No Paper at School

My daughter started a new school this year. One of the items she was required to buy was a tablet computer (a tablet allows you to write on the screen with a special stylus and it has software to translate your handwriting).  All students have the same type of tablet. In addition, she was required to take some computer classes over the summer and even I had to attend one of the classes, so I’d know how to use the online reporting system and I’d understand what my daughter would be doing.  Why do all of the students have tablet computers?

The school has a goal: to go paperless.  The school teaches everyone how to use Microsoft office for writing papers and delivering presentations.  They use Microsoft One Note (electronic binder or file system) to organize all of their work. They go online to get handouts, homework, submit homework, and interact with others.  Though they’re not totally paperless, the school is moving in that direction and hopes to be there soon.

Electronic Books

Amazon released the Kindle paperless reader about three years ago. It’s designed to allow people to download and read books without the paper. Earlier this summer, Amazon estimated that they reached the point where more people are downloading electronic books than are buying hardcover books in paper form.  While the Kindle was one of the first, the iPad came along and changed the game.

Electronic Subscriptions

Apple’s new iPad has reader applications for books, magazines, and newspapers.  The iPad gives you pages in color as well as b&w. Material is also easier to read because the iPad is larger than a Kindle, yet the iPad is smaller and lighter than a laptop computer.

Do you want to wait for your newspaper to be delivered in the morning? Don’t you love getting the paper when it’s raining or snowing?  With an electronic reader, you just login and start browsing, searching, and reading the news. Plus, an e-reader never requires you to suspend your subscription when you’re traveling and all of your reading material is always with you (or it’s just a download away).

Do You Still Have Paper in the Office?

Document management systems have been around for years. Many organizations are scanning paper files or using document management software to eliminate paper storage, retrieval, and waste.

Think of the cost savings in your office.  If an employee spends five minutes retrieving and replacing a file from a file cabinet and that employee works with just 10 files per day, that’s about 200 hours per year per employee (5min x 10files x 5days x 48 weeks)!  If you pay one employee $20 per hour, you’re spending about $4,000 per year just to have documents handled! Document management software will pay for itself in the first year.

Bizmanualz has been in the business of providing paper-based binders of policies, procedures, and forms for decades, but that is now changing.  All Bizmanualz policies and procedures have also been available via automatic download, immediately after you complete your purchase, for several years. Our customers have been moving from hardcopy manuals to electronic copies for some time. But wait! There’s more!

Bizmanualz New Policy Management Software

Bizmanualz new Policy Management Software product incorporates the Bizmanualz policies, procedures and forms library, includes document management features for controlled storage and retrieval and helps you comply fully with ISO, JCAHO, CFR, ITIL, and other standards and regulations.

Using the Bizmanualz Policy Management Software provides immediate access to all of your files.  You won’t need to download files for editing, reviewing, or releasing to your employees.  No more printed binders.  The new, paperless Bizmanualz Policy Management Software solution helps you to achieve your goal of a paperless office.

Are Paperless Offices a Reality?

I think the paperless office is here.  You can purchase a tablet computer for computing work, purchase a Kindle or iPad for your reading, and the Bizmanualz Policy Management Software for your policies and procedures compliance.  The rest of your office paperwork can easily be put inside a document management system (like the Bizmanualz DMS) and there you have it – a paperless office!

Try it. I think you’ll enjoy not having file cabinets ring the office, fewer dead trees, and less recycling to worry about.  The lean solution is not to produce the paper in the first place.

In business, employees are expected to perform their job all day long.  But how much time is allocated to practicing their job?

In football, teams have a playbook defining, step-by-step, every player’s job on every play.  The team practices every play until it is executed correctly.  Now they are ready for the game on Sunday.

Does your company have a playbook or business manual?  With step-by-step procedures, job descriptions, reports and forms for every job?  Does every employee know exactly what is expected from them for the company to succeed and keep its customers happy?

Your Playbook is a Valuable Asset Leading You to Success

All large organizations have a playbook or business manual.  Is that how they got large?  They standardize business processes to eliminate inefficiencies.  They find the plays that work and use them over and over to succeed.

Let’s take sales – do your salespeople have a quota to fill?  Do they have call sheets to complete, month-end status reports, 30-60-90 day forecasts?  What about the rest of your company?  Every employee needs the same process detail to be successful.  Yet having clearly defined policies and procedures is often an afterthought to starting a business.

But, policies and procedures are your business.  Return policies, credit procedures, sales and service policies, policies on vacation, healthcare, and sick leave.  Policies, documented or not, communicate your strategy, vision, and understanding of the market to your employees and customers.  It’s not what you say. It’s what you do that is the essence of your company.

How many points could your team score if there was no playbook and positions were not clearly defined?  How would you communicate in the huddle what you wanted to get done?  Chaos would develop and the team that was better organized would win.

What are the Costs of NOT Having Policies and Procedures ?

• Opportunity costs – Lost sales or goodwill from the uneven treatment of customers.  McDonalds requires that all food served at its thousands of franchises taste and is served exactly the same.  Would you continue to eat at McDonalds if it wasn’t?
• Inefficiency costs – Time spent correcting tasks improperly performed or documented.  “If you don’t have time to do it right the first time, when will you have time to fix it.”?
• Legal Liability – How much does the company pay its lawyers to defend itself when policies and procedures are unclear, someone gets damaged, and people sue?  In the movie “Erin Brockovich” Management gambled with safety procedures and lost.  The losing company had to pay hundreds of millions of dollars for damages, plus legal fees and they still had to fix the problem.

Companies operating without clearly articulated policies and procedures are gambling – they don’t know if they’ll succeed.  Successful companies don’t take chances with success.  They practice, honing their skills, focused on winning through a process of well thought out policies and procedures.  Not only do policies and procedures solve business problems, but they can be the deciding factor between your business success and failure.

The second most important external user of a company’s financial statements is a bank (or other debt or equity institution). The financial institution will dictate the report needed. Copies of tax returns and company-prepared financial statements may be all that is required. On the other hand, the financial institution may require a higher level of assurance by requesting that an independent accounting firm either compiles, reviews, or audits the company’s financial statements.

