Oracle Apps Tutorial: How to Reconcile Inventory Activity

to the General Ledger

When reconciling Inventory to the General Ledger, we need to know how Inventory is integrated
with the General Ledger and how Inventory calculates inventory value. Inventory integrates
with GL using cost elements and material distributions. WIP integrates with GL using cost
elements and WIP distributions. Cost elements define the elemental level that Oracle tracks and
accounts for inventory and manufacturing cost. After we review these concepts, I will discuss
how Oracle calculates inventory value and how you can reconcile this balance to the General
Ledger.

Oracle uses Cost Elements to track and account for

Inventory Cost
Oracle uses 5 cost elements to track inventory value. When you setup an Inventory organization,
youll be asked for default accounts for material, material overhead, outside processing,
overhead, and resources. The first two (material and material overhead) are associated with
material transactions (from the Inventory module) and the last three (outside processing,
overhead, and resources) are associated with WIP transactions (from the WIP module).

Inventory Organization Costing Parameters

The Relationship between Inventory, WIP, and Receiving

Transactions and Inventory Value Reports

It is important to note that only material and WIP transactions affect inventory value. Material
transactions occur in the Inventory module, WIP Transactions occur in the WIP module, and
receiving transactions occur in the Purchasing module. Receiving transactions do not affect
inventory value reports. These transactions are recorded to the receiving sub-ledger and affect
the receiving value reports.

Relationship between Receiving, Material, and WIP Transactions and Inventory Value

How Material Receipts flow from Receiving to Inventory

When you look at a receiving transaction (with a routing of Direct Delivery) you will see two
transactions. The first transaction is the Receive transaction. This records the receipt in the
receiving module and creates the accrual. The second transaction is the Deliver transaction.
This records the movement of inventory from receiving into inventory. It records the credit to
the receiving module and the debit to the inventory module. The way receiving affects inventory
value is when the deliver material transaction is created. This transaction is not recorded in the
receiving module it is recorded in the Inventory module.

Receiving Transaction Flow for Accounting and Costing

How Oracle Calculates Inventory Value

When a material or WIP transaction is processed in Oracle, the on-hand quantity is updated. If
you are using the Average Cost costing method, the average cost is also updated. Oracle uses the
on-hand quantity multiplied by the item cost to calculate Inventory value. If you run period-end

inventory value reports, Oracle will rollback the quantity and cost to the period end values.
Otherwise, the inventory value is calculated (real time) with the current on-hand and item cost.

The Relationship between Material and WIP Distributions

and Inventory Value
After a material or WIP transaction has been recorded, the Cost Manager will create the
distributions for that transaction. Each transaction has two distributions per cost element. Each
cost element will have a debit and credit distribution associated with specific accounting line
types. The accounting line type tells us if this distribution affects inventory value. If the
accounting line type is Inv Valuation then inventory value is affected.

Inventory Value Calculation and Material Distributions

Because Inv Valuation is the only accounting line type that affects inventory value, we can say
that the inventory value should equal the sum of the Inv Valuation accounting line types. This
gives us the first step in our reconciliation. Does the sum of the Inv Valuation accounting line
types equal the Inventory Value report? If not, then you have a problem with the on-hand or item
cost being out of sync with the material distributions. To verify this for a specific period, you
need to subtract the inventory value from last period from the inventory value for this period.

Reconciling Inventory Activity to GL Activity

After you have verified that the difference between last periods inventory value report and this
periods inventory value report equals the Inv Valuation material distributions, you can verify
the sum of all material distributions for each inventory valuation GL account equals the
difference the same amount. If theres between the two amounts you know that there are some
material distributions that do not have an accounting line type of Inv Valuation. The main
culprit for these distributions is miscellaneous issues, miscellaneous receipts, and cost updates
coded to an inventory valuation GL account. The other possible reason is if your receiving
account is the same as your inventory valuation GL account. This will cause you to debit and
credit the same account when the deliver transaction is recorded. You can verify this by
entering the material valuation GL account with the accounting line type of Receiving
Inspection into the material distribution form. When you have the adjustments to your material
distributions, you can now compare the material distributions amount to the difference between
last periods GL balance and this periods GL balance. If you are using different accounts for
each cost element, youll need to add them together before comparing. If you have a problem
here, then look for journal entries that do not have a source of Cost Management. If you

exclude these journal entries and you still do not balance, then make sure all accounting has be
created, interface, and posted to the GL.

Inventory Activity Reconciliation Worksheet