7.4 Payment Accounting: Issue and Clearing, Gains and Losses, Discounts, Cross-Currency Payments and Bills Payable
Key Takeaways
At payment issue debits liability and credits cash; at payment clearing does the same when the payment clears; at issue and clearing credits cash clearing at issue and moves it to cash at clearing.
Realized gain or loss is calculated at the point set by the payment accounting option, and always at foreign-currency prepayment application.
Conversion rate gain or loss records invoice-to-PO or invoice-to-receipt rate variances on items accrued at receipt; realized gain or loss records invoice-to-payment differences.
In Oracle's cross-currency example, a 100 GBP invoice at 1.75 is paid as 125 EUR at 1.45, giving USD 181.25 of cash against USD 175 of liability and a USD 6.25 realized loss.
A foreign-currency invoice without a conversion rate gets a No Rate hold; Apply Missing Conversion Rates fills rates for non-User rate types, and the next validation removes the hold.
Payment accounting completes Understand the Payment process. It also explains several reconciliation differences in chapter 8. The key control is the payment accounting option on Manage Payment Options for the payment business unit. It isn't set on the bank account.
The three payment accounting options
| Option | At payment issue | At payment clearing | Realized gain or loss calculated |
|---|---|---|---|
| At payment issue | Dr Liability, Cr Cash. For bills payable: Cr Bills Payable at issue, then Dr Bills Payable, Cr Cash at maturity. | No entry | At payment creation (bills payable: at maturity) |
| At payment clearing | No entry | Dr Liability, Cr Cash | At clearing |
| At payment issue and clearing | Dr Liability, Cr Cash Clearing. For bills payable: Cr Bills Payable, then at maturity Dr Bills Payable, Cr Cash Clearing. | Dr Cash Clearing, Cr Cash | At every point |
Oracle's caution again: don't change this option after the first implementation. Changing it causes accounting to get stuck, so use a new business unit instead.
With either clearing-based option, Cash Management reconciliation produces the clearing events (Payment Cleared, Payment Clearing Adjusted, Payment Uncleared in the Reconciled Payments event class). You'll see uncleared items until bank statements are reconciled (section 2.5).
Worked example: issue and clearing
A check for USD 15,000 is issued on 10 May and reconciled on 3 June.
- 10 May: Dr Liability 15,000, Cr Cash Clearing 15,000.
- 3 June: Dr Cash Clearing 15,000, Cr Cash 15,000.
The Cash Clearing balance between the two dates shows outstanding checks.
Realized gain or loss versus conversion rate variance
| Distribution | Measures | Where the account comes from |
|---|---|---|
| Conversion rate gain or loss | The rate variance between the invoice and the PO or receipt, for items accrued at receipt. Calculated at validation. | Default distributions in Common Options |
| Realized gain or loss | The rate difference between invoice and payment, calculated according to the payment accounting option | Realized gain and loss distributions in the Common Options currency settings (per bank account payment) |
Realized gain or loss is always calculated when a foreign-currency prepayment is applied, whatever the payment accounting option.
Example: realized gain
An invoice for EUR 50,000 is accounted at 1.20, a liability of USD 60,000. It is paid at 1.14, costing USD 57,000. The payment entry is:
- Dr Liability 60,000
- Cr Cash (or Cash Clearing) 57,000
- Cr Realized Gain 3,000
If the payment rate had been higher than the invoice rate, the difference would be a realized loss (debit).
Discounts
When a discount is taken at payment, the discount credit is allocated by the Discount Allocation Method in invoice options (section 3.1):
- All invoice lines: prorated across the invoice lines. For PO lines accrued at receipt, the discount goes to the price variance account.
- Tax lines and single distribution: the tax share is prorated across tax lines and the rest goes to Discount Taken.
- Single distribution: the whole discount goes to the Discount Taken distribution in Common Options.
Worked example: a USD 1,000 invoice has two expense distributions of USD 800 and USD 200, no tax, and terms 2/10 Net 30. It is paid within 10 days, so the discount is USD 20.