In this case, the company might want to know what is required and the difference between these types of reports. Accounting policies and procedures for financial reporting would help. First of all, only Certified Public Accountants¹ (CPAs) who meet a higher peer review level and other reporting standards can issue these statements. A public accountant (PA), tax practitioner, or an accountant who is not a licensed CPA cannot issue such statements. Fully-licensed CPAs must keep their licenses current, with continuing education and documented peer review, to be able to issue opinions on these reports.

Compilation

A business owner will need to find a CPA with the necessary credentials to request a compilation, review, or audit.  The least expensive report, and one that should satisfy most banks for small and mid-sized business, is a compilation.  Essentially, the CPA reviews the financial statements prepared by the company and attaches an accountant’s report to it.  No further investigation is performed.

Interestingly, the standard compilation report issued by a CPA is nothing more than a glorified disclaimer, stating that the CPA is providing no financial statement assurance.  The AICPA defines a compilation as “a service where the accountant presents, in the form of financial statements, information that is the representation of the company’s management and owners without undertaking to express assurance on the financial statements.”

Review

A review involves essentially the same process as a compilation, except that the auditor does perform certain analytical reviews — reviewing account balances for reasonableness and questioning management about material modifications that might be made in order for the statements to be in conformity with GAAP².  In a review report, the CPA expresses a “limited assurance” — not an opinion — of the reasonableness of the financial statements and their conformity to a comprehensive basis of accounting, like GAAP, cash basis, or income tax basis reporting.

Audit

A financial audit provides the highest level of financial statement assurance.  An audit normally takes considerably more time than either a compilation or a review.  The audit work, itself, can fill several large binders of documentation for a small-to-medium-size business.

Every balance sheet account is proven, within the limits of materiality³. Direct confirmations of account balances are mailed from the CPA to banks, customers, vendors, and other debt holders to validate the balances of cash, accounts receivable, accounts payable, and other assets and liabilities.  If inventory is material, the CPA must observe the inventory counting as of the report date.  The CPA also tests the accounting procedures and internal controls, including computer controls.  All transactions are subject to audit under a statistical sampling formula.

A surprisingly large amount of time is spent in non-financial areas to determine any claims, lawsuits, contingencies, or other events that could harm the company. Incorporation and other organizational papers are reviewed; all leases, loan documents and other contracts are reviewed; and all minutes and other relevant correspondence are read.  The CPA also sends letters to all attorneys asking for full disclosure on any relevant matter.

The AICPA defines an audit as an engagement where a CPA provides an opinion about the fairness of a financial statement presentation in accordance with a comprehensive basis of accounting, such as GAAP, cash basis, or income tax basis.  This is a fairly simple statement for what can easily involve weeks of work for even a relatively well-structured small business.

It’s important to recognize the relative costs of these three types of reports.  If the cost of an audit is $12,000, a review for the same business might average $4,000, and a compilation, $3,000.  Relative to an audit, a review and compilation are considerably less expensive.  However, the difference in cost between a review and compilation is not nearly as great.  This is important to remember if faced with a requirement from a lender or investor.  If they request an audit, you might try to convince them that a review is adequate and certainly provides more assurance than a compilation.  This could save you considerable expense.

SEC – Audit

For publicly-held companies, an audit is the minimum level of assurance required.  In addition to the audit, there are other SEC reporting requirements, depending on the size of the business.  A full explanation of these SEC reports is beyond the scope of this article.

Internal Reports

Much emphasis has been given to financial statement reports — the balance sheet, income statement, and the statement of cash flows.  These three are the most important reports on the overall financial condition of the company over a given period of time.  A primary objective in developing policies and procedures over the accounting function is to improve the timeliness, accuracy and completeness of these statements.

A company’s accounting or information system can provide much more than those three statements, however.  Management should be encouraged to use the data available in the accounting system for other uses.  Financial statements are extremely useful; however, they only provide current valuation, and transactional information from the past.

A statement of cash flow, reconciling the sources and uses of cash, can be a useful starting point for extrapolating data that projects the anticipated sources and uses of cash needed into the future.  By analyzing changes in aging of accounts receivable and accounts payable, you can develop more reliable estimates and better anticipate future cash receipts and future cash payments.

The relationship between sales, inventory levels, and related costs of sales can be used to determine the anticipated needs for additional inventory related to projected sales.  Using the data captured by the accounting system every day, a projected cash flow report, updated daily, can be a powerful tool to alert management in enough time to properly react to anticipated additional working capital requirements.

With a powerful forward-looking cash management tool, like the described projected cash flow report, the projected activity levels in future months can be used to create budgets in the current and succeeding months.

With income statement projections, projected cash flow reports, and budgets, we have a truly interactive management information system.  Data collected from the past is used to project the future, fed back into the budgets, which control the present and determine the future.  This creates a continually updated management information loop.  This provides a business with the tools to act, not just react.

SUMMARY

We hope this introduction to your Bizmanualz™ Accounting Policies and Procedures manual will increase your appreciation of the importance of establishing effective accounting procedures.  Your business is a continuously flowing stream of transactions.  Like a sturdy, well-maintained net cast across a stream, effective accounting policies and procedures help trap data completely and accurately. Once collected, the real benefit is utilizing the data to provide the information needed to review the past, position the present, and chart the future.

NOTES

¹The “chartered accountant” designation is more common outside the USA.
²A number of accounting authorities, like the AICPA and the IASB, are currently working on convergence of GAAP with IFRS (international financial reporting standards).
³Information is material if its omission or misstatement could influence economic decisions made on the basis of the financial statements. Materiality depends, in part, on the size of the item or error, evaluated in light of the circumstances of its omission or misstatement.

The economy is said to be improving. Though they’ve had their ups and downs, the Dow, NASDAQ, and other market indexes are up from a year ago. The housing market may have also hit bottom.

One indicator that doesn’t bode well, however, is the unemployment rate. Firms still aren’t hiring. They’re getting by with what — or whom — they have. What does this mean for the currently employed? It means we’re expected to be more efficient…more productive. “We’ve go to do more with less!”, we so often hear it. This is frustrating for both sides. Employees are trying their hardest, in virtually all cases. And, employers want to keep growing.

As a manager or owner, simply telling your employees “we have to be more efficient” won’t motivate them. Saying, like wishing, doesn’t make it so. You have to be a mentor and coach to get the most out of your employees — all of them.

