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Reconciliation Guide
Reconciliation Guide
Account Summary
End-to-end
JE Flow
Points to be noted
Thus, if an entity has used an office building to carry on its operations in a month, the
rent due for that month should be ‘accrued’ in that month itself even though it is actually
paid in next month. Here, by accruing the rent, we create a Liability – a payable.
Similarly, if an entity has lent an amount to an employee as Loan, it will accrue for the
interest due on it for a period, despite the fact that the employee will pay interest at the
end of tenure of loan (assuming that is in the terms of loan). Here, by accruing the
interest, we create an Asset – a receivable.
Accrual stems from “Matching Concept”. Accordingly, to ascertain true and fair picture
of Profit or Loss of an entity, revenue and expense of a period should be matched with
each other, whether they are received or paid in the same period or not. Most of the
entities make Accrual entries as ‘Reversing’ entries, that is, they get reversed in the
next period. Freedom does the same. Alternatively, some entities do not reverse it in
next period; rather adjust the payment/receipt against the accrual.
1. Payroll related expenses viz. Payroll, Bonus, Vacation, P4P, MBO, Severance
2. Raw Material related viz. Newsprint, AP, Ink
3. Expenses related viz. Commission, Telephone, Marketing, ABC, Facilities
4. Tax related viz. Sales Tax, FICA, 401K
Account Summary
This may be an Asset or a Liability account and accordingly have a Dr. / Cr. Balance.
End-to-end (Assuming it as Reversing JE)
JE Flow
1 3 4
Please see the T-Accounting hereunder for more clarity (and on the use of
numbers above)
Rent Account
1 __________________________________________________ 2
Jan 31 To O/s Rent XXJan 31 By P&L A/c XX
(Creation of liability) XX (Exp transferred to P&L) XX
3
4 Feb 1 To Bank A/c XX Feb 1 By O/s Rent XX
(Exp paid) (Accrual reversed)
Feb 28 To O/s Rent XX
(Creation of liability)
Points to be noted
Purchase bills are updated in Papex sub-system from which a report is generated to
ascertain the amount of purchase. It is cross-verified with Production Department to
check the accuracy of purchase. If there is a difference between the two sources, it is
informed to the client who resolves the difference and gives the final figure. Since the
payment for these purchases is made in next period, an Accrual Entry is passed as
follows:
(Source: Yuma)
ACCOUNT RECEIVABLE
In Freedom, for Circulation, generally credit is not allowed and it is against Advance
Payment. However, for customers who had been with Freedom for long period of time,
a grace period may be allowed if there subscription period ends and they do not make
payment before end date. Freedom continues delivering copies for few weeks and
requests them for payment. For this facility, a fee is charged for the grace period along
with the revenue for the copies delivered during this period.
For Advertisement, Freedom does not give any credit period to one-time customers who
just walk-in for printing of an advertisement. Apart from this, generally, the credit period
is 15 days’ net for Advertisement (also known as Courtesy Credit). If payment is not
made within this period, further printing of Ad for those customers is suspended. For
running customers, the credit period ranges from 30 days to 90 days depending upon
their credit report, business given by them to Freedom, past payment history and other
relevant factors.
Most big organizations have a sub-system to record AR. This sub-system will capture
each minute detail related with each customer. The sub-system is capable of generating
various reports for analysis and decision making. This sub-system is linked to GL
wherein final numbers flow. Freedom uses AR 2000, AR 2005, AR 5000, Mactive at
various locations as AR sub-system.
Account Summary
End-to-End
JE Flow
Points to be noted
A report is generated by AR 2000 on monthly basis which gives the details of all AR
accounts and the revenue generated from them. The team takes the numbers from this
report and based on their transaction codes, classifies it to appropriate revenue account
viz. Classified Advertisement, Display Advertisement, National Revenue, Preprint
Revenue, Retail Colour Revenue etc. After this, the JE is made as follows:
Dr. AR
Bad Debts mean the amount of receivables that could not be collected due to
insolvency, death, default etc. of debtor. The receivable could be against sale of goods,
rendering of services, Loans & Advances to supplier/employee. It is a loss of the entity
which owned this receivable. In Freedom, Bad Debts would arise on account of AR from
Circulation Revenue and Advertisement Revenue.
