What Is Accrual Accounting in Oracle Apps?

Oracle applications are the interactive business software products of the Oracle Corporation (ORCL), one of the world's leading financial and accounting software companies. Oracle Financials Accounting Hub (FAH) is part of the Oracle E-Business Suite group of applications that businesses can run as a cloud-based application. Through FAH, users can create auditable and reconcilable accounting forms from other source systems, which are very valuable in an increasingly interactive business age.

What Is Accrual Accounting?

Accrual accounting forms one of the two major types of accounting methods for businesses in the United States. Under the accrual method (sometimes called the accrual basis of accounting), businesses record revenues when the transaction occurs, not when the actual cash payment for the sale is received. Likewise, expenses are recorded and recognized in the period for which the related revenue is recognized; this is called the matching principle.

Accrual accounting is particularly useful for companies that have to report inventory or have large accounts payable or accounts receivable. The financial impact of loans, credit accounts, and prepaid services are considered more carefully under accrual accounting.

The other major accounting method, cash basis accounting, records revenues and expenses when money is actually received/paid. Cash basis accounting is widely considered to be a less accurate form of accounting, and the Internal Revenue Service (IRS) prohibits larger businesses or businesses with inventory from using cash basis accounting.

Accrual Accounting and Oracle Applications

The FAH application is a type of enterprise software—purposefully designed computer programs that aim for organization-wide use rather than individual use. Applications, such as Oracle's FAH, typically default towards accrual accounting however both cash and accrual are offered.

Companies can adjust the FAH application through a transformation engine that enforces individualized accounting policies. Companies can establish separate corporate, management, and reporting requirements and check against any unique auditing or reporting rules for the IRS.

Companies that use Oracle's applications for accrual accounting post their accounting distributions for invoices and payments, whereas only payments are necessary under cash basis accounting. These distributions automatically debit the associated expense accounts—assuming that the underlying source systems can accommodate it—and credit the liability accounts. This type of automated account balancing can also be extended to generated revenue, inventory control, taxes, depreciation, and amortization.

Special Considerations

The accuracy of source software is paramount for effective accrual accounting through Oracle. Because Oracle pulls data from sometimes disparate sources and combines them, some entry errors may be difficult to reconcile. Oracle does have some built-in functionality that supports businesses in tracking pertinent information, such as their receipt accrual's unbilled receipts account. These tools also enable users to identify, isolate, and resolve exceptions through business-specific exception management or online assistance.

Designed in part by professional accountants, the Oracle system is updated whenever there are changes in either government accounting requirements or the generally accepted accounting principles (GAAP). Since accrual accounting tends to ignore time and instead focuses on economic events, cash flow can be problematic, but the Oracle system can also help to create statements of cash flow.