Financial accounting has two important generally accepted accounting principles (GAAP) that guide the statement of financial earnings:

• Revenue recognition principle
• Cost matching principle

The revenue recognition principle requires revenues to be recognized when a firm has performed all, or a substantial portion of services to be provided, and cash receipt is reasonably certain. The matching principle requires that cash outlays associated directly with revenues are expensed in the period in which the firm recognizes the revenue. The Oracle e-Business Suite supports this matching principle by synchronizing the recognition of cost of goods sold (COGS) with the revenue recognized in Oracle Receivables for shipments made in Oracle Order Management, or other order fulfillment systems. With this feature, sales order revenue and the associated COGS are recognized in the same period. In addition, when sales order revenue is only partially recognized, the associated COGS is recognized in the same proportion.

Revenue / COGS Recognition Process Flow
When you ship confirm one or more order lines in Oracle Order Management and then run the applicable Cost Management cost and accounting processes, the cost of goods sold associated with the sales order line is immediately debited to a Deferred COGS account pending the invoicing and recognition of the sales order revenue in Oracle Receivables. When Oracle Receivables recognizes all or part of the sales revenue associated with a sales order line, you run a cost process that calculates the percentage of total billed revenue recognized. Oracle Inventory then creates a cost recognition transaction that adjusts the Deferred COGS and regular COGS amount for the order line. The proportion of total shipment cost that is recognized as COGS will always match the proportion of total billable quantity that is recognized as revenue.

Steps for Deferred COGS

• Define Deferred COGS Account



• Define Accounting Rules for Sales Orders



• Define Transaction Types for Orders

COGS Recognition and Concurrent Processes
The matching and synchronization of the earned and deferred components of sales order revenue and COGS is  ccomplished by running the following COGS recognition concurrent processes at user-defined intervals:

• Record Order Management Transactions : The Record Order Management Transactions concurrent process picks up and costs all uncosted sales order issue and RMA return transactions and creates a record for each new order line in the costing COGS recognition matching table. This  process is not mandatory. If you don't run this process, then the cost processor will select and cost the uncosted sales order issues and insert them in the COGS matching table. This process can be used if you need to process the COGS recognition transactions at shorter intervals than the cost processor.
• Collect Revenue Recognition Information: The Collect Revenue Recognition Information concurrent process calls an Oracle Receivables API to retrieve the latest revenue recognition percentage of all invoiced sales order lines in Oracle receivables whose activity date is within a user-specified date range. This process must be run before the Generate COGS recognition Event concurrent process.

• Generate COGS Recognition Events : The Generate COGS Recognition Events concurrent request compares the COGS recognition percentage for each sales order line and accounting period combination to the current earned revenue percentage. When the compared percentages are different, the process raises a COGS recognition event and creates a COGS recognition transaction in Oracle Inventory that adjusts the ratio of earned and deferred COGS to match that of earned and deferred revenue. You must run this process after completion of the Collect Revenue Recognition Information concurrent process.