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Accounting Concepts & Accounting Entries in Oracle www.erpstuff.com
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P re f a c e
This document is for those who are interested to learn Financial Accounting Basics which will help
them in Oracle Applications (e-Business Suite) accounting entries. In the document after accounting
entries of Oracle different modules are also provided for guidance.
Pre Requisites
o Oracle Applications 11i instance access
References:
o Accounting by Meigs & Meigs

o Oracle Applications Instance
Document Change Log
Date Version Description
12-Sep-07 1 Accounting Basics and Accounting Entries of AP

Contents
CONTENTS...................................................................................................................................................... 4
1 - ACCOUNTING ........................................................................................................................................... 6
1. ACCOUNTING ...............................................................................................................................................6
2. ACCRUAL BASIS OF ACCOUNTING ......................................................................................................................6
3. CASH BASIS OF ACCOUNTING ...........................................................................................................................6
4. TYPES OF ACCOUNTING INFORMATION ................................................................................................................7
4.1. FINANCIAL ACCOUNTING .............................................................................................................................7
4.2. MANAGEMENT ACCOUNTING (MANAGERIAL ACCOUNTING) ....................................................................................7
4.3. TAX ACCOUNTING .....................................................................................................................................7
5. FINANCIAL REPORTING ...................................................................................................................................7
6. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)........................................................................................7
7. ACCOUNTING EQUATION .................................................................................................................................8
2 - DOUBLE ENTRY SYSTEM .......................................................................................................................... 9
1. DOUBLE ENTRY ............................................................................................................................................9
3 - DEBIT & CREDIT RULES......................................................................................................................... 10
1. DEBIT & CREDIT RULES ............................................................................................................................... 10
1.1. PAID CASH RS. 500 FOR TELEPHONE BILL...................................................................................................... 10
1.2. PURCHASED FURNITURE OF RS. 2,000 ON CREDIT FROM MUHAMMAD HAYAT........................................................... 11
4 - EXAMPLE TRANSACTIONS ..................................................................................................................... 12
1. ACCOUNTING TRANSACTIONS EXAMPLES ........................................................................................................... 12
5 - TRIAL BALANCE ..................................................................................................................................... 15
1. TRIAL BALANCE .......................................................................................................................................... 15
6 - BALANCE SHEET..................................................................................................................................... 16
1. BALANCE SHEET FINANCIAL STATEMENT............................................................................................................ 16
1.1. ASSETS ................................................................................................................................................ 17
1.2. LIABILITIES (DEBTS) ............................................................................................................................... 17
1.3. OWNERS EQUITY ................................................................................................................................... 17
7 - INVOICES (AP) ...................................................................................................................................... 18
1. INVOICE (PURCHASE / OTHER DEBIT) .............................................................................................................. 18
2. PREPAYMENT INVOICES ................................................................................................................................ 18
3. PAYMENT ENTRY ........................................................................................................................................ 18
4. PURCHASE RETURN / OTHER CREDIT ............................................................................................................... 19
5. FIXED ASSET(S) PURCHASES .......................................................................................................................... 19
6. PAYMENT OF SALARY (WITHOUT PAYROLL SETUP) ............................................................................................... 20
6.1. RECORDING OF LIABILITY ......................................................................................................................... 20
6.2. RECORDING INVOICE AT THE TIME OF PAYMENT .............................................................................................. 20
6.3. PROCESSING PAYMENT ............................................................................................................................. 20
7. ADVANCES TO SUPPLIERS, EMPLOYEES AND PREPAID EXPENSES ............................................................................... 21
8. PROCESSING OF PREPAYMENT ........................................................................................................................ 21
8.1. PREPAYMENT INVOICE .............................................................................................................................. 21


