Accounting entries of P2P cycle in Oracle R12

 The Procure-to-Pay (P2P) cycle in Oracle R12 involves various transactions that generate accounting entries as goods and services are purchased, received, and paid for. Below is a detailed breakdown of the typical accounting entries generated during each step of the P2P cycle:

1. Purchase Order Creation

When a Purchase Order (PO) is created, there are no accounting entries recorded immediately. The creation of a PO is a commitment to purchase and does not impact the financials until the goods or services are received.

2. Receipt of Goods or Services (Receiving Transaction)

When goods or services are received, accounting entries are generated to reflect the receipt in inventory or as an expense. The entries depend on whether the receipt is for inventory or direct charge (expense) items.

a. Inventory Receipt (Accrual-Based)

• Dr. Inventory Material (Asset)
  • Reflects the increase in inventory.
• Cr. Accrual (Receiving Inventory or Purchase Price Variance Account)
  • Represents the liability to the supplier, which will be cleared when the invoice is matched.

b. Direct Expense Receipt (Accrual-Based)

• Dr. Expense Account
  • Charges the expense to the relevant cost center or department.
• Cr. Accrual (Receiving Inventory or Purchase Price Variance Account)
  • Represents the liability to the supplier.

3. Invoice Receipt (Invoice Matching)

When an invoice is received from the supplier and matched against the PO and receipt, accounting entries are generated. The type of invoice (Standard, Prepayment, etc.) and matching method (2-way, 3-way) will affect the entries.

a. Standard Invoice (3-Way Matching)

• Dr. Accrual (Receiving Inventory or Purchase Price Variance Account)
  • Clears the accrual created at the time of goods receipt.
• Dr. Tax Expense (if applicable)
  • Reflects any sales or VAT tax related to the purchase.
• Cr. Accounts Payable (Liability)
  • Records the liability to the supplier.

b. Invoice Price Variance (if applicable)

If there is a variance between the PO price and the invoice price, an Invoice Price Variance (IPV) entry is created:

• Dr./Cr. Invoice Price Variance (Expense/Revenue)
  • Adjusts the difference between the PO price and the invoiced amount.

4. Payment to Supplier

When a payment is made to the supplier, accounting entries are created to clear the liability and reduce cash or bank balances.

• Dr. Accounts Payable (Liability)
  • Clears the liability recorded at the time of invoice matching.
• Cr. Cash/Bank (Asset)
  • Reduces the cash or bank balance as payment is made.
• Dr./Cr. Discounts Taken (if applicable)
  • Reflects any early payment discounts taken by the company.

5. Purchase Returns or Adjustments

If goods are returned to the supplier or adjustments are made, the corresponding accounting entries depend on the nature of the transaction.

a. Return of Inventory to Supplier

• Dr. Accrual (Receiving Inventory or Purchase Price Variance Account)
  • Reverses the accrual for the returned goods.
• Cr. Inventory Material (Asset)
  • Decreases the inventory account.

b. Adjustment of Invoices

If an invoice adjustment is made (such as a credit memo), the accounting entries are as follows:

• Dr. Accounts Payable (Liability)
  • Reduces the liability to the supplier.
• Cr. Expense Account or Inventory
  • Adjusts the relevant account depending on whether it’s an expense or inventory item.

6. Month-End Accruals

At the end of the accounting period, manual accrual entries may be made for any receipts not yet invoiced or any known liabilities that have not yet been recorded:

• Dr. Expense or Inventory Account
  • Records the cost of goods or services received but not yet invoiced.
• Cr. Accrual (Liability)
  • Reflects the accrued liability for goods or services received but not yet invoiced.

Summary of Key Accounts Involved:

• Inventory Material (Asset): Used for goods received into inventory.
• Expense Account (Expense): Charged for direct expense items.
• Accrual (Liability): Records the obligation to pay for received goods/services before the invoice is received.
• Accounts Payable (Liability): Reflects the amount payable to the supplier once the invoice is matched.
• Cash/Bank (Asset): Decreased when payments are made to suppliers.
• Invoice Price Variance (Expense/Revenue): Adjusts for differences between PO and invoice prices.
• Tax Expense (Expense): Records any applicable taxes on purchases.

These entries ensure that your financial records accurately reflect the status of procurement, receipt, and payment transactions in the P2P cycle.