You say you “don’t have time for that”? Well, do you have time for inadequate performance? Do you have time to replace and train a replacement? Time to acclimate them to the “company way”? Time to recoup the investment you’ve already made or the experience? The wisdom?

How do your employees stack up to expectations? Are they performing at a satisfactory level? If not, could that be due to:

• Poor training?
• Inadequate equipment?
• Time pressure?
• Lack of priorities and/or organization?
• Poor communication?
• Lack of motivation?

Home in on the reason(s) for employees’ underperformance to determine if better coaching will address them.

What, When, and Why — Does the employee know what to do, when to do it, and why? If not, you need to tell (maybe even show) them.

What Is and What Should Be — What is the standard of performance and how does the employee measure up to it? Does the employee know what the standard is? You have to let them know clearly what’s reasonably expected of them.

Communicate — Does the employee know his/her performance isn’t meeting the standard? You need to let them know.

Train — Does the employee have the skills needed to do the tasks required of them? If not, you need to invest time in training to get higher performance in return.

Realistic Expectations — That standard of performance: is it reasonable? What’s it based on? Is your standard current? Stretch goals are fine…as long as they’re fact-based.

The Butterfly Effect — What impact does substandard performance have on the rest of the organization? The employee may need to be reminded of his/her place in the firm, their relationship — direct and indirect — to everyone else, and how inadequate performance affects other people and processes. The organization is, after all, only as strong as its weakest links.

Ample Resources — Does the employee have enough (time, money, materials, etc.) to get the job done? You have to see that they do.

Performance Hurdles — Is something beyond the employee’s control affecting his/her performance? Is there something you, the employer or manager, can do to help?

Positive Feedback — Is the employee getting the occasional, well-placed “attaboy”/”attagirl” for a job that exceeded expectations? Or, are they being “rewarded” by having more responsibilities heaped upon them? “You did this so well, we’re going to give you more” can be as damaging as “You stink!”

Motivation — Is the employee’s heart in the job? If not, more training, better equipment, and more resources (like time) aren’t going to solve the problem of poor performance.

Now, let’s say you’ve analyzed the situation and have come to the conclusion that coaching will help turn the employee’s performance around. Here’s how you might go about it:

1. HOLD THE COACHING SESSION IN PRIVATE

Nobody but the two of you need be involved.  Be warm and courteous. Remain calm and keep a positive attitude.

2. CLEARLY STATE UP FRONT THE REASON FOR THE SESSION

Don’t be blunt, though. Say “I’d like to discuss (XYZ)”, rather than “I need to talk to you about your recent performance problems.” You want to engage them, not talk at them.

3. SHOW YOUR CONCERN FOR THE PERFORMANCE ISSUE

Example: “It looks like we’re not following up with customers as quickly or as thoroughly as we should. We used to get back to 80% of our customers within 10 days of their purchase. Now it’s more like 10%.” Focus on the problem, not the person.

4. DESCRIBE THE WAYS IN WHICH THE PERFORMANCE ISSUE AFFECTS OTHERS (INCLUDING YOU)

Example: “When we don’t follow up with customers in a timely manner, they probably feel like we don’t care about anything but their money.” Emphasize “we” and “the team”. Putting the focus entirely on them only deepens the sense of isolation they already feel.

5. ACKNOWLEDGE THE EMPLOYEE’S SIDE OF THE ISSUE…AND LISTEN

Regardless of whether the employee apologizes, rationalizes, promises to do better, etc., hear them out. They may have a valid explanation (like that they’re overworked — you might do more with less but you can’t do more with nothing).

Remember: there are always at least two sides to every story.

6. GET THE EMPLOYEE’S INPUT ON HOW TO IMPROVE THEIR PERFORMANCE

Ask, “What can be done to improve our follow-through with customers?” There may be some beautiful gems hidden among their thought nuggets – help them find those gems. After all, they’re on the front line every day, so they’ll have insights you won’t.

7. DISCUSS POSSIBLE SOLUTIONS

Work with the employee to develop a number of potential solutions to the performance issue. Make use of the employee’s ideas and offer guidance, but don’t take over the project. You’re a coach, not a critic.

8. AGREE ON A SOLUTION AND ACTIONS TO TAKE

Identify what you both think is the best solution. Agree on how to arrive at the solution and on reasonable deadlines. Be clear of your intent – that you want status updates so you can help them, not because you get any joy out of “riding” them.

Be sure to put the action plan in writing and make sure you both have a copy.

9. CHECK ON THE EMPLOYEE’S PROGRESS AND CONTINUE TO GET THEIR FEEDBACK

Give them additional guidance and reinforcement. Don’t hover around them constantly. Just make sure that they’re not stuck on something. If they have ideas on how to improve the process or the result, listen and evaluate. If they have a good idea, let them run with it.

10. GIVE POSITIVE FEEDBACK FOR POSITIVE RESULTS

Every time the employee meets a deadline or hands in a “deliverable”, give them a sincere “Good job!” Don’t say, “That’s more like it”, or “You should’ve been doing this all along.”

Remember — even star employees who are strongly self-motivated (and there are probably more of them out there than you think) can use a sincere pat on the back…or a handshake…or a shout-out. So, you can imagine how an employee who’s been struggling will benefit from quality feedback.

You’ve been there. You know how good it feels when someone takes you under their wings. Give back what you got.

Now it’s time for your feedback. Tell me what you think.

* * * * * * *

References

Toastmasters International Advanced Communication and Leadership Program, “Interpersonal Communication” — Project #4, “The Coach”.

]]> http://www.bizmanualz.com/information/2010/06/28/ten-keys-to-improving-employee-performance.html/feed 0 http://www.bizmanualz.com/information/2010/06/26/whats-the-difference-between-bookkeeping-accounting-and-reporting.html http://www.bizmanualz.com/information/2010/06/26/whats-the-difference-between-bookkeeping-accounting-and-reporting.html#comments Sat, 26 Jun 2010 14:17:13 +0000 Chris Anderson http://www.bizmanualz.com/information/?p=1690 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.

Bookkeeping

Bookkeeping and accounting share two basic goals:

• To keep track of income and expenses, thereby improving The Company’s ability to achieve profitability
• To collect the necessary financial information about The Company’s business to file required reports and tax returns

Bookkeeping refers to the actual transactional entering and recording of data.  Examples are writing checks, processing payroll, making deposits, recording disbursements and recording receipts.

