Example of Accounting of Trade Transactions in Internal Drop Shipments

An internal drop shipment is a trade transaction involving the movement of goods from an inventory organization directly to a customer, yet the business unit that sells the goods to the customer is different from the business unit to which the inventory organization belongs.

From the financial standpoint, the business unit to which the inventory organization belongs sells the goods to the other business unit who, in turn, sells the goods to the customer.

The following is an example of accounting performed by Oracle Cost Accounting and Oracle Receipt Accounting for an internal drop shipment. It illustrates:

• Transactions that are captured in Oracle Supply Chain Financial Orchestration and interfaced to Receipt Accounting and Cost Accounting.

• Accounting entries that Receipt Accounting and Cost Accounting generate for the drop shipment flow from the selling organization to the customer of the buying organization.

• Accounting entries that Receipt Accounting and Cost Accounting generate for the return flow from the customer to the seller.

Scenario

China Ltd. drop ships the goods to the customer of US Inc.

Transactions from Supply Chain Financial Orchestration

The trade agreement, accounting rule sets, and associated purchase orders are set up in Supply Chain Financial Orchestration, and the transactions flow into Receipt Accounting and Cost Accounting based on this setup:

• China Ltd. acquires goods locally at the cost of USD 50, plus USD 10 overhead on the receipt of goods.

• Intercompany transfer price from China Ltd. to US Inc. is USD 100.

• Intercompany invoicing is set to Yes.

• Overhead rule is configured in Cost Accounting for transaction type Trade in-Transit Receipt in Cost Organization CO1.

• US Inc. books a profit of USD 40 (USD 100 transfer price - USD 50 PO price - USD 10 overhead).

Analysis

Receipt Accounting and Cost Accounting create accounting distributions for the transfer of goods.

Accounting Entries

The following figure illustrates accounting entries for the shipment from legal entity China Ltd. to legal entity US Inc.

Cost Accounting generates distributions under cost organization CO1 and inventory organization M1.

The following table describes the cost accounting entries.

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr	Functional Currency	Cost Element	Basis of Amount
Cost Accounting	Sales Order Issue	Trade In-Transit	50	USD	Material	Current Cost
Cost Accounting	Sales Order Issue	Trade In-Transit	10	USD	Overhead	Current Cost
Cost Accounting	Sales Order Issue	Inventory	-50	USD	Material	Current Cost
Cost Accounting	Sales Order Issue	Inventory	-10	USD	Overhead	Current Cost
Cost Accounting	Trade In-Transit Issue	Intercompany Cost of Goods Sold	50	USD	Material	Current Cost
Cost Accounting	Trade In-Transit Issue	Intercompany Cost of Goods Sold	10	USD	Overhead	Current Cost
Cost Accounting	Trade In-Transit Issue	Trade In-Transit	-50	USD	Material	Current Cost
Cost Accounting	Trade In-Transit Issue	Trade In-Transit	-10	USD	Overhead	Current Cost
Accounts Receivable	Intercompany Accounts Receivable Invoice	Intercompany Receivable	100	USD	Not Applicable	Transfer Price
Accounts Receivable	Intercompany Accounts Receivable Invoice	Intercompany Revenue	-100	USD	Not Applicable	Transfer Price

Receipt Accounting generates distributions under business unit US West and inventory organization M2. Cost Accounting generates distributions under cost organization CO2 and inventory organization M2.

The following table describes the receipt and cost accounting entries.

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr	Functional Currency	Cost Element	Basis of Amount
Receipt Accounting	Trade Receipt Accrual	Trade Clearing	100	USD	Not Applicable	Transfer Price
Receipt Accounting	Trade Receipt Accrual	Intercompany Accrual	-100	USD	Not Applicable	Transfer Price
Cost Accounting	Trade In-Transit Receipt	Trade In-Transit	50	USD	Material	Sending Organization Cost
Cost Accounting	Trade In-Transit Receipt	Trade In-Transit	10	USD	Overhead	Sending Organization Cost
Cost Accounting	Trade In-Transit Receipt	Trade In-Transit	40	USD	Profit in Inventory	Internal Markup
Cost Accounting	Trade In-Transit Receipt	Trade Clearing	-100	USD	Material, Overhead, and Profit in Inventory	Transfer Price
Accounts Payable	Intercompany Accounts Payable Invoice	Intercompany Accrual	100	USD	Not Applicable	Transfer Price
Accounts Payable	Intercompany Accounts Payable Invoice	Intercompany Liability	-100	USD	Not Applicable	Transfer Price
Cost Accounting	Trade Sales Issue	Deferred Cost of Goods Sold	50	USD	Material	Sending Organization Cost
Cost Accounting	Trade Sales Issue	Deferred Cost of Goods Sold	10	USD	Overhead	Sending Organization Cost
Cost Accounting	Trade Sales Issue	Deferred Cost of Goods Sold	40	USD	Profit in Inventory	Internal Markup
Cost Accounting	Trade Sales Issue	Trade In-Transit	-50	USD	Material	Sending Organization Cost
Cost Accounting	Trade Sales Issue	Trade In-Transit	-10	USD	Overhead	Sending Organization Cost
Cost Accounting	Trade Sales Issue	Trade In-Transit	-40	USD	Profit in Inventory	Internal Markup