- Under All invoice lines: the payment entry is Dr Liability 1,000, Cr Cash 980, Cr expense distribution 1 USD 16, Cr expense distribution 2 USD 4.
- Under Single distribution: the USD 20 credit goes to Discount Taken.
Oracle Payables records discounts when they are taken. It has no separate "discounts lost" accounting.
Cross-currency payments
A cross-currency payment is paid in a currency different from the invoice currency. The accounting relieves the liability in the invoice currency and credits cash or cash clearing in the payment currency. Oracle's example:
| Rate | Value |
|---|---|
| Invoice | 100 GBP; GBP to USD 1.75 |
| Cross-currency rate | GBP to EUR 1.25, so the payment is 125 EUR |
| Payment rate | EUR to USD 1.45 |
| Entry | Entered | Accounted (USD) |
|---|---|---|
| Invoice: Dr Item expense / Cr Liability | 100 GBP | 175.00 |
| Payment: Dr Liability | 100 GBP | 175.00 |
| Payment: Cr Cash Clearing | 125 EUR | 181.25 |
| Payment: Dr Loss | 0 EUR | 6.25 |
| Payment: balancing lines | 125 EUR / 100 GBP | 175.00 each |
The liability is relieved at USD 175.00. The cash costs USD 181.25 (125 × 1.45), so there is a USD 6.25 realized loss. If a PPR is missing cross-currency rates, it stops until you supply them.
Missing conversion rates
If Require conversion rate entry is off in Common Options, a foreign-currency invoice can be saved without a rate. At validation it gets a No Rate hold, which stops accounting and payment. Run Apply Missing Conversion Rates: it applies rates from Manage Daily Rates to invoices and payments whose rate type isn't User. The next validation removes the hold. Oracle also lists this process in its period-close steps.
Bills payable and escheatment
- Bills payable (future-dated payments) are credited to the Bill Payable distribution until maturity. Run Update Matured Bills Payable Status to mature them; this is also a close step.
- Escheatment handles checks that are never cashed. After the payment options' Minimum days to initiate escheatment, a negotiable check can be escheated (Payment Escheated event). The amount is held in the Unclaimed Fund distribution from Common Options until you create the invoice that pays the escheatment authority.
Voids
Voiding reverses the payment accounting, any realized gain or loss, and related interest invoices. With withholding at payment, it also creates a reversing withholding invoice (section 7.2). The Payment Canceled event carries these reversals.
A business unit accounts for payments at issue and clearing. A USD 15,000 check is issued on 10 May and reconciled in Cash Management on 3 June. Which entries are created?
10 May: Dr Liability, Cr Cash Clearing. 3 June: Dr Cash Clearing, Cr Cash.
10 May: Dr Liability, Cr Cash. 3 June: no entry.
10 May: no entry. 3 June: Dr Liability, Cr Cash.
10 May: Dr Cash Clearing, Cr Liability. 3 June: Dr Cash, Cr Cash Clearing.
A 100 GBP invoice is accounted at a GBP to USD rate of 1.75 and paid in EUR at a cross-currency rate of 1.25 GBP to EUR. The EUR to USD payment rate is 1.45. What is the realized gain or loss in USD?
No gain or loss, because cross-currency payments are accounted only in the payment currency
A USD 6.25 realized gain
A USD 6.25 realized loss, because cash of USD 181.25 relieves a liability of USD 175.00
A USD 31.25 realized loss, because 125 EUR is compared with 100 GBP
A foreign-currency invoice is on a No Rate hold, and Require conversion rate entry is disabled in Common Options. Daily rates now exist for the invoice's Corporate rate type. What clears the hold?
Releasing the No Rate hold manually with a Variance Release Reason
Changing the payment accounting option to At payment clearing
Running Apply Missing Conversion Rates and then validating the invoice
Paying the invoice, which assigns the payment-date rate
Sections you finish are checked off in the contents.