Accounting

Accounting encompasses the broader responsibilities over developing and maintaining the accounting system under which bookkeeping functions are performed and generally falls within the top ten job responsibilties of a CFO.  Accounting is concerned with the timely and accurate recording of transactions, providing useful management information, and properly reporting such information for various user needs.  Developing and maintaining an accounting system involves setting up and maintaining an appropriate chart of accounts for the particular business.

Accounting policies and procedures are then established to provide guidance and internal control for all possible financial transactions, from source documents (checks, sales orders, etc.), to journals (payroll journal, cash disbursement journal, invoice register, etc.), to the general ledger, (based on the chart of accounts), and ultimately to a variety of reports for all internal and external needs.

Bookkeeping and reporting can be thought of as the input and output of a complete accounting system.  Accounting policies and procedures ensure:

• Integrity of the input data; and
• Accuracy and validity of the output report.

Reporting

Reporting, (the output of the data generated through various bookkeeping functions), is used for both internal and external purposes.  Internal Reports are reports used within the company, by both management and other designated personnel.  Internal reporting can be further divided into non-financial and financial data.

Non-financial data

Non-financial data includes a variety of measurement and productivity data, applicable to the specific business.  These can be daily customer count, web page “hits”, production activity per employee hour, units and total weight of product shipped, or even daily weather conditions.

Financial data

Examples of financial data reports include:

• Financial statements – Profit and loss reports (income statement), balance sheets and cash flow statements
• Daily reports with critical balances, such as, sales, cash level, inventory, accounts receivable and accounts payable
• Segmented profit and loss reports (or P/L) on specific jobs, profit centers or departments
• Register reports, listing all transactions for specific areas such as, payroll, checks, receipts, invoices, etc.
• Listings of source data files such as customer, employee, vendor and inventory lists.
• Aging reports for both Customers (accounts receivable or A/R) and Vendors (accounts payables or A/P)
• Inventory reports for costing and valuation
• Exception reports – open purchase orders, back orders, inventory stock outs.

External reports generated for the use of people or organizations outside of the business.  Generally, one of the more important users is the Internal Revenue Service (IRS) and 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 report most commonly requested of the company is the general ledger and related financial statements.

Report data and format will vary depending on user:

• Banks, lending institutions. To observe the financial viability of a business and to determine its ability to support additional amounts and types of debt financing
• Employees. To determine the stability of the business of their employer – this may be useful in wage negotiations
• Suppliers. To assess the suitability of granting credit terms to a business
• Existing and Potential Investors. To assess the potential risk of investing in a business and to monitor the status of existing investment in a business
• Public. To gain more insight into any business, which is legally required to make certain financial information available
• Government. To fulfill the requirements of all applicable local, state and federal reporting statutes, including income, sales, insurance, property, and payroll tax returns
• Media / Press. To use available business reports in specific trade and business publications

Accounting Software Program Structure

To navigate more easily in any accounting software it is important to understand the basic organizational structure that is common to all accounting software.  In spite of all the ancillary menu options and all the different terms used by competing accounting software products, there are really only three major components of any accounting software package:  Input, Output, and Maintenance.

Input refers to all of the “bookkeeping” tasks discussed above.  This includes entering invoices, checks, bills, payments, payroll, accounts payable and adjusting entries.  Each accounting software may “disguise” this input function under different names:  “tasks” or “activities”, or it may include specific input functions separately under each cycle area, or it may simply provide icon pictures of activities to be clicked on.  Regardless of the specialized “look” of the program, the most important and most heavily used routine in any accounting software is data input.

Output refers to all of the reporting functions of the program.  Once transactional data has been entered, the only usefulness in having it entered is the ability to retrieve it in a variety of report formats.  Generally, these reporting options are found grouped together under one menu, not surprisingly labeled, “reports”!  However, with some programs, they are scattered throughout the menus as appendages to each major cycle activity.

Maintenance encompasses the accounting tasks and can be broken down into two sub-categories:  utility maintenance and data file maintenance.  Utility maintenance refers to overall utility features like backup, restore, import and export data, fiscal year close, purge, or condense and repair data.  These are all usually found on one menu and are generally placed under administrative password control to prevent unathorized use.

Data file maintenance does require data input, but the input is not transactional.  This refers to the creation and maintenance of the chart of accounts (in support of the general ledger), the customer list, vendor list, inventory list and employee list.  These are generally found in one area usually labeled “maintain” or “lists”.  In other programs they may be separated and found within each module (i.e.: customer list in the accounts receivable module or revenue cycle).

Understanding how your own accounting software works, (where its input, output and maintenance functions are), is as important as understanding the actual double entry accounting that is occurring “behind the scenes”.  As you will discover throughout the Accounting Policies and Procedures Manual, you need to know how the numbers have developed and where they came from, in order to establish effective accounting policies and procedures to insure their integrity, accuracy and completeness for financial internal control.

Accrual Method

The accrual accounting method is defined as the method of keeping accounts which shows expenses incurred and income earned for a given period, although such expenses and income may not have been actually paid or received in cash.  Hence, the financial statements show revenues and expenses, even before any such revenues or expenses are paid.

The accrual method is the more acceptable and the more widely used because it correctly matches the earning process to the activity.  In other words, revenue is recorded when services or goods are rendered or shipped, regardless of when paid.

Cash Method

The cash method of accounting is familiar to most individuals since personal income tax returns are filed on the cash basis.  As the name implies, revenues and expenses are only recorded when the consideration paid actually changes hands.  This could be months after the actual event occurred.

Many small business owners prefer the cash basis due to its simplicity and ease of understanding.  At the end of any given period, the recorded net income will agree more closely to the change in the business’s cash balance.  However, when requesting financing from any bank or agency, business owners are generally asked to furnish financial statements, prepared on the accrual basis.  Clearly any “stakeholders” want to see the true effect on the financial statements of activities, as they occur, as opposed to when they are paid.

Many small businesses (under $1,000,000 in sales) may use the cash basis method for filing business tax returns, even if the business keeps its books on the accrual basis.  In a growing business, income taxes can be deferred for a year for revenues recorded from increases in accounts receivables.