The customer returns goods directly to China Ltd.

The following figure illustrates accounting entries for the return flow from US Inc (Sold-to Legal Entity) to China Ltd (Legal Entity).

Receipt Accounting generates distributions under business unit US West and inventory organization M2. Cost Accounting generates distributions under cost organization CO2 and inventory organization M2.

The following table describes those receipt and cost accounting entries.

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr	Functional Currency	Cost Element	Basis of Amount
Receipt Accounting	Trade Return Accrual	Intercompany Accrual	100	USD	Not Applicable	Transfer Price
Receipt Accounting	Trade Return Accrual	Trade Clearing	-100	USD	Not Applicable	Transfer Price
Cost Accounting	Trade In-Transit Return	Trade Clearing	100	USD	Split into three lines (Material, Overhead, and Profit in Inventory)	Transfer Price
Cost Accounting	Trade In-Transit Return	Trade In-Transit	-50	USD	Material	Sending Organization Cost
Cost Accounting	Trade In-Transit Return	Trade In-Transit	-10	USD	Overhead	Sending Organization Cost
Cost Accounting	Trade In-Transit Return	Trade In-Transit	-40	USD	Profit in Inventory	Internal Markup
Accounts Payable	Intercompany Accounts Payable Debit Memo	Intercompany Liability	100	USD	Not Applicable	Transfer Price
Accounts Payable	Intercompany Accounts Payable Debit Memo	Intercompany Accrual	-100	USD	Not Applicable	Transfer Price
Cost Accounting	Trade Sales Return Receipt	Trade In-Transit	50	USD	Material	Sending Organization Cost
Cost Accounting	Trade Sales Return Receipt	Trade In-Transit	10	USD	Overhead	Sending Organization Cost
Cost Accounting	Trade Sales Return Receipt	Trade In-Transit	40	USD	Profit in Inventory	Internal Markup
Cost Accounting	Trade Sales Return Receipt	Deferred RMA Gain/Loss	-50	USD	Material	Sending Organization Cost
Cost Accounting	Trade Sales Return Receipt	Deferred RMA Gain/Loss	-10	USD	Overhead	Sending Organization Cost
Cost Accounting	Trade Sales Return Receipt	Deferred RMA Gain/Loss	-40	USD	Profit in Inventory	Internal Markup

Receipt Accounting generates distributions under business unit CN and inventory organization M1. Cost Accounting generates distributions under cost organization CO1 and inventory organization M1.

The following table describes those accounting entries.

Subledger	Event Type	Accounting Line Type	Amount in Functional Currency +Dr/-Cr	Functional Currency	Cost Element	Basis of Amount
Cost Accounting	RMA Receipt	Inventory*	50	USD	Material	Current Cost
Cost Accounting	RMA Receipt	Inventory	10	USD	Overhead	Current Cost
Cost Accounting	RMA Receipt	Trade In-Transit	-50	USD	Material	Current Cost
Cost Accounting	RMA Receipt	Trade In-Transit	-10	USD	Overhead	Current Cost
Cost Accounting	Trade In-Transit Return Receipt	Trade In-Transit	50	USD	Material	Current Cost
Cost Accounting	Trade In-Transit Return Receipt	Trade In-Transit	10	USD	Overhead	Current Cost
Cost Accounting	Trade In-Transit Return Receipt	Intercompany Cost of Goods Sold	-50	USD	Material	Current Cost
Cost Accounting	Trade In-Transit Return Receipt	Intercompany Cost of Goods Sold	-10	USD	Overhead	Current Cost
Accounts Receivable	Intercompany Accounts Receivable Credit Memo	Intercompany Revenue	100	USD	Not Applicable	Transfer Price
Accounts Receivable	Intercompany Accounts Receivable Credit Memo	Intercompany Receivable	-100	USD	Not Applicable	Transfer Price

* Inventory is received at the current cost, and the difference between transfer price and cost is booked as cost variance.