Sounds odd but this is reality in a number of asset intensive industries. Take construction industry for example. All the equipment and material that is required to construct a plant or a building is typically stored on site. Here we should be able to keep track of inventory from planning perspective and at the same time some of the items while sitting in inventory on site. Asset tracking for depreciable items comes handy here.
The flow is very simple. You receive items against a purchase order and run one program which creates an asset for you in Fixed Assets. From then on the asset starts getting depreciated. But where it gets tricky is in accounting. Since we are receiving this into inventory as well as creating an asset in fixed asset, potentially we are counting the asset value twice. An asset value can be in inventory or assets not both. So how Oracle handles this? Also what happens if we dispose of or sell this asset? Let us examine the accounting entries for each transaction to understand this.
Take a case. Donald Drumps Construction Company is constructing a huge building in the suburbs of New York. A forklift was required to be purchased for the construction needs. This forklift is treated as an asset hence required to be created as asset. Hence a purchase order was raised and sent to the supplier to be delivered at the construction site. It costs $150,000 and the company uses standard costing.
Each construction site can be assigned a different organization or a Subinventory within an organization. A location should be created for this construction site in New York and assigned to this Subinventory. Important attributes in the item master to be enabled are shown here.
When the supplier sends forklift against this PO, someone on site receives into inventory. As soon it is received into inventory, IB gets created, marking the transaction (csi_transactions) ready to be processed for asset creation.
Accounting for PO Receipt transaction into Inventory is as shown here.
Now as per the flow running the program Create Assets: Interface Inventory Transactions to Assets will interface the asset to the fixed assets taking this information from IB and inventory. Creation of assets also involves in an accounting entry as the asset value is increasing. So the accounting in this transaction is:
As you can see here, inventory account is used to credit, debiting the asset account taken from the asset category assigned to the item in the item master. So the inventory value goes down in balance sheet increasing the asset value from fixed asset. All this is happening at cost of the item. And the asset starts depreciating for the period of the project.
What happens after the building construction is done?
Out of a number of possibilities, two things can happen. This forklift can be moved to another site where construction is going on or simply after the project is successfully completed, this can be sold right from the site to another smaller construction company. If it is moved to another site (considered as Asset Move in Asset Tracking) depending on how the other site is configured in the system (different organization mapped to different asset book or same asset book), treatment in assets is different. But let us take the case where Mr. Drump is tired of this asset and would like to sell it off. Since quantity exists in inventory we can create a sales order and ship it. When you ship accounting is (assuming that he is selling at 60% of the cost as the equipment is already used):
This is not good. As you can see we credited Inventory account twice. Once when we are creating asset and once shipping this forklift after usage. Also since we have shipped the asset to someone else, Mr. Drump should retire this asset from asset books by retiring the asset.
Asset Tracking handles this well. Inventory sends this shipping transaction message to IB which identifies the transaction to be eligible for asset retirement. Another program, called Interface Move Transactions to Assets is run to send the retirement message to Fixed Assets from IB. Asset retirement ensues.
But what about crediting the inventory account twice? To solve this issue there is another program we need to run to reverse the shipping accounting: Create Reversal GL entries For Inventory FA Items. This program identifies transactions that are eligible (rows in csi_transactions table with gl_interface_status_code flag set to 1) and inserts rows into gl_interface for importing into GL. So when you run this program, accounting is:
You can see that COGS account is not touched as revenue is involved and only Deferred COGS is touched. This might surprise you because, you thought, with the advent of Subledger Accounting, all transactions from sub-ledgers to GL flow through the Subledger Accounting application. Here is one accounting entry flowing into GL without Subledger accounting, making reconciliation harder for inventory.
Moreover this left credit balance in my deferred COGS account as you figured it out!
Points to consider:
- Don’t be surprised to see inventory account having the source of Assets when reconciling inventory to GL. Also accounting flows from Asset Tracking but with the source of Inventory (reversals).
- What happens to all those reports that are used to match the inventory value by quantity and inventory value in inventory account? The will not match here because quantity very well exists but the value in the account got credited elsewhere in assets and not in the inventory in of form of an issue.