Percentage of Completion Method

The percentage of completion method is a variant of the accrual method, used for businesses with long term contracts, primarily construction contractors.  Instead of valuing revenues based on services invoiced, contractors will adjust the revenue billed to agree with the estimated percentage of the total contract that has been completed to date.

Reporting Standards

Many transactions are entered routinely through the accounting system without much concern about reporting standards.  However, other transactions can be handled in different ways depending on a person’s judgment over the facts and circumstances.  For example, if a business decides to lease an expensive piece of machinery, how should it record lease payments?  Perhaps they should be simply charged to lease expense.   Do you have a lease policy procedure? Your accounting policies should clearly state how to record leases.

However, maybe the terms of the lease imply an obligation and the payments represent a pay-off of that obligation.  In that case, a portion of the payment should be applied to the debt and the other portion charged to interest expense.

The resulting financial statements would look different in those two cases.  The usefulness of financial statements would be severely limited if their presentation was based solely upon the preparer’s judgment.  Consequently, certain standards must be agreed upon and followed.

GAAP – Generally Accepted Accounting Principles

There was no commonly agreed upon standardization over accounting practices for within past accounting systems until after the great depression of 1933.  In response to the vast sums lost by investors in the stock market crash, the Securities and Exchange Commission (SEC) was established and given authority to set accounting standards for publicly held corporations.

In an effort to stave off further government regulation, the accounting profession, organized under the American Institute of Certified Public Accountants (AICPA), issued its first auditing standards in 1939.  This began its attempt at self-regulation, though the AICPA continues to work with the SEC and defers to the SEC on regulatory reporting requirements for publicly held companies.

Between then and 1959 the AICPA issued 51 authoritative pronouncements known as Accounting Research Bulletins (ARB) that formed the basis of what became known as generally accepted accounting principles (GAAP).  From 1959 to 1973 the Accounting Principles Board (APB) issued 31 additional standards.

In 1973 a new full-time independent body, separate from the AICPA was created, called the Financial Accounting Standards Board (FASB).  This board has issued over 147 Statements of Standards by the end of 2002.  These standards, along with official interpretations, Accounting Research Bulletins (ARB), previously issued pronouncements, SEC rulings, industry guides, and other exposure drafts make up the current basket of generally accepted accounting principles.

The Matching Principle

Woven through all of the GAAP pronouncements are several universal principles.  One is the concept of matching.  Accrual and percentage of completion methods represent attempts to more properly match the financial statement presentation to the actual transactions that have occurred.  Revenues are matched to services performed and product sold, and expenses are matched to activities that have incurred expenses.  This is why accrual based reporting conforms to GAAP and cash based reporting does not.  The matching principle is a keystone of generally accepted accounting practice.

Conformity

Conformity is another widely used concept in accounting.  The method of implementing percentage of completion, for example, should be the same for all companies.  Only by practicing conformity will there be comparability.  Investors, lenders and business owners, could not properly evaluate the success of a particular business as compared to the rest of its industry, if all businesses used different methods for recording transactions.  Conformity is another fundamental principle in GAAP.

Valuation

A common consensus in GAAP reporting is the agreement that financial statements are valued on an historical basis.  This is an important concept that provides for consistent conformity.  As an example, real estate is valued at its original cost, not what it might be worth on an appraised value.

Accounting board pronouncements have continued to modify this principle to make financial reports even more conservative than historical basis, by requiring a downward adjustment, if the potential selling value has fallen below the original cost.

An example is inventory, when obsolescence reduces its value below its original cost. Another example is the yearly devaluing of fixed assets through depreciation.  Each year the original cost of a building or equipment is lowered by writing off a portion of its expected life and expensing it to depreciation.  Other assets like accounts receivable are reviewed and written down to their expected realizable value by charging off any amount deemed uncollectible to bad debt expense.

The overall attempt is to present financial statements on the most conservative basis possible.  The objective is to ensure that the net worth recorded on a company’s financial statements is never more than the true value of a company, based upon the lower of historical cost or the expected realized selling price of its assets minus its liabilities.

Events in the early years of the 2000’s have shown how important this objective is.  In spite of all the GAAP pronouncements in place, “creative accounting” techniques that push the gray areas of accounting valuation issues have resulted in significant, previously undisclosed impairments to the financial statements of companies like Tyco, Enron, and WorldCom.

Inventory Valuation

Inventory valuation is a specially treated area that deserves specific mention.  Inventory is always valued at the lower or cost or market (realizable value, net of selling costs).  However, cost can be determined in three different ways.

First In – First Out (FIFO) values the cost of inventory based on the principle that the first item purchased is the first item to be sold.  Visually, this method mimics a store owner’s method of stocking shelves by putting its most recent purchases at the back of the shelf, so that the older product is sold first.  Hence, the value of the amount of inventory on hand, always represents the cost of the very latest purchases.  In a true FIFO valuation, each purchase is tracked as a separate layer with its own cost.  Sales are also tracked and taken from one or more specific layers.

A variant on the FIFO method is the Average Cost FIFO method, which eliminates the need to keep track of separate purchasing layers.  The cost of each new purchase is added to the “pool” which changes the overall cost of the “pool”.  Sales are then taken from this single “pool”, leaving a value of the inventory on hand that closely resembles, but not necessarily equals, the value of inventory on a true FIFO method.

A final method of valuation is based on Last In – First Out (LIFO).  This is the opposite of FIFO: the last items purchased are deemed to be the first items sold.  This means that the ending inventory value is comprised of the very first items purchased.  This value could be lower than the FIFO value, particularly in inflationary times.

One might ask how two opposing methods of valuation could both be allowed under GAAP, particularly, when this would seem to violate the important principle of conformity.  This is one of many good examples of the challenge to create a consensus of opinion when there are several options, which have equal justification and support.  Accounting principles are not static laws handed down from the mountaintop, hence the term, “generally accepted”.

In this case, there is current justification and support for either method.  In deference to conformity, GAAP provides that financial statements valuing inventory on LIFO are to include a footnote reference, which discloses the valuation difference between LIFO and FIFO.  This is one of many compromises that provide conformity over different methods of valuation.