The key feature of Provision for Bad Debts is that it is estimated figure. Based on past
experience (i.e. historical data) or availability of new information (e.g. debtor filing for
Bankruptcy) or aging of debtors, an estimate is made for the provision. Mostly, there is
a business policy for creation of this provision.
Bad Debt recovered is the amount of cash realized against a Bad Debt that has
already been written-off to P&L Account. It is treated as Income of the entity.
Account Summary
Bad Debt is a Nominal A/c (Loss) and has a Dr. Balance. Provision for Bad Debt is
Liability and has a Cr. Balance. Bad Debts Recovered is Nominal A/c (Income) with a
Cr. Balance.
End-to-end
JE FLOW
Points to be noted
1. Look for business policy for creation of Provision for Bad Debts. The amount in
GL should adhere to the policy.
2. Look at actual Bad Debt v/s Provision for Bad Debt. Ideally, they should be close
to each other. If there is significant difference, the Provision needs revision.
3. Having excess Provision is not good for the bottom-line of business. It is an
unnecessary hit which results in lower Profit being reported.
4. Study the debtors closely. If you see any debtor approaching/moving above the
credit period, inform the client immediately. Timely action can save Bad Debts
Loss.
5. Do a comparative and trend analysis of Sales Revenue, AR and Bad Debts.
Since they are inter-related, this analysis can highlight areas where special
attention is needed. Try to cover a period of 6-12 months for trending; or present
a comparative study with the figures of last year for comparable period.
6. Ratio Analysis (like Debtor Turnover; Average collection period) will assist in
highlighting focus areas.
In first two months of every quarter, Provision is created by using Budgeted figures. In
the third month, it is trued-up to actual provision calculated by applying the percentage
to AR as provided in Aging Schedule. Any shortfall in Provision for Bad Debts Account is
made good by passing following JE:
(Source: OCR)
CASH & BANK
This category primarily takes care of Cash & Bank Receipts, Transfers made from/to
Bank, Petty Cash and charges levied by Bank.
The major component of Cash & Bank will be collection/deposit of Circulation and
Advertisement Revenue. Next important feature would be Cheque Returns/NSF.
The purpose of opening any Bank Account is very important. That determines the type
of transactions one can expect in those accounts. There are some Bank Accounts
which are ‘Zero Balance’ Accounts, thus, every day the balance therein will be swept to
another Bank Account. Some Bank Accounts may be opened only to record receipts &
collections while some may be for disbursements only. Carefully note the purpose of
each Bank Account.
Account Summary
This is an Asset A/c having Dr. Balance. Cash A/c should necessarily have Dr. Balance
while Bank A/c may, at times, have Cr. Balance.
JE Flow
Points to be noted
Cash Receipts
(Reversal of JE on month-end)
Fixed Assets are those assets which are used for production of goods, rendering of
services or for administrative purposes. It includes, Land, Building, Machinery,
Equipments, Vehicles and the like. As compared with Current Assets, Fixed Assets
generally have a useful economic life of more than one year and are intended by
management to be utilized for business for a longer term.
On acquisition, Fixed Assets are initially recognized in the books at Cost. Cost
comprises of Purchase Price, All non-refundable taxed and duties, and all other costs
necessary to bring the asset to its present location and condition e.g. transportation
cost, installation cost etc.
Subsequently, Fixed Assets are measured either at Cost less Accumulated Depreciation
and Impairment Loss, if any or at Fair Value. At Freedom, they follow the former method
of measurement of Fixed Assets.
If Fixed Assets are developed internally, for example, if a building or a machinery is self-
constructed, the cost would be ascertained using the normal principals of Cost
Accounting. It includes Material, Labour and Overhead.
Depreciation is a measure of decline in the value of Fixed Assets due to use, wear-
and-tear, passage of time, etc. Depreciation is bound to happen on all Fixed Assets
(except Land) irrespective of its current market price is more/less than its Cost Price.
