Develop the habits of sound bookkeeping

Develop the habits of sound bookkeeping to avoid
running into serious trouble IT TAKES EFFORT AND
DISCIpline to maintain accounting records that are
accurate and reliable. Left to untrained personnel
without knowledgeable oversight, accounting records
can quickly slip out of control.

The consequences of poor accounting can become
painfully clear. Expenses run amok. Checks issued may
be returned for insufficient funds. Accounts
receivable may age until they become uncollectible.
Shrinkage may erode inventory and not be detected.
Payables accumulate for lack of cash. On top of that,
lenders and investors lose confidence in the company's
financial performance. What is a business owner or
manager to do?

Accounting fundamentals

At the highest level, certain key elements must be in
place to assure that financial information is
accurate. The first is the retention of basic
accounting records, including the general ledger,
journal entries, journals of sales, purchases, cash
receipts and cash disbursements, and month-end account
details, including accounts receivable and accounts
payable. Inventory transaction journals and month-end
perpetual listings are also desirable.

The chart of accounts, which defines the accounts in
use by the company, must allow for an appropriate
level of detail to manage the business. As part of
month-end procedures, supporting details must be
reconciled to the general ledger, and maintained in a
file for ready reference. Other assets and
liabilities, such as prepaid expenses and accrued
liabilities, should be detailed and computed as
necessary.

Reconciliations of bank accounts from bank to book
balances are particularly important. The proper role
for independent bank reconciliation includes certain
audit steps as well as balancing to books. Optimally,
the individual performing the reconciliation would be
outside the accounting function and receive the bank
statements directly from the bank. He or she would
examine endorsements and compare canceled check
information with cash disbursements records. Multiple
or manual endorsements are a possible clue to
wrongdoing.

Journal entries are also critical to control, as they
represent changes made to account balances that are
done outside of the basic accounting records just
mentioned. They should be numbered and bound together
with their supporting documentation. Both the preparer
and reviewer should sign off. Only authorized
individuals should be allowed to prepare them. Without
control, journal entries are dangerous. They convey
the power to commit fraud as they can be used to
camouflage any number of improprieties.

There is no substitute for independent, knowledgeable
review of critical accounting functions. In smaller
companies, the owner or manager may best perform
these. Critical review by the owner or manager can
make the difference in establishing an appropriate
control environment. Some of the crucial areas for
such review include financial statements, bank
reconciliations, journal entries, credit approval
decisions, past due accounts receivable, accounts
receivable write-offs, unmatched documents, and checks
issued. Budgets should be established to facilitate
the review of revenue and expenses. More intensive
scrutiny can be directed to those areas in which
performance is below budget.

Extra effort

Each month-end, special effort should be made to
assure that sales are completely recorded. This
entails matching of shipments with billing. Ideally, a
sequentially numbered billing document is produced
simultaneously with shipping documents. That way, as
long as shipping procedures are followed, an item
cannot ship without being billed. Barring that,
pre-numbered shipping records should be
crossreferenced with subsequent invoices.

Care must also be taken to review the open accounts
receivable for accuracy. In addition to collection
calls and correspondence, monthly customer statements
are a way of keeping open invoices in front customers.
Customers who are genuinely unaware of an invoice for
one reason or another will call and disclose the
problem. The write-off of accounts must be authorized
in writing, and preferably be assigned to a collection
agency.

Similarly, accounts payable should be checked to be
sure that they are recorded completely. Typically,
cut-off procedures include keeping accounts payable
open for late arriving invoices as well as tracking of
unmatched receivers and freight bills. When perpetual
inventory records are integrated with the general
ledger, things can be made easier and more reliable.

Liabilities are updated as inventory is received,
based on actual quantities extended at purchase order
prices. The liability account caption is "accrued
inventory," "goods received," or "open receivers." The
liability is relieved to accounts payable when the
vendor invoice is received. As long as the system
functions, there should be no cutoff or completeness
issue relative to inventory purchases.

Additional control over accuracy can be achieved by
reconciling vendor monthly statements. Often, these
statements received are simply filed or thrown away.
By reconciling them to accounts payable recorded, on
the other hand, potential disputes can be resolved in
a timely manner. This control is particularly
effective for assuring that accounts payable records
are in sync with those of the vendors.

The ultimate control over purchases and inventory,
however, comes with perpetual inventory records and
details of cost of goods sold. In whatever manner
derived, from manual costing out of orders or through
back-flushing, a cost of goods sold per system is
useful for comparison with cost of goods derived from
purchases adjusted for the change in inventory levels.
This provides control at an aggregate level.

Expenses should also be scrutinized to determine that
they are in line with budget or expectation. This
means explaining what particular items are for and why
they are needed. Payroll should be reviewed, with time
paid for direct labor reconciled to hours worked from
a time reporting or job costing system. Capital
expenditures should be set up as assets in accordance
with appropriate criteria. Depreciation should be
computed and booked. For that, an estimate is
sufficient at interim dates.

Multiple locations

An accounting group that is responsible for multiple
operating locations has special concerns at month-end.
For maximum control over accounting, the group should
perform the review function as an owner-manager role.
It should also maintain copies of the basic accounting
records, and prepare reconciliations, including those
of bank accounts.

Certain processes should be considered for
centralization. These include maintenance of accounts
receivable and accounts payable details by the
accounting group. Billing and purchasing might also be
done centrally, as well as the collection and
disbursement of cash. For better control of inventory
at remote locations, a duplicate perpetual record
could be maintained by the accounting group. Finally,
an internal audit function could be established.

A month-end checklist

* Retain the general ledger, journal entries, journals
of sales, purchases, inventory transactions, cash
receipts, and cash disbursements.

* Keep month-end account details, including accounts
receivable, accounts payable, and, if maintained,
perpetual inventory listings.

* Reconcile details supporting balances to the general
ledger, including bank accounts.

* Control journal entries by requiring supporting
documentation and authorizing sign-off.

* Provide owner or manager review of financial
statements, budgets, bank reconciliations, journal
entries, credit approval decisions, past due accounts
receivable, accounts receivable write- off, unmatched
documents, and checks issued.

* Match shipments with billing.

* Review open accounts receivable for accuracy.
Implement collection procedures and send monthly
customer statements of account. Authorize write-offs.

* Implement cut-off procedures to assure that all
accounts payable are recorded.

* Reconcile vendor monthly statements to accounts
payable balances.

* Scrutinize expenses and compare them to budget.

* Consider centralization of functions when there are
multiple locations