Materiality

A final important concept in all of GAAP is materiality.  Surprisingly, coming from a group of professionals known for their penchant for chasing down pennies, every pronouncement contains a materiality clause that allows for non-compliance in any area, if the effect on the financial statement presentation is clearly immaterial.  In other words, if the effect is minimal or does not represent a significant change in the financial position of the account then it might be considered immaterial.

Balance sheet

Contains accounts whose value is determined at a specific point in time.

Assets – accounts with value that you own

• Cash – the amount on hand or in the bank at a specific point in time
• Accounts Receivable – how much people owe you
• Inventory – the value of business merchandise for sale
• Fixed Assets – the value of property and equipment

Liabilities – accounts with value that you owe to others

• Accounts Payable – how much you owe others for unpaid purchases
• Debt – how much you owe others for money borrowed
• Other Liabilities – services or money owed to others

Equity – accounts with paid in capital or earned from profits.

• Contributed Capital – money invested in business by ownership
• Distributions – dividends and other types of money paid out to ownership
• Capital Stock -            money invested in exchange for company ownership
• Retained Earnings – earnings retained in business from net profits

Income Statement

This statement contains accounts whose value is determined over a period of time (e.g., day, week).

Income: total sales and income recorded over a period time

Expenses: total purchases and other expenses recorded over a period of time

Basic Accounting Formula

All transactions are posted to one or more of these accounts.  As discussed earlier, every posted transaction must balance.  That is, debits must equal credits.  Furthermore, the result of every posting, if done correctly, will never put the Basic Accounting Formula out of balance.  Asset accounts will always equal the total of all liability and owner equity accounts.  If this formula is ever out of balance, the cause will always be an incorrect transaction posting where debits did not equal credits.

Assets include those accounts, which give value to the company: cash, accounts receivable, inventory, property, etc.  Liabilities are those accounts which reduce the company’s value:  accounts payable, debt, and other liabilities.  If total assets are greater than liabilities, then this net value (that is, the total of all assets minus liabilities) represents the true value of the business, otherwise known as its Equity. Hence, the Basic Accounting Formula can be expressed and equally understood in these two ways:

Assets = Liabilities + Equity

or

Equity = Assets – Liabilities

If the company’s assets are less than its liabilities, then it will necessarily show a negative equity.  This makes intuitive sense to anyone following the demise of a business in bankruptcy.  When a business owes more than it has in value, the resulting negative equity is an obvious warning sign.

The equity accounts include owner’s contributions, distributions, and retained earnings.  Retained earnings operate in a manner unique to all other accounts.  It contains the net effect of postings to all income and expense accounts.  It is truly the one account, which links the balance sheet accounts (assets, liabilities and owner’s equity) with the income and expense accounts.

Understanding the importance of retained earnings, the Basic Accounting Equation could be expanded thus:

ASSETS  =  LIABILITIES  + (Investor and owner contributions, and distributions + Retained Earnings)

OR

ASSETS  =  LIABILITIES  +  (OWNER’S EQUITY ACCOUNTS +  INCOME – EXPENSE)

———————EQUITY ———————————

When a transaction, like writing a check or paying a bill, is executed in an accounting program, the software is designed to take this transaction event and create the proper and necessary debit and credit entries to record the effects of the transaction in the appropriate journals and general ledger accounts.  Your accounting policies and procedures should help you acheive accounting control.

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.

Various reports, including financial statements, can be prepared from the data collected in the GL.  Corrections or necessary adjustments can be made to the general ledger by creating adjusting journal entries, posted to the general journal.

1. Revenue Cycle

Order Entry. Invoices entered through direct entry, sales orders, or a point-of-sale (POS) system, such as a cash register, are posted to the sales journal.  These entries also accumulate on the accounts receivable ledger, organized by customer.  If the business maintains an inventory, the posting of sales also affects the inventory ledger. Finally, all sales journal activity is also posted to the GL.  A discussion of your revenue cycle should be covered in your revenue procedures.

Cash Receipts / Deposits. Receipts on sales and other bank deposits are posted to the cash receipts journal.  Sales receipt information also accumulates on the accounts receivable ledger, organized by customer.  These postings are also entered on the bank account ledger.  Finally, all cash receipts journal activity is also posted to the GL.

Accounts Receivable. Accounts Receivable is a separate journal that records both sales and cash receipt data by customer.  The data comes from the postings to the cash receipts journal and the sales invoice journal.

2. Purchase Cycle

Purchase Orders / Purchasing. Invoices entered through direct entry, or through purchase orders, are posted to the purchase journal.  These entries also accumulate on the accounts payable ledger, organized by vendor.  If the business maintains an inventory, the posting of purchases also affects the inventory ledger.  Finally, all purchase journal activity is posted to the general ledger.

Cash Disbursements / Checks. Payments on account or for expenses are posted to the cash disbursement journal.  Payment on account information also accumulates on the accounts payable ledger, organized by vendor; these postings are also entered on the bank account ledger.   Finally, all cash disbursement journal activity is posted to the general ledger.

Accounts Payable. Accounts Payable is a separate journal that records both sales and cash receipt data by vendor.  The data comes from the postings to the cash disbursement journal and the purchase journal.

3. Payroll Cycle

Payroll data by employees are entered into the payroll journal.  These postings are also entered in the cash disbursements journal and the payroll ledger.  Finally, all payroll journal activity is also posted to the GL.

4. General Journal Cycle

Corrections or adjustments to the above major transaction cycles can be made through adjusting journal entries, posted directly to the general ledger. These are also compiled in a separate journal, known as the “general journal”.

How Does “Posting” Work?

The specific postings, as outlined in the cycles above, do not necessarily take place as separate steps, especially in computerized environments.  There are only two basic posting methods in computerized accounting systems: real-time and batch posting.

In real-time posting, the source transaction (check, bill, payment, receipt, etc.) is posted to the specific journal and any related subsidiary ledger (e.g., accounts receivable, accounts payable, inventory) and is simultaneously posted to the general ledger.

In batch posting, the journals and subsidiary ledgers are posted, but entries are not yet posted to the general ledger.  Posting these journals to the general ledger is done separately.  Typically, a group of transactions (often a full day’s worth) is entered.  Later, after the journals are reviewed for accuracy, this entire day’s group, or “batch”, is posted to the general ledger.

To understand this posting process better, it would be helpful to follow specific transactions through a sample company.  First, however, we need to define various accounting terms and concepts.