9. ADJUSTMENT OF PREPAYMENT AGAINST INVOICE ................................................................................................. 22
9.1. PROCESSING OF INVOICE FOR EXPENSES ....................................................................................................... 22
9.2. ADJUSTING PREPAYMENT AGAINST INVOICE.................................................................................................... 22
10. PROCESSING PETTY CASH PAYMENTS ........................................................................................................... 22
10.1. RECORDING OF INVOICES (FOR DAILY CASH PAYMENTS).................................................................................... 23
10.2. PROCESSING OF PAYMENT FROM PETTY CASH ACCOUNT .................................................................................... 23
8 - IMPORTS................................................................................................................................................ 24
1. LETTER OF CREDIT ...................................................................................................................................... 24
1.1. SIGHT L/C............................................................................................................................................ 24
1.1.1. ENTERING PREPAYMENT INVOICE ............................................................................................................ 24
1.1.2. RECORDING INVOICE FOR GOODS RECEIVED AGAINST IMPORT ........................................................................ 24
1.1.3. APPLYING PREPAYMENT AGAINST PURCHASE INVOICE .................................................................................... 25
2. USANCE L/C ............................................................................................................................................. 25
2.1. PROCESSING INVOICE .............................................................................................................................. 25

1 - Accounting
1. Accounting
Accounting is to provide information to decision makers and this will help them in making economic
decisions. Managers, investors, and other internal groups want the answers to two important
questions,
1.1. How well did the organization perform?
1.2. Where does the organization stand?
The accounts answer these questions with two major financial statements,
1. Income Statement
2. Balance Sheet
There are two basis of accounting Accrual and Cash.
2. Accrual Basis of Accounting

The accrual basis of accounting recognizes revenues and expenses when they occur instead of
when cash is received or disbursed. For example we consumed electricity in the month of January
while the bill will be received and paid in the month of February. If we will not record the electricity
expense in January then there will be no expense of electricity in January and the February will
bear the burden of January and so on. In accrual the effect should be in the period in which the
expense occurred not when the payment is made.
3. Cash Basis of Accounting

The cash basis of accounting recognizes revenue and expense when cash is received and disbursed.
Now as in the above example demonstrated in the accrual basis the expense will be recorded in the
month of February in cash basis accounting. So when we will generate January reports there will be
no effect of expense which are occurred but no payment is yet made.

4. Types of Accounting Information

4.1. Financial Accounting
It deals with financial resources, obligations and activities of an economic entity. The Financial
Accounting assists investors and creditors in deciding where to place their scarce investment
resources.
4.2. Management Accounting (Managerial Accounting)

Management Accounting is the development and interpretation of accounting information to aid
management in running the business.
4.3. Tax Accounting

The preparation of income tax returns is a specialized field within accounting. The tax returns
are based upon financial accounting information. However the information often is adjusted or
reorganized to conform to income tax reporting requirements.
5. Financial Reporting
Now as the information is available so the next step is to arrange the information in presentable
and analyzable so the management should be able to analyze their business position and should
take decisions on the basis of that information. To provide financial reporting financial statements
are generated. Here is a complete set of financial statements,
o Balance Sheet: It shows the financial position/status of the business on a specific date.
o Income Statement: The purpose of this statement is to view the profitability of the business.
o Owners Equity Statement: To show the changes in the amount of owners equity the
statement of owners equity is used. In corporations it is called as statement of retained
earnings.
o Cash Flow Statement: To summarize the cash receipts (inflows) and cash payments
(outflows) of the business over the same time period covered by the income statement.
In addition to these statements several notes are also included which contain additional information
useful for the interpretation of financial statements.
6. Generally Accepted Accounting Principles (GAAP)

Different people or companies have different ways of presenting information. So if we have

statements of two different companies and both are formatted on different standards and we have
to compare. May be with certain effort we would be able to make comparison but that would be
time consuming and not much informative. It is also not easy when there is a need to compare
statements of multiple companies on frequent basis. To overcome this problem few rules are
developed which are called as generally accepted accounting principles. The GAAP ensures two
concepts comparability and reliability.
7. Accounting Equation
The accounting equation shows that how much assets business owns and who provided these
resources to the business. This accounting equation will always be balanced means left hand side
and right hand side always equal.
Assets = Liabilities + Owners Equity

