Encumbrance flow from Purchasing to Payables to General Ledger.

ENCUMBRANCE:-------------

Encumbrance accounting is a means of budgetary control. The primary purpose of tracking encumbrances is to avoid overspending a budget.Encumbrance can also be used to predict cash outflow and as a general planning tool. Encumbrance deals mainly with General Ledger, Purchasing and Payables modules.

ENCUMBRANCE SETUP:------------------

1. In General Ledger-----------------1.1. Enable budgetary control in your Set of Books:

Navigation: Setup -> Financials -> Books -> Define

Alternative Region: Budgetary Control OptionsFlag Enable Budgetary Control.

1.2. Create budgetary control groups:

Navigation: Budgets -> Define -> Controls

Enter name and description and create budgetary control rules.eg. Add Purchasing as Source with category Purchases.

This control group has to be attached at the Site level or User level Profile Option (Budgetary Control Group) and this will control the behavior regarding the tolerance of budgetary control.

See MetaLink Note 297949.1How to Use Budgetary Control Groups in the Purchasing Applicationfor additional information.

1.3. Define Budget:

Navigation -> Budget -> Define -> Budget

In Budget, basically you set period boundary for your budget i.e. time frame. Remember to open the periods for the budget by pressing the Open Next Year button.

NOTE: A prerequisite to the above step is that Encumbrance year should be open at Set of Books level.

Navigation: Setup -> Open/Close

1.4. Define Budget Organization:

Navigation: Budget->Define->Organization

In this step you choose the accounts for which you want to have control and link it to your Budget defined in step 1.3. Complete Header of form and navigate to Ranges and define your ranges for your organization.

1.5. Encumbrance types:

Navigation: Setup -> Journals -> Encumbrances.

Encumbrance types are defined so as to bifurcate the reservation of funds done at different levels i.e. Requisition, PO or Invoice level, it helps management people in having better financial control.

2. In Purchasing OR Payables-------------------------Enable encumbrance: Encumbrance has to be enabled in Financial Options form in Payables or Purchasing modules.

In Purchasing: Setup -> Organization -> Financial OptionsAlternative Region EncumbranceIn Payables: Setup -> Options -> FinancialsAlternative region Encumbrance

Select different encumbrance types for Requisition, PO and Invoice. Here you attach the types that you defined in step 1.5. of GL setup.

ENCUMBRANCE TRANSACTIONS:-------------------------

1) Enter requisition

Navigation: Requisitions -> Requisitions.

Create a requisition, reserve and approve the requisition. When approved you can do a funds check in GL and this should be in commitment phase, provided commitment is the type of encumbrance you have attached at requisition level in Financial options.

No journal entries are created for this particular transaction but encumbrance entries can be created by running the Create Journal Program in GL.

2) Create Purchase order from Requisition

Navigation: AutoCreate

Find your requisition, Select the requisition and go to automatic. Make sure that your supplier information is entered and select create. This will now create your PO. Complete, reserve and approve your PO.

When approved you can do a funds check and this should be in obligation phase, assuming obligation is the type you attached at PO level.

No journal entries are created at this stage but similar to the previous step you can create encumbrance entries by Create Journal Entry program. While using PO Encumbrance you cannot change price, quantity, shipment or currency once a PO has been reserved and approved, the only way to deal with

such a situation is to cancel the existing PO and create a new one when a PO is cancelled system takes care of adjusting encumbrance.

NOTE: The important point over here is that if you create the PO manually then it will lead to the duplication of reservation of funds for the same transaction as the system will treat PO as a separate transaction and you will end up having double reservation for the same transaction one at requisition level and other at PO level, so always go for Autocreate mode while using Encumbrance Accounting.

3) Receive your goods.

Navigation: Receiving Receipts

Find your PO. Mark as receipt and save. Depending on the routing you may have to deliver it. Once the Goods are received Journal entries will be generated for Receiving by the system. At this point PO encumbrance is relieved otherwise it gets relieved when you post the invoice from payables to GL, this is in case in Accrual basis of Accounting while in case of Cash basis of accounting PO encumbrance gets relieved when you post payment information from Payables.

NOTE: Important reports which can be used to track the things are:

1. Requisition Distribution Detail Report.2. Purchase Order Distribution Detail Report. 3. Encumbrance Detail Report.

Change Responsibility to Payables.

4) Enter invoice with the type PO Default (This will ask you for a PO Number)

Navigation: Invoices -> Entry -> Invoices

Complete by entering invoice number, date and amount. Navigate to match and in the find screen the PO number will be displayed, if not correct Navigate to find. The PO information will be displayed. Flag the lines and select Match.

Your PO distributions lines will be copied to your Invoice distributions. Approve your invoice. When approved you can do a funds check and this should be in the other phase.

5) Transfer to GL--------------Navigation: Other -> Request -> Run

Select the Payables Transfer to General Ledger. Complete parameters and submit request. This will now transfer all journal lines created in AP to GL and if automatic import was selected in it will result in an unposted journal batch. If an error was encountered this will entries will be in the GL_INTERFACE table. Do the correction and re-run the import.

Change Responsibility to General Ledger

6) Review actual and encumbrance journal entries.

Navigation: Journals -> Entry

Find your journal and select Review Journal. The entries should be debit to the expense account and credit to your payables control account. If this is fine you can post your journal.

Navigation: Journals -> Encumbrance

Find your journal and select Review Journal. The entries at this point is a single sided credit entry to your expense account. The debit entry to your encumbrance account will be created at posting. You can now post these entries as well.

NOTE: It is clear with these entries that the entries from Purchasing and Payables where the encumbrance was created is still outstanding. This is normally the big concern. Very little reference in the Purchasing, Payables and General Ledger Reference Manuals describes the process of creating these entries. The result at this point is that your encumbrance accounts and funds available does not represent correct balances in GL.

To complete the process you have to Run the concurrent program: Create Journal Entries in General Ledger. This will create the journal entries out of transactions that pass funds reservation from Purchasing and Payables. Note that you can no longer view these details online or through reports.

Refer to the creation of requisitions and PO's; this program creates the entries that represent the movement form Obligation to commitment to Other. This will result in unposted entries in GL and you can now view these journals and post.

It is recommended that you schedule this program to run at desirable intervals.

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