O2C Cycle with Accounting Entries

The best practice to handle fixed asset items and to eliminate the confusion of other types of items is to follow the below procedure:

1. Define a FA item for each asset category you have, for example, let's say we have two asset categories (Computers and Equipment), then we'll define the following items:

          Item Code: FA00001, Item Description: Computers

          Item Code: FA00002, Item Description: Equipment

2. Assign expense item for FA00001 with Asset Clearing Account attached to Computers Asset Category (Purchasing Tab)

3. Assign Asset Category for FA00001 with Computers Asset Category (Purchasing Tab)

Now, let's say we want to purchase a Dell laptop:

1. Create PO and enter Item FA00001, You will notice that Description will be defaulted to "Computers"

2. Change the description to "Dell laptop" (You have to enable the "Allow Description Update" in purchasing tab")

3. You will notice that PO charge account will be picked as the Asset Clearing Account

The rest is to create the invoice and match it to this PO and run create accounting, then run Mass Addition Create

By this you have distinguished FA items from other inventory and expense items

We expected when you set the Expense to "Accrue at Receipt" in purchasing options, upon matching the invoice to PO, Expense AP accrual account will be populated. but when you create accounting and run the Mass Addition create, The FA item should be transferred to Fixed Assets module.

But Why the Expense AP Accrual account is populated instead of PO charge account when the expense is set to accrue at receipt?

This is intended behavior because we want the system to record that there is liability upon receiving the item but we still do not have the invoice. In this case when we perform the receiving for the item, Expense AP Accrual will be credited to pinpoint this un-invoiced receipt.

Below is the accounting flow when expense is set to "accrue at receipt" :

First of all, the charge account in the PO will be asset clearing. The accounting then goes as below:

On Receipt:
Dr Receiving and Inspection
           Cr Expense AP Accrual

On Deliver:
Dr Asset Clearing
           Cr Receiving and Inspection

On AP Match:
Dr Expense AP Accrual
           Cr AP Liability

Therefore the final accounting is:

Dr Asset Clearing (PO Charge Account)
           Cr AP Liability

But Mass Addition Process, instead of checking AP distribution, checks for Debit account of Delivery (which is taken from PO Charge Account) for matched invoices, and will transfer it to FA.

On Asset Addition

Dr Asset Cost