Accounting Terms and Concepts

Double-Entry Accounting

We can thank the 14^th and 15^th century Italian merchants for developing the double-entry system of accounting that we still use today.  It is widely believed that Benedetto Cotrugli (aka, Benedikt Kotruljevic) was the first to document this concept of double-entry accounting (in his accounting policies and procedures, perhaps?).  In 1458, he wrote Delia Mercatura et del Mercante Perfetto (Of Trading and the Perfect Trader), which included a brief chapter describing many of the features of double-entry accounting.

In 1494, Luca Pacioli, from San Sepulcro in medieval Tuscany, published the Summa de Arithmetica’s 36 short chapters on bookkeeping (entitled De Computis et Scripturis, or “Of Reckonings and Writings”) so the subjects of the Duke of Urbino could learn how to conduct business and provide the trader with a fast, accurate method to determine his assets and liabilities.

For many centuries before this, commercial transactions had been recorded — journalized — on paper, papyrus, or clay tablets.  However, these journals provided only totals of transaction groupings. It was the Italians who first recognized that it is impossible for a business transaction to occur without affecting at least TWO accounts. There can never be only one effect from a transaction — there has to be balance.

An Italian farmer sells wood to a shipbuilder for 400 ducats. To account for this transaction, he would record, “wood sale – 400 ducats”. His “sales” account has increased by 400 ducats. But, what else has happened?  What other account was affected? His “cash” account also increased by 400 ducats.

What if he sells his wood to the shipbuilder on credit and receives no cash? In this case, it’s his “accounts receivable” account that increases by 400 ducats.

There Are Always Two Sides – at Least – to Every Transaction

Later, when the shipbuilder pays his debt to the farmer, the farmer records an increase in his cash account and a decrease in his accounts receivable by 400 ducats each.  You can see that an integral feature of the double-entry method is that transactions must equal. At the time, this new method was heralded as an astounding discovery and was described as “a magic mirror, in which the adept sees both himself and others.”

Today, double-entry bookkeeping is used for recording a transaction in two or more different places, or ledger accounts.  This practice simplifies finding errors since the totals of both ledger accounts should agree.

Debits = Credits

Bookkeeping entries are divided into debits and credits. The debit side is typically the left side of the ledger page and credits are on the right.  The origin of the words “debit” and “credit” come from the simple concept: “who owes you” and “to whom you owe”.

Debits are transactions relating to purchases, expenses, or increases in an organization’s assets. Credits are transactions related to revenues, or an increase in the firm’s equity and liabilities. Recording a transaction requires a debit and a credit entry.  If the entries are correctly recorded, the totals on both sides of the ledger agree.

The double-entry bookkeeping method — listing debits in one column and credits in the other — requires that the debit and credit columns add up to zero. The double-entry bookkeeping method is still the basis for tracking financial affairs, almost six centuries .   The following list illustrates the effect of posting a debit or credit entry on each major account type:

These account types are the general account classifications used in all accounting systems.  They are also used to organize the general ledger, from which financial statements are developed.  Your accounting policies and procedures should take into account the main accounting cycles, accounting methods, and accounting terms to guide the operation of your accounting system.

On one hand, popular accounting programs for small and mid-sized businesses have become more widely used than ever before.  On the other hand, industry consolidation has significantly reduced the accounting program choices to a handful.  These choices are typically inexpensive, easy to implement, and come with little support to develop appropriate accounting policies and procedures to ensure that the data generated by these programs is accurate and complete.  Entry-level software like Quickbooks® and mid-level software like MAS-90 or Great Plains share this common deficiency.  “Support” documentation is long on the explanation of user features and short on accounting policy and procedural advice.

Accounting Systems – The Recent Past

Only twenty years ago, small to medium sized businesses faced daunting choices for selecting an accounting system.  There were only three choices:  Continue to use a full manual system (a comprehensive pegboard “one-write” system, employing many journals anchored to an imposing cloth bound general ledger book that rivaled the size of the largest Webster’s Dictionary); purchase or lease a computerized accounting system; or build your own automated system.

The manual systems were not trivial.  They were produced by major firms, which provided on-site implementation and training.  These systems were well documented with many accounting policies and procedures built into the regimented use of the “one-write” journals and corresponding ledgers.   Internal controls were manual at best.

An alternative decision was to purchase or lease an automated accounting system.  But this required another decision of whether to buy a “ready made” product or build your own.  To make this decision, the company would typically hire a consultant or CPA firm to perform a comprehensive “needs” analysis.  The consultant would eventually select, either a commercially built multi-module accounting program (like Solomon, our Real World), or a programmer to develop the structure from custom code (RPG was a popular language used to create custom accounting programs).

Either one of these alternatives would have to run on a leased or purchased dedicated mini-computer system, (the IBM 36 was the popular mid-size business choice for many years).  Both solutions required tremendous resources in time and money.  Even the “ready made” solutions required plenty of additional programming to fit it into the specific company’s needs.  For a half a year or more, various consultants, programmers and specialists would write code, test and rewrite code.

In either case, documentation was paramount.  Hence Accounting Policies and Procedures, as they applied to the mechanics of the accounting system were well documented as a by-product of the installation and implementation process.  The total costs in the purchase or lease of the hardware and software (ready made or custom built), and in the company’s own human resources, was staggering.

Accounting Software – The Present

Imagine the months of decision making preparation, the months of development, the reams of Accounting Policies and Procedures documentation, and the total costs that easily went from tens of thousands to hundreds of thousands of dollars.  Compare this with current practice: The company owner (or the controller or other designee) walks into a local retailer, picks up a copy of the most successfully marketed accounting software package (i.e., the one occupying prime shelf space), drives back to the office, and loads the program on any available PC.  There you have it – the decision making process, needs analysis, implementation, and installation, all for one low price…or is it?

None of these accounting programs comes with supporting accounting policy and procedure documentations.  Internal controls do not exist and require manual processes and extra paperwork.  Your accounting software does not come with support  to help in your compliance with Sarbanes Oxley.  Of course you can develop your accounting policies and procedures yourself, from scratch.  But, this take a lot of time and expertise.