1,000,000 = 300,000 + 700,000
If any two of the above are known then the third one can be calculated very easily.
Assets = Liabilities + Owners Equity
1,000,000 = ? + 700,000
Like for example if we know total assets and owners equity then we can calculate liabilities
as below,
Assets - Owners Equity = Liabilities

1,000,000 - 700,000 = 300,000

2 - Double Entry System
1. Double Entry
Each accounting transaction will always affect at least two accounts where one will be debit and the
other will be credit. This will make sure that the accounting equation will always be balanced. In
double entry transactions are recorded as debit and credit where debit is the left hand side while
the credit is the right hand side. The following is the T-Account.
Debit (Dr) Credit (Cr)
0 0

3 - D e b i t & C re d i t R u l e s
1. Debit & Credit Rules
In order to decide which account is debit and which is credit after a transaction you need to
remember few rules.
Accounts Increase Decrease
Assets Debit Credit
Liabilities Credit Debit
Owners Equity Credit Debit
Revenue Credit Debit
Expenses Debit Credit
Revenue: The revenue is the price of goods sold and services rendered during a given
accounting period. The revenue increases owners equity and expenses decreases the same
so rules for revenue and expenses are extension of Owners equity. With increase in revenue
there will be increase in Owners equity and increase in Owners equity is always credit so
revenue will also be credited.
Expenses: The expenses are the costs of the goods and services used up in the process of
earning revenue. The increase in expenses decreases Owners equity and decrease in
Owners equity is always debit so expense will also be debited if increased.
Now as we know the rules of debit and credit so we will pass few entries for practice.
1.1. Paid Cash Rs. 500 for telephone bill.

In this transaction two accounts are involved the first is cash and other is telephone expense. As
the cash is an asset and we have paid cash so our cash is decreased means our assets are
decreased. We know that decrease in assets is always Credit so here our cash account is credit.
For the 2nd account simple way is that if the 1st account is credit then the 2nd will always be
debit and vice versa. But here we will evaluate as that it is an expense and increase in expense
is always debit so our telephone expense will also be debit.
Account Description Debit Credit
Telephone Expense 500
Cash 500
1.2. Purchased furniture of Rs. 2,000 on credit from Muhammad Hayat.

In this transaction there is no involvement of cash but it is a credit transaction which is a liability
and the supplier name is Muhammad Hayat. So the two accounts in this transaction are
furniture which is an asset account and increase in asset is always debit so furniture is debit by
2,000 while the second is supplier account named Muhammad Hayat which is a liability and
increase in liability is always credit.
Furniture 2,000
Muhammad Hayat (Supplier) 2,000
With the help of rules we can easily decide which account will be debited and which will be
credited.

4 - E x a m p l e T ra n s a c t i o n s
Transaction:
A transaction represents the movement of money from one account to another account. Whenever
you spend or receive money, or transfer money between accounts is called a transaction or a
transaction is any event that affects the financial position of an organization and requires recording.
Transactions always involve at least two accounts. Examples of transactions are: paying a bill,
transferring money from savings to checking, buying a pizza, withdrawing money, and depositing a
paycheck etc.
1. Accounting Transactions Examples

Now we will discuss in detail few accounting transactions.
# Transactions Accounts Account 1 Account 2
1 Owner of the Business Capital As owner provided capital Owner investment is a

invested Cash 500,000 to the business as cash so liability on the business
Cash
in business. the cash of business and business has to
increased and cash is an payback that amount to
asset. As we know the owner. And as we
increase in asset will know increase in liability
always be debit. is always credit.
2 Purchased Land for Land Land is an asset and As the cash is paid so the
Cash 100,000. increase in asset is always cash is decreased. Cash is
Cash
debit. an asset and decrease in
asset is always credit.
3 Purchased stationary Stationary Purchasing of stationary is As we purchased on

on credit for 2,500. an expense and increase in credit which means we
Accounts
expense is always debit. have not paid any cash
Payables
and will make payment
on a future date. So this
is a liability and increase
in liability is always credit.

