What is Netting

A business sells goods and services to a party ( customer). They need to collect money for the same. The business may also buy goods and services from the same Party. If they were to pay for each transaction separately.....

a) The Transaction cost would flare up (bank charges, credit card fees, commissions etc would go up)
b) The cash flow position would be adversely affected on a day to day basis. Say if a customer owes you 100 and you buy for 125 and have to pay in full for the purchase without setting of what is due from the same party.

Background-11i and R12

In R11i netting was there albeit in the background. A special global patch was needed to use the Contra charging feature.
In R12 this has now become a full fledged out of the box feature that helps businesses to Pay the net amounts to parties and enjoy efficiencies as discussed above.

Simple setups

First a netting payment goes out from a dummy cash account not the real cash account. This Netting account needs to be set up first in GL.

Then a Netting bank account is setup And the above cash account is pulled up into the same. There is no need for any payable documents for this bank account.

The next thing that needs to be done is to configure the AP/AR Netting Receipt Class/Payment method in AR. This is a straightforward set up.

Finally the Netting Agreement which links the customer and supplier (Parties) and opens a wide range of possibilities

a) You can net between specific sites.
b) You can choose to net by currency or a specific currency.
c) You can specify the rules on how netting should take place in what order.
d) You can choose to net according to rules or bypass the netting agreement and invoice selection after running a netting batch to add or remove invoices selected.

Finally the net amount that remains is settled using an actual cash account (bank account) paying only for the net due or receiving the balance.