Accounting Practices – The future

The future begins today, with your purchase of this Bizmanualz™ Accounting Policies, Procedures and Forms.  This manual is needed more now than ever.  Accounting systems are more accessible than ever before.  Unfortunately, they come with no instructions.  The user guide that comes with the accounting software only explains what the menu options do, it doesn’t explain which options result in sound accounting practices.

Accounting software is looking more and more like your own internet browser home page, (no surprise since each manufacturer is competing to be your primary web portal).  New Accounting Software as a Service (SaaS) applications will make this a reality.  But, in the process, the actual functions of accounting are less obvious, and as a result, less understood.

This article series will take a look behind the scenes of the “splash screen”.  Hopefully, by understanding the concepts and consistent accounting rules utilized by all accounting software programs, you will develop more confidence to rely on the information generated by the program, you will have a deeper appreciation of the importance of accounting policies and procedures for internal control, and you will be able to use it more effectively to run your company.

Lack of Management Support

Top management must be absolutely, unequivocally committed to the idea that implementing a quality management system will improve the business. If management isn’t sold on the premise, the rank-and-file isn’t going to buy it. ISO 9001 puts it this way:

Top management shall provide evidence of its commitment to:

• Developing and implementing the quality management system; and
• Continually improving the effectiveness of the QMS.

What do you suppose the developers of ISO 9001 meant by “providing evidence of commitment”? A quick e-mail to a select group of individuals, saying “good old Wutsizzname” has been assigned the task? Or, does it go much further than that?

Insufficient Resources

Management has to ensure the availability of resources needed to develop, implement, and maintain the company’s QMS. By resources, ISO 9001 means people, training, equipment, tools, funds, and time. To ensure that there are adequate resources for your QMS, you need SMART objectives and you need a development, implementation, and maintenance plan.

These aren’t separate plans, either. They’re all part of a larger plan. The development, implementation, and maintenance phases of your QMS each have to be planned with the others in mind. Are you familiar with the saying, “The whole is more than the sum of its parts”? Well, nowhere is it truer than your QMS.

So, set your objectives, make your plans, and provide appropriate and sufficient resources. Monitor the progress of the project and adjust as needed.

Or, take a wild guess as to how much and how long it’ll take to develop your QMS. (You might get lucky.)

Poor Communication

For your QMS to conform to ISO 9001, top management has to communicate to the entire organization how important it is to meet customer and regulatory requirements. You didn’t need ISO 9001 to tell you that, did you?

The quality standard also says that “top management shall ensure that responsibilities and authorities are defined and communicated within the organization.” If Wutsizzname is the lead developer of the QMS, he has to be a developer in more than name only. Top management has to be clear about what his responsibilities are and how far his authority extends and should make it clear Wutsizzname is backed by management.

Poor communication isn’t simply a matter of what you say — it’s mostly what you do (or don’t do).

Lack of Customer Involvement

Customers and their satisfaction are the heart and soul of every successful business. And it’s not just external customers that deserve the company’s attention — there are internal customers for every project and process, as well. The ISO process model doesn’t make a distinction — a customer is a customer.

Customers of the QMS include procedure users. Their satisfaction may be measured by how well a procedure is executed, time after time. The best way to ensure customer satisfaction (i.e., consistently outstanding execution) is to involve the users in developing the procedure.

Who would know better than they whether the procedure accurately depicts the process in question? Why wouldn’t you have the users — the process owners and stakeholders — test and validate the procedure before its implementation?

In other words, if you tell Mr. Wutsizzname, “Don’t bother the people in XYZ department with silly questions – just write the procedure“, is the result of that procedure likely to come anywhere near what you expect?

Recapping the seven ways you can make your QMS project a success:

• Have a positive attitude;
• Carefully craft a comprehensive development plan;
• Manage your expectations;
• Ensure the unqualified support of top management;
• Provide sufficient resources to get the project done right;
• Keep the lines of communication open at all times; and
• Involve users/customers in the development process.

Is there anything that I missed? Anything you’d like to add to the list? If your QMS project — or any other major project of yours – didn’t turn out like it was supposed to, what would your experiences tell you to do differently?

I appreciate all your comments. Thanks for your time, and best of luck.

Compliance means meeting requirements, usually of regulations or standards. Compliance monitoring refers to a continuous process of ensuring that your business governance and risk management programs are working.

For example, an information technology GRC program consists of activities designed to ensure that your IT organization:

• Supports the current and future needs of your business; and
• Complies with IT-related legal and standard requirements (e.g., privacy laws, ISO 27001).

Risks – and Regulations – Are Increasing

Every year there are more regulations to deal with, more risks that crop up, and more compliance activities intended to combat those risks.  All demand more resources.  People resources require a system of training, awareness, and management.  More regulations and risks require more resources, people, and management coordination.

How Does a Growing Organization Face this Onslaught of Increasing Complexity?

First – Write It Down. Visibility is the key. Documentation helps you organize and make the complex less so.  Your governance approach forms the basis for your policies.  Your identified risks — and your responses to them — form your internal control framework that is documented in your procedures.  Your policies and procedures drive your total cost of compliance.  They are the tools that provide management visibility, employee awareness, and the basis for your compliance monitoring activities.

Second – Automate. Policies and procedures automation is critical to any organization with a robust governance program.  There are sometimes hundreds of regulations and standards that apply to any business.  Add in operating requirements, risks, employees, and multiple geographic locations, and you should consider policy and procedure management software.  Otherwise things just fall through the cracks and your governance program will decay.  Besides, the cost of automation is falling.

New SaaS (Software as a Service) technology eliminates the need for your IT department to purchase hardware, install policy software, and maintain a new product.  SaaS Policies and procedures provide the lowest cost, fastest start-up, and the fewest headaches — but don’t take my word for it. You really have to experience it!

Third – Don’t Reinvent the Wheel. Numerous examples of policies and procedures — easy-to-use templates — exist on the Internet.  Bizmanualz provides the best selection of business policy and procedure templates, as well as business improvement services, procedure training, and process support to speed up and simplify your process of developing and implementing your system of policies and procedures.

Policy Procedure Management Software

Policy procedure management software helps to reduce the inherent complexities your business faces.  Your GRC program can be significantly enhanced with the addition of Policy and Procedure Management software.  Reduce complexity, lower compliance costs, and improve compliance using Bizmanualz online Policies and Procedures Management software.

Call or write — let us know how we can help.