4 Purchased furniture Furniture Furniture is an asset and We made this purchase

for Cash 20,000. as this is an addition in our on cash that is we
Cash
assets so assets are immediately paid cash so
increased. As we know this is a cash transaction
that increase in assets is and cash is our asset and
always debit. on decrease on
cash/asset we will record
it as credit.
5 Sold unused stationary Accounts As we sold stationary to Stationary was our

& equipments of 500 Receivable Mr. Liaquat Ali who is our expense and we recorded
to Mr. Liaquat Ali. customer and we have not it as debit as it was
Stationary
received any cash yet and increased. But here we
will receive in future so are reducing our expense
this is our Accounts by selling stationary. So
Receivables. As we know now expense is decreased
that accounts receivables and decrease in expense
is an asset and increase in is always credit.
asset is always debit.
6 Purchased Office Building We purchased Building and As this is not a cash

Building for 100,000 increased our assets. Here transaction and here Mr.
Account
from Mr. Imran building account will be Imran Nawaz is our
Payables
Nawaz. debited. supplier from whom we
purchased building. As we
have to pay in future so
this is liability and
increase in liability is
always credit.
7 Received cash 5,000 Cash Cash is received from our Accounts receivables is an
from Mr. Liaquat Ali customer Mr. Liaquat Ali asset and as our accounts
Accounts
hence our asset which is receivables are decreased
Receivables
cash is increased so it is a and decrease in assets is
debit account. always debit.
# Accounts Debit Credit
1 Cash 500,000
Capital 500,000

2 Land 100,000
Cash 100,000
3 Stationary 2,500
Accounts Payables 2,500
4 Furniture 20,000
Cash 20,000
5 Accounts Receivables 500

Stationary 500
6 Building 100,000
7 Cash 5,000
Accounts 5,000
Receivables

5 - T ri a l B a l a n c e
1. Trial Balance
In the double entry each transaction always have double sided equal effect so the debit side must
be equal to credit side. So before preparing balance sheet it is better to verify your entries balance
which should be equal that is debit balance = credit balance. Keep in mind that trial balance will
only find numeric mistakes like user entered 75 on debit side while 57 on credit side or vice versa.
So here the debit and credit balance is not equal. So what we will do is that we will take balances
of each ledger and will update it in the trial balance. A sample trial balance is as below,
ERPSTUFF COMPANY
Trial Balance
June 31, 2006
Cash 200,000
Accounts Receivables 20,00
Land 100,000
Building 50,000
Office Equipment 30,000
Salaries Payable 75,000
Capital 175,000
400,000 400,000

6 - Ba la n c e S h e e t
1. Balance Sheet Financial Statement

It shows the financial position of the business on a specific date. The balance sheet will have a
header with company name (legal entity), title as Balance Sheet and the balance sheet date. In the
body there are 3 major sections Assets, Liabilities and Owners Equity.
ERPSTUFF COMPANY
Balance Sheet
June 31, 2006
Assets
Cash 200,000
Accounts Receivables 20,00
Land 100,000
Building 50,000
Office Equipment 30,000
Total 400,000
Liabilities and Owners Equity
Liabilities
Accounts Payable 150,000
Salaries Payable 75,00
Total 225,000
Owners Equity
Capital 175,000
Total 400,000
Now we will discuss each section of Balance Sheet separately.

