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8 Replies Latest reply: Nov 20, 2012 9:43 PM by oracle_samba RSS

Double Cost A/c impact of brrow & lent and Intrcompany in same legal entity

oracle_samba Newbie
Currently Being Moderated
Hello Experts / Dina,
Could someone please explain me the double cost accounting impact on borrowed and lent process and inter-company accounting in same legal entity scenario?

Example – Lets say US company X-star running the project on Mobile Apps development in US consulting division (Project Organization) and the resources from marketing division (Expenditure organization) are working on it on developing marketing campaign and decided to share the cost 100%.

Using Borrow and Lent:-Assume MIS cost is charge of USD 100 on Project Mobile Apps Development. A/c is

Debit- US Company-Marketing (Expenditure Org)-MIS Cost A/c (Expense A/c)-100 USD.

Then if you use borrowed and lent accounting method the accounting entries will be generated as
Debit- cost to US Company –US Consulting (Project Org) – MIS Cost A/c (Expense A/c)-100 USD
Credit- cost to US Company-Marketing (Expenditure Org)-MIS Cost A/c (Expense A/c)-100 USD.

In this case cost on Expenditure organization is totally reverse and cost is only charge to provider organization.

In Inter-company scenario:- But let say if you are trying to implement the same scenario using inter-company accounting.

Then MIS cost charge of USD 100 on project will derive the same accounting as mentioned above.
Debit- US Company-Marketing (Expenditure Org)-MIS Cost A/c (Expense A/c)-100 USD.

Revenue will generate below accounting.
Credit- US Company-Marketing (Expenditure Org)-MIS Revenue A/c (Revenue A/c)-100 USD.

And payables intercompany invoice in provider organization will generate below accounting.
Debit- cost to US Company –US Consulting (Project Org) – MIS Intercompany Cost A/c (Expense A/c)-100 USD.

Now the question is why in Inter-company scenario (2nd case example ) the cost of expenditure organization is not reverse similar like in borrow and lent scenario? I guess implementation of intercompany scenario results in double costing for same company (within legal entity).

But this might look properly when you implement inter-company approach across legal entity as company can report separate expense and (internal-external) revenue across company.
Similarly like inter-company scenario when you use inter project billing, you end up in creating double costing. Am I right?

Please let me know whether my understanding is correct?

Your reply on this will be greatly appreciated.
Thanks
:-)
  • 1. Re: Double Cost A/c impact of brrow & lent and Intrcompany in same legal entity
    oracle_samba Newbie
    Currently Being Moderated
    Hello,

    Any help on this please?

    Regards,
    :-)
  • 2. Re: Double Cost A/c impact of brrow & lent and Intrcompany in same legal entity
    Dina Rotem Guru
    Currently Being Moderated
    Hi

    With Borrow and Lent you cross charge within the same operating unit.

    Organization A is providing the resource and charging the cost on a project owned by organization B.
    The accounting of the cross charge distribution can be set as follow:
    Debit org B on "Internally Purchased Cost" account
    Credit org A on "internal Revenue" account

    This way you can report on Org A:
    Cost 100
    Internal revenue 100

    You can report on Org B:
    Internally Purchased Cost - 100.

    In GL you may want to offset both the internal trade accounts on a balancing value of cost center. So the internal revenue credit will offset the internally purchased cost debit.

    Dina
  • 3. Re: Double Cost A/c impact of brrow & lent and Intrcompany in same legal entity
    oracle_samba Newbie
    Currently Being Moderated
    Hi Dina,

    First of all thanks for responding to my question.

    I would like to progress my understanding on this topic by dividing them into each point. Please correct my understanding on each point with little explaination if possible. :-)

    1.With borrow and lent you cannot only cross charge within the same operating unit but also cross charge across operating unit only within same legal entity. Am I right?


    2.On the below example explained below sec 2.1; this perfectly works fine in scenario where organization within legal entities are agree to share the revenue.
    But what if the organizations agreed to share the cost? In that case it should generates the accouting mentioned below in section 2.2. Am I right.?
    2.1> (Example provided by you- share revenue)
         Debit org B on "Internally Purchased Cost" account
         Credit org A on "internal Revenue" account

    2.2>(same Example used by me with diff scenario of sharing the cost)
         Debit org B on "Internally Purchased Cost" account
         Credit org A on "Labor Cost A/c" account

    If so then isn't it nullifying the cost generated by Org A previously.
    2.2.1>
    Debit Org A on "Labor Cost A/c"
    after generating borrow & lent
    Debit org B on "Internally Purchased Cost" account
    Credit org A on "Labor Cost A/c" account
    Resulting in general ledger module showing the cost on Org B "Internally purchase cost"
    Am I right?

    3.But lets say now if organization are agreed to share the cost but instead of using borrow and lent, they are agreed to use inter-company functionality then
    accounting entries will result mentioned below.Am I right?
    3.1>
    Cost -               Debit Org A on "Labor Cost A/c" account
         
    Inter-comp Invoice -     Debit Org A on "Inter Recivable A/c" account
                   Credit Org A on "Inter-revenue A/c" account

    Paybles inter invic -     Debit Org B on "internally purchase a/c" account
         
    Now my worries are if both the process agrees on same principle of sharing the cost design for
    same purpose then why results in different accounting by finally creating double costing on Org A and Org B as well. Am I not sure whether my understanding is correct. Please help.

    Also mentioned by you earlier..

    "In GL you may want to offset both the internal trade accounts on a balancing value of cost center. So the internal revenue credit will offset the internally purchased cost debit."

    I am not sure how you can offset the internal revenue and cost account for Org A in GL. (is this done manually??) Could you please explain in detail if possible?

