrent program:

[...]

Exception signal: 11 (SIGSEGV), code: 1 (Address not

mapped to object), addr: 0x0, PC: [0x1871af5,

expCheckExprEquiv()+5015]

*** 2008-06-20 23:31:09.278

ksedmp: internal or fatal error

ORA-07445: exception encountered: core dump

[expCheckExprEquiv()+5015] [SIGSEGV] [Address

not mapped to object] [0x000000000] [] []

Current SQL statement for this session:

INSERT INTO XLA_DIAG_SOURCES (

EVENT_ID , LEDGER_ID , SLA_LEDGER_ID ,

DESCRIPTION_LANGUAGE , OBJECT_NAME ,

OBJECT_TYPE_CODE , LINE_NUMBER , [...]

Patch.5889331 - This is a

DB patch applicable for

RDBMS version 10.2.0.3

Xlaaccup: ora-00001: unique

constraint(xla.xla_ae_lines_gt_u1)

violated

This issue can be resolved by adding event_id to index

xla_Ae_lines_gt_u1


for R12 &Patch.6997731:R12.XLA.B

for R12.1 (controlled

release)

R12 : SLA consolidated Consolidated fix Patch.6826219:R12.XLA.A

37

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critical fixes on Feb 19, 2008

Getting error while savingreceipt of expense PO’s

The view PSA_CST_XLA_UPG_V was checkingreceiving inventory org instead of PO operating unit


Appendix: Important Tables used by Encumbrance Accounting

The following tables are used for the encumbrance transactions.

Requisitions:

PO_REQUISITION_DISTRIBUTIONS.encumbered_flag

PO_REQUISITION_DISTRIBUTIONS.encumbered_amount

Purchase Orders:

PO_DISTRIBUTIONS.encumbered_flag

PO_DISTRIBUTIONS.encumbered_amount

Po_bc_distributions

SLA :

XLA_EVENTS

XLA_AE_LINES

XLA_AE_HEADERS

XLA_DISTRIBUTIONS_LINK,

XLA_TRANSACTION_ENTITIES

General Ledger:

GL_BC_PACKETS

GL_BC_PACKET_ARRIVAL_ORDER:

GLBV_ENCUMBRANCE_BALANCES

GLBV_ENCUMB_JOURNAL_BATCHES

GLBV_ENCUMB_JOURNAL_ENTRIES

GLBV_GL_ENCUMBRANCE_TYPES

GLFV_ENCUMBRANCE_BALANCES

GLFV_ENCUMB_JOURNAL_BATCHES

GLFV_ENCUMB_JOURNAL_ENTRIES

GLFV_GL_ENCUMBRANCE_TYPES

GL_ENCUMBRANCE_TYPES

GL_ENCUMBRANCE_TYPES_CURRENT_V

GL_ENCUMBRANCE_TYPES_V

RG_ENCUMBRANCES_V

38

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Appendix: Reference Documents / Notes related to Encumbrances

• Master Note For Oracle EBS Procurement Suite-Encumbrance And Accrual Accounting[Document ID 1138043.1]

• Impact of R12 Design in PO Accounting [Document ID:429105.1]

• Oracle Applications Release 12 Upgrade Sizing and Best Practices to evaluate the potentialgrowth of your SLA tables[ Document ID:399362.1]

• R12 FAQ for the SLA Upgrade: SLA Pre-Upgrade, Post-Upgrade, and Hot Patch[ DocumentID:604893.1]

• Create Accounting Process [Document ID:579836.1]

• R12 Account Requirements For Inventory Accrual Reconciliation[Document ID:824388.1]

• R12 FAQ Accounting for On Line and Period End Accruals [Document ID:1113712.1]

• FAQ R12 Essentials Of Accrual Accounting [ID 827125.1]

• R12 How To Diagnose Issues with Period End Accruals [ID 603971.1]

• R12: Discrepancies With Period End Accruals-Troubleshooting [ID 1279848.1] • R12 Receipt Accrual Period end process-Duplicate accrual reversal entries created [ID

873399.1]

• FAQ Encumbrance Accounting - Setup And Usage [Doc ID 1086669.1]

• R12: Diagnostic Script to help troubleshoot Purchasing Accounting or Encumbrance Issues[Doc ID 1483743.1]

• Steps to Run Import And Validate AAD (Application Accounting Definition) withtroubleshooting [Doc ID 1406203.1]

39


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White Paper Title: Encumbrance Accounting in

the Procure to Pay Flow: Best Practices

May 2014

Author: Sabrina Sun

Contributing Authors: Vijayaganesh

Sampathkumar, Supriya Bontala, Acharya

Devadula

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

Copyright © 2014, Oracle and/or its affiliates. All rights reserved.

This document is provided for information purposes only, and the contents hereof are subject to change without notice. This

document is not warranted to be error-free, nor subject to any other warranties or conditions, whether expressed orally or implied in

law, including implied warranties and conditions of merchantability