1.1. Assets
These are economic resources that are owned by a business and are expected to benefit future
operations. The assets can be further divided into two categories tangible and intangible.
Tangible: Tangible assets are those assets which you can touch or which have physical
existence like building, land and cash.
Intangible: The intangible assets are those assets which you can not touch. Like good will,
accounts receivables etc.
Here is a question that what will be the value of assets like land and building. So there the
concept of Cost Principle will be used.
Cost Principle-Historical Cost: The cost principle says that show such assets in the balance
sheet at their cost. This cost will be historical cost. The historical cost is the purchase price of
that asset.
1.2. Liabilities (Debts)
Liabilities are also called as debts. These are payables to the suppliers and to whom we have to
pay are our creditors. The creditors claims have high priority than owners claim. That is the
business first have to pay to the creditors and then to the owner. The liabilities are further
divided into two categories Short Term and Long Term liabilities.
Short Term: Those liabilities which are due within one year.
Long Term: These liabilities are not due within one year.
1.3. Owners Equity
Owners Equity is the owners claim to the assets of the business. As creditors claims have
priority over owners claim so the Owners Equity is the residual value that is,
Assets Liabilities = Owners Equity
The withdrawals by the owner are called as drawings.

7 - Invoices (AP)
1. Invoice (Purchase / Other Debit)
Relevant Charge / Expense Account ***
Creditors Control Account ***
2. Prepayment Invoices
Advance to Creditors Control Account ***
3. Payment Entry
Creditor Control Account ***
Bank/Cash Account ***

4. Purchase Return / Other Credit
AP Accrual / Expense Account ***
5. Fixed Asset(s) Purchases

For all Assets related invoices, CWIP Clearing Account will be selected at the invoice distribution
level. Upon selection of CWIP Clearing Account the field Track as Asset will be automatically
activated (activation of this field is mandatory for data to be transferred to Oracle Assets).
Asset / CWIP Clearing Account ***
Supplier Control Account ***
After running "Mass Addition Program" in Oracle Payables, system will transfer all invoices
distributions containing "CWIP Clearing Account" to Oracle Assets which will then be matched to
purchase orders.

6. Payment of Salary (Without Payroll Setup)
6.1. Recording of Liability

In order to record liability, you will have to process a Journal Voucher in the General Ledger.
The relevant Liability Account will be debited.
Salary Expense Account ***
Salary Payable Account ***
6.2. Recording Invoice at the time of Payment

Now as we have created a liability in the General Ledger now in order to process payment we
need to create an invoice in the Oracle Accounts Payable module. To this we need a dummy
supplier to process an invoice of type Other Debits.
Salary Payable Account ***
6.3. Processing Payment

After creation of invoice in the AP module now we can process payment.

Bank Account/Cash ***
7. Advances to Suppliers, Employees and Prepaid Expenses
To record advances to Suppliers and Employees and to process prepaid expenses such as prepaid
rent, prepaid insurance etc. a Prepayment type invoice will be created in the system. For this
purpose, employees will be opened in the system as suppliers.
8. Processing of Prepayment
8.1. Prepayment Invoice

Create a Prepayment Type invoice.
Advances to Creditors / Advances to

***
Employees / Prepaid Expenses Account
8.2. Processing payment

The user will then process payment in the normal manner for this Prepayment Invoice.
Following accounting entry will be created:

Withholding Tax Payable Account* ***
Bank / Cash Account ***
* Withholding Tax will only be deducted at time of payment and if applicable.
9. Adjustment of Prepayment against Invoice
9.1. Processing of Invoice for Expenses

The user will then process a Purchase Invoice or Other Debit type invoice depending upon the
type of expense. Following accounting entry will be created:
Expense Account ***
9.2. Adjusting Prepayment against Invoice

The Purchase Invoice or Other Debit type invoice entered above will then be matched with the
relevant Prepayment Invoice.
Advance to Creditors Control Account ***
10. Processing Petty Cash Payments

10.1. Recording of Invoices (for Daily Cash Payments)

For the purpose of booking daily cash payments user will process Purchase Invoices / Other
Debits (depending on the type of expenses / payment) for these expenses in the system in the
name of the either Petty Cash Supplier or original supplier as the case might be. The relevant
Expense / Charge Account will be captured in the invoice distributions window. Following
accounting entry will be created:
Relevant Expense Account ***
10.2. Processing of Payment from Petty Cash Account

Payment will then be processed for these expenses using the relevant Bank Account (Petty Cash
Account) set up in the system for cash payments. Following accounting entry will be created in
the system:
Cash in Hand Account ***