Depreciation is an accounting adjustment – there is no outflow of Cash in it. It
systematically reduces the value of Fixed Asset over its useful economic life. Thus, it
complies with Matching Principle, whereby, cost and benefit of Fixed Assets are
matched over the useful life of the asset. It also assists the entity in retaining sufficient
cash within business for replenishment/replacement of asset at the end of its useful life.
There are two methods of charging Depreciation – Straight Line Method and Written
Down Value Method. Under the former, equal amount is charged as Depreciation
throughout the useful life of asset. Under the latter, the amount of depreciation is higher
in the initial years vis-à-vis the later years.
Account Summary
Fixed Asset is an Asset Account with Dr. Balance. Depreciation is a Nominal Account
with Dr. Balance. Provision for Depreciation is a Liability Account with Cr. Balance.
End-to-End
JE Flow
Points to be noted
Acquisition of Asset
At Freedom, if the payment for the Fixed Asset is already made, the JE for acquisition is
passed by Corporate and IBPO has nothing to do in it. We can directly see the
acquisition in Great Plains. However, if the payment is not yet made (i.e. it is credit
purchase), we get a report from Xendocs in Webextender which gives the details of
assets acquired on credit. We pass an accrual entry for them as follows:
It is a reversing JE. Next month, it will reverse and we will make the same JE again next
month as the payment is still not made. This repeats until the payment is made. See
below for the explanation:
Since this reversal would again reduce the Fixed Asset which is already put to use,
depreciation will cease to apply causing incorrect accounting. Hence, we will again
make accrual entry (as the payment is not yet made). This entry would again be a
reversing JE.
Assume that the payment is made in next month, so the following entries will follow:
Dr. Depreciation
Inventory consists of Raw Material (e.g. Newsprint, Ink, Plates), Work-in-progress (e.g.
semi-finished goods), Finished Goods (e.g. Newspaper, Magazines) and Consumables
(e.g. Rubber Bands, Plastic Bags, Lubricants, etc.).
There are two methods to ascertain Inventory: FIFO (First In First Out) and Weighted
Average Method. FIFO presumes that the inventory received first is issued first. Thus,
the Inventory-in-hand and its cost would reflect latest purchased quantity at latest
purchase price. Weighted Average Method assigns average cost to issue of Inventory
and Inventory-in-hand.
In this category, IBPO records purchase of Inventory (mainly, Raw Materials) and Issue
of the same for production for various locations of Freedom.
Account Summary
Name of type of
Inventory e.g. Black Ink
Points to be noted
Acquisition of Inventory
At Freedom, this entry is passed by Corporate. Hence, at IBPO, most of the locations
do not make this JE.
Expensing of Inventory
PREPAID
It is an advance payment for an expense. Thus, a lump sum amount is paid in a period
for which the benefit is received in the next period or periods. Based on Matching
Concept, the amount which pertains to next period(s) is deferred and charged to P&L in
those respective period(s). In Freedom, historically we have booked Rent, Insurance,
Postage and Maintenance kind of expense to Prepaid.
Account Summary
End-to-end
JE Flow
Points to be noted
1. Check the calculation of Prepaid. Look for the invoice or the agreement which
gives rise to Advance Payment. Find out the period for which the advance
payment is made.
2. Sometimes, the date of payment may not coincide with commencement of the
period for which advance payment is made. For example, an Insurance Premium
is due on 15th May 2010 for policy period commencing from 15 th May 2010 to 14 th
May 2011. If here, the premium is paid well ahead of due date, say on 26 th April
2010, the calculation of Prepaid will start only from 15 th May 2010 and not earlier.
Such instances should be carefully noted.
3. Generally, the amortization of prepaid expense is uniform over several months.
Hence, the teams can always prepare the JE in advance rather than waiting for
the month-end close to start.
4. The period and the amount to be amortized should be approved/authorized by a
proper office. Find out whether this is happening or not.
