In a recent article, we briefly discussed external financial reports in terms of the audience, or specific users of company information. Generally, one of the most important users in the USA is the Internal Revenue Service (IRS), followed by various state and local taxing authorities. Required income tax returns can be prepared more easily from financial reports that are classified in a comparable manner. A tax practitioner is usually retained to prepare and file these returns. The reports most commonly requested of the company are the general ledger and related financial statements.

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Accounting Basics

Three important terms are easily confused.  They are: Bookkeeping, Accounting, and Reporting. What are they, how do they interrelate, and how do they interface with accounting policies and procedures?  First, let’s define the terms.

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Accounting methods and accounting standards are typically defined within your accounting manual, a key component of your accounting system.  Your accounting manual defines your policies, procedures, and internal controls for Sarbanes Oxley and other compliance needs.  There are two main accounting methods: accrual and cash.

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The financial transactions of any accounting system can be grouped into four major accounting cycles: Revenue, Purchase, Payroll, and General Journal.

Four Main Accounting Cycles

Accounting transactions in the form of sales invoices, receipts, purchase invoices, checks, and payroll entries are posted to the appropriate journals. Simultaneously — as a form of internal control — these postings are recorded in the general ledger, or “GL”. The GL accumulates all transaction activity, where it is organized by account class.

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How familiar are you with the accounting rules and concepts utilized by accounting software systems?  If you were more confident with the information generated by your accounting program, would it help you to use it more effectively to run your company?  More importantly, do you understand how your Accounting Policies and Procedures integrate with the accounting rules and concepts to produce the internal controls you need?

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You’ve just been given the task of writing a new procedure that documents an existing business process.  You make sure you understand, and you close with, “I’ll get on this process right away.”

That’s when your boss says, “Process? Did I say ‘process’? I meant processezzz! Plural!”  And before you can blurt out, “What do you mean?”, the boss says you need to develop procedures for all accounting processes, not just the one.  Oh, and he wants them by the end of the month!

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Small and medium-sized businesses rely on a steady, consistent stream of incoming cash – customers paying for goods and services with cash, checks, and credit cards. Many retail and service businesses have multiple people conducting cash transactions throughout the day. Creating a cash policy and cash procedure for important cash handling processes like cash drawer management, end of day closing, or cash in deposits, can be vital to protecting the life blood of your business.

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Everywhere in your organization people are carrying out business processes to make things happen. It doesn’t matter if the processes are well defined, poorly documented or if the staff is trained. If things are getting done – it is because people are executing business processes.

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What is the difference between a well-conceived and well-written accounting policy and a poorly conceived and poorly written accounting policy?  Of course, the needs of every organization are different, and the most important element of an accounting policy is that it helps the organization. Last week we mentioned the importance of gathering accounting policies into the accounting manual.  Now let’s review some important points to consider when crafting policies.

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The question “What should be in your accounting manual?” should first be answered by another question: “Why do you need an accounting manual?” Whether you are looking to purchase a pre-written accounting manual or create your own accounting manual from scratch, these are two important questions to answer.

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