Simplify Period Ending Closes by Automating the Accrual Process

Updated: August 14, 2009

The process of ferreting out current period business expense items to be accrued at period-end can be a difficult experience for many organizations, but it need not be so. To gain control over period-end accruals requires a combination of both process automation steps and process discipline for best results.

How can an organization get control of over its period-end accruals? The first question to ask yourself is how do we control spending today? Procedurally, every organization should control current-period spending by one of these methods:

  1. By using corporate credit/debit cards, using card providers who allow online statement viewing and ideally, statement downloading.
  2. By requiring a purchase order to be issued on everything purchased, whenever possible.
  3. By requiring vendor invoices to be mailed to a common lockbox.
  4. By requiring any employee with out of pocket expenses to making an accounting of such expenses on a weekly basis.

Encouraging corporate credit/debit card usage is perhaps one of the best control mechanisms to implement. Most such expenses are included in your statement balance on the same or next business day in most cases.

If any given expense payment can't be made using a corporate debit/credit card, the option is for the employee to make an out of pocket payment using a personal funding source (i.e. cash or a personal credit card). Ideally, an organization will require that out of pocket expense reports be completed and filed, electronically, on a weekly basis. What sort of incentives are there for employees to file quickly? Fast filing should go hand in hand with fast repayment. A general rule is to require filing by Monday for payment by the following Friday and add an additional week onto every delayed filing; that will get their attention and cooperation very quickly. Expense reports should explicitly differentiate between funding sources as "paid by organization" vs "paid by employee" (out of pocket).

Organizations that have ERP systems should be leveraging their software to its fullest. For ERP systems that include purchasing modules - be sure to use system generated purchase orders and follow-up by receiving all goods into the system. Purchases made in this way will be properly classified and in many systems, automatically accrued. How is this so? Most ERP systems include "received not vouchered" functionality that will alert you to any goods received, but not yet invoiced by the vendor.

However, for goods or services purchased without a purchase order, almost any Accounts Payable System or A/P module in an ERP system will allow you to "log" invoices into the system when received, even if they aren't being paid immediately (i.e. a future due date, still requires management approval, etc.). Such logging constitutes an accrual, although in some systems the booking of accrual to what's in the log may not be an automated accounting entry.

If the right combination of disciplined and automated processes are established, the collection of data to build out period end accruals will be largely automated, allowing the accountant to focus on the analysis of the data to prevent over or under accruals from occuring.

If your organization does not have an ERP system, all is not lost. A relatively simple log of unpaid invoices can be created and maintained using a spreadsheet or simple database. Information about what to accrue for can be gleaned from the same sources as previously mentioned earlier in this article - albeit you won't have automated entries flowing from the ERP system into your accruals spreadsheet. Remember that when you accrue manually, you'll still need to relieve those accruals (either manually, or as system generated reversing entries).

Although not specifically covered here, the necessity for the thoughtful review and approval of all organizational expenditures by one or more levels of business management, in addition to accounting's review, remains a mandatory practice and is your organization's best method for evoking meaningful, long-term spending discipline within the organization.

End of Report

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