    Thanks
    :-)
  • 4. Re: Double Cost A/c impact of brrow & lent and Intrcompany in same legal entity
    oracle_samba Newbie
    Currently Being Moderated
    Hello Dina,

    Any help on this would be greatly appreciated.

    Thanks
    :-)
  • 5. Re: Double Cost A/c impact of brrow & lent and Intrcompany in same legal entity
    Dina Rotem Guru
    Currently Being Moderated
    Hi

    Here are my responses along side your questions:

    1.With borrow and lent you cannot only cross charge within the same operating unit but also cross charge across operating unit only within same legal entity. Am I right?
    No. Borrow and Lent works only within the same operating unit. This functionality does not involve supplier and customer invoices, only accounting entries. When you cross operating units you must use the intercompany billing process.

    2.On the below example explained below sec 2.1; this perfectly works fine in scenario where organization within legal entities are agree to share the revenue.
    But what if the organizations agreed to share the cost? In that case it should generates the accounting mentioned below in section 2.2. Am I right.?
    2.1>; (Example provided by you- share revenue)
    Debit org B on "Internally Purchased Cost" account
    Credit org A on "internal Revenue" account

    2.2>;(same Example used by me with diff scenario of sharing the cost)
    Debit org B on "Internally Purchased Cost" account
    Credit org A on "Labor Cost A/c" account

    If so then isn't it nullifying the cost generated by Org A previously.
    2.2.1>;
    Debit Org A on "Labor Cost A/c"
    after generating borrow & lent
    Debit org B on "Internally Purchased Cost" account
    Credit org A on "Labor Cost A/c" account
    Resulting in general ledger module showing the cost on Org B "Internally purchase cost"
    Am I right?

    In my example the credit of the provider organization is on account - Internal revenue. This is not considered as revenue share, since the revenue of org A from its customer agreement is not decreased.
    Internal revenue and internal purchased costs are two accounts that are different from the norma business accounts. When you report in GL for the organization A you will get external revenue of 1000, labor cost of A of 300, and internal purchased cost of 400.  So margin of org A is 1000-300-400 = 300.
    When you report in GL for the organization B you will get internal revenue of 400, labor cost of 370, and org B margin is 400 - 370 = 30.
    When you report in GL for the entire company (summary of bot organizations) you will have - External revenue of 1000, labor cost of 670, and total margin of 330.
    Note the margin of the company is shared by org A -300, and org b - 30.
    To get the report of the total company I did not included the internal trading accounts - the internal purchased cost and the internal revenue.

    In the approach you provided you credited the cost of org B, rather than credit an internal revenue account.  That is also a legitimate approach. However for audit use I could suggest to use a separate account for crediting the costs o org B, and not the same original account of labor A/C.

    3.But lets say now if organization are agreed to share the cost but instead of using borrow and lent, they are agreed to use inter-company functionality then
    accounting entries will result mentioned below.Am I right?
    3.1>;
    Cost - Debit Org A on "Labor Cost A/c" account


    Inter-comp Invoice - Debit Org A on "Inter Receivable A/c" account
    Credit Org A on "Inter-revenue A/c" account

    Payables inter invoice - Debit Org B on "internally purchase a/c" account

    The accounting results of both processes could be the same. The difference is the introducing of AP & AR invoices and the need to run payments on both sides. In any case on org A you always debit an account which means internally purchase, cost purchased from another organization.  On org B you always credit an account that could be named internal revenue or cost reimbursement or cost reduction, etc.

    Now my worries are if both the process agrees on same principle of sharing the cost design for
    same purpose then why results in different accounting by finally creating double costing on Org A and Org B as well. Am I not sure whether my understanding is correct. Please help.

    Also mentioned by you earlier..

    "In GL you may want to offset both the internal trade accounts on a balancing value of cost center. So the internal revenue credit will offset the internally purchased cost debit."

    I am not sure how you can offset the internal revenue and cost account for Org A in GL. (is this done manually??) Could you please explain in detail if possible?

    My note about the need to offset in GL is related to the method of reporting. As explained in the example above, when reporting on the entire company you need to omit the internal trade accounts.  The method I use is to set up additional cost center value in GL which is not related to any real organization. This cost center is used for offset entries.
    I take the balance of internal purchased cost from of organizations and create a journal entry of the same amount but negative for the offset cost center.  The same is done for the balance of internal revenue of all cost center. As a result  the total internal purchased cost and the total of internal revenue at company level (accross all cost centers) is zero.  Now you can report on the entire company without the affect of the internal trade.  Those journal entries may be created automatically by allocation rules set up in GL.

    Dina
  • 6. Re: Double Cost A/c impact of brrow & lent and Intrcompany in same legal entity
    oracle_samba Newbie
    Currently Being Moderated
    Hi Dina,

    I am really greatful to you and many many thanks for answering my queries. I understod all the explaination provided you but need a little further clarification on one of your statement mentioned below.

    _"In the approach you provided you credited the cost of org B, rather than credit an internal revenue account. That is also a legitimate approach. However for audit use I could suggest to use a separate account for crediting the costs o org B, and not the same original account of labor A/C."_

    What should be the account type of separate account for crediting the cost of Org B? is it of type expense a/c similar like Labor cost clearing account? Please help.

    Thanks once again :-)

    Regards,
    :-)
  • 7. Re: Double Cost A/c impact of brrow & lent and Intrcompany in same legal entity
    Dina Rotem Guru
    Currently Being Moderated
    Hi

    If you want to credit cost the account should be of type Expense
    If you want to credit revenue the account should be of type Revenue.

    Dina
  • 8. Re: Double Cost A/c impact of brrow & lent and Intrcompany in same legal entity
    oracle_samba Newbie
    Currently Being Moderated
    Hi Dina,
    Thanks for your quick help on this.
    Regards,
    :-)

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