8 - Imports
1. Letter of Credit
Letter of Credit (L/C) is used while importing goods from other country and there are two types of
L/Cs.
1.1. Sight L/C

In Sight L/C you will have to pay full payment in advance and for this we will record a
Prepayment Invoice.
1.1.1. Entering Prepayment Invoice

On receipt of Bank Debit Advice, the user will process a Prepayment Invoice in L/C currency with
the amount of Debit Advice. User will enter exchange rate as appearing on Debit advice.
Advance to Supplier (Imports) Account ***
To generate L/C cost sheet and L/C Register you will have to capture L/C related information by
using Descriptive Flexfield (DFF).
1.1.2. Recording Invoice for Goods Received Against Import

After receipt of goods, a Purchase invoice will be processed for the invoice value of goods
received in the name of the relevant Supplier.

Stock Account ***
1.1.3. Applying Prepayment against Purchase Invoice

This invoice will then be matched with the prepayment invoice entered above.
Advance to Supplier (Imports) Account ***
2. Usance L/C
In Usance L/C the payment is made after receipt of goods so there will be no prepayment in case of
Usance L/C.
2.1. Processing Invoice

In case of Usance LC, invoice for value of goods will be processed after the receipt of goods.
The Invoice will be processed in foreign currency and Exchange rate on Invoice will be manually
entered. Invoice type Purchase Invoice will be used for this purpose.
Stock Account ***
2.2. Processing payment

Then process payment for the invoice.
Bank Account ***

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All Rights Reserved 2007 2/26

o Accounting by Meigs & Meigs

Document Change Log

Date Version Description

12-Sep-07 1 Accounting Basics and Accounting Entries of AP

All Rights Reserved 2007 3/26

All Rights Reserved 2007 4/26

8.2. PROCESSING PAYMENT ............................................................................................................................. 21

All Rights Reserved 2007 5/26

There are two basis of accounting Accrual and Cash.

2. Accrual Basis of Accounting

3. Cash Basis of Accounting

All Rights Reserved 2007 6/26

4. Types of Accounting Information

4.2. Management Accounting (Managerial Accounting)

4.3. Tax Accounting

6. Generally Accepted Accounting Principles (GAAP)

All Rights Reserved 2007 7/26

Different people or companies have different ways of presenting information. So if we have

Assets = Liabilities + Owners Equity

Assets - Owners Equity = Liabilities

All Rights Reserved 2007 8/26

2 - Double Entry System

Debit (Dr) Credit (Cr)

All Rights Reserved 2007 9/26

1. Debit & Credit Rules

Accounts Increase Decrease

Assets Debit Credit

Liabilities Credit Debit

Owners Equity Credit Debit

Revenue Credit Debit

Expenses Debit Credit

1.1. Paid Cash Rs. 500 for telephone bill.

All Rights Reserved 2007 10/26

Account Description Debit Credit

Telephone Expense 500

1.2. Purchased furniture of Rs. 2,000 on credit from Muhammad Hayat.

Account Description Debit Credit

Muhammad Hayat (Supplier) 2,000

All Rights Reserved 2007 11/26

1. Accounting Transactions Examples

# Transactions Accounts Account 1 Account 2

1 Owner of the Business Capital As owner provided capital Owner investment is a

3 Purchased stationary Stationary Purchasing of stationary is As we purchased on

All Rights Reserved 2007 12/26

4 Purchased furniture Furniture Furniture is an asset and We made this purchase

5 Sold unused stationary Accounts As we sold stationary to Stationary was our

6 Purchased Office Building We purchased Building and As this is not a cash

# Accounts Debit Credit

All Rights Reserved 2007 13/26

5 Accounts Receivables 500

All Rights Reserved 2007 14/26

All Rights Reserved 2007 15/26

1. Balance Sheet Financial Statement

Liabilities and Owners Equity

Now we will discuss each section of Balance Sheet separately.

All Rights Reserved 2007 16/26

1.2. Liabilities (Debts)