5. There cannot be a balance in Prepaid Expense Account which continues as-it-is
for long. Ideally, either it should be amortized or it should get adjusted in next
period(s). If you see unchanged Opening Balance or stagnant balance, be alert.
Live Example of JE from Freedom (with brief procedure)
Expenses paid in advance are transferred to Prepaid Expense Account. From there, it is
amortized over the period for which it is paid in advance. For this, the team looks for
Invoice in Webextender on which the period is mentioned. Since Corporate makes the
payment, they book it to Inter-company; our team just posts the entry to GP.
REVENUE
Revenue is the income of an entity which arises from core or central operations.
Revenue arises from sale of goods and from rendering of services. For Freedom, the
core operation is printing and publication and the main source of income is circulation
and advertising.
It is said to be ‘earned’ when the ownership of goods passes from seller to buyer. Until
that happens, revenue cannot be recognized. Hence, in a ‘Single Copy Sale’, the
revenue can be recognized immediately on sale to customer. However, in a contract to
supply newspaper over a period of 12 months, it is recognized as and when sale
happens. Therefore, even if subscription is received in advance, it will be recognized
over 12 months on suitable basis (in this case, on straight-line basis).
Account Summary
End-to-End Flow
JE Flow
Points to be noticed
At IBPO, currently we do Property Tax (Real) and Sales Tax JEs for Freedom.
Property Tax: In USA, there are two types of taxes – Real Property Tax and Personal
Property Tax. The former is a tax on Real Estate and the latter on Personal assets. (We
make JEs for Real Property only). Property Tax is calculated for whole year and
monthly JE is passed for the accrual and payment.
Sales Tax: It is levied on sale of goods. It is an indirect tax wherein the amount of tax is
collected from the buyer and paid to the Government.
Account Summary
It is a Nominal A/c (Expense) and has a Dr. Balance. Indirect Taxes are Liabilities and
have a Cr. Balance.
End-to-end
Property Tax
Sales Tax
JE FLOW
Property Tax
Sales Tax
Points to be noted
1. Ideally, Property Tax accrual and payment figure would be same every month. If
it is different, it may be because of change in rate of tax, adjustment of tax
refund/discount, property acquisition/disposal. Look for these changes and
ascertain the reason.
2. Back-up for the JE would be the tax bill received from County or the Self-
Assessment sheet prepared by business.
3. Look for this equation: Accrual = Payment + Refunds + Discounts. This equation
should necessarily hold good for each accrual. If Accrual > Payment + Refunds +
Discounts; it is a case of Over-Accrual and should be either adjusted against
accruals of next period or written back in P&L. Over-accrual is never good for
bottom line.
Property Tax is accrued monthly on the basis of budgeted amount. The Bill for it is
generally received in September. The accrual is trued-up with the Bill. It is ensured that
the accrual does not fall short of Bill. The payment of tax is made by Corporate. The
entries are as follows:
ALLOCATION
For example, initially rent paid for the whole office building may be recorded as one
amount in Corporate Books. Later, based on Floor Space occupied by each
department, it is allocated to them. This assists in determining the true profit/loss of
each department. Similarly, an Advertisement may have been booked where a part of it
is hosted on website also, besides being published in the newspaper. In this case, if
initially the advertisement revenue was booked as single amount; it would be allocated
to Print Revenue and Online Revenue.
Account Summary
Since this is not an account by itself, it will not have a Dr. or Cr. Balance.
End-to-end
JE Flow
Points to be noted
All internet revenue is booked to the main Internet Revenue Account. Then, it is
allocated to various internet categories on the basis of a report generated from a sub-
system called GEAC which details each internet Advertisement. The individual amount
are mentioned in that report based on which JE is passed to allocate the amount
originally recorded.
(Source: Yuma)
RECLASS
Reclass means transferring an amount from one account to another account. This is
done to either rectify a mistake committed or to allocate the amount to correct
department, location, account heads etc.
Account Summary
Since this is not an account by itself, it will not have a Dr. or Cr. Balance.
End-to-end
JE Flow
Payroll department books the amount of severance expense in the severance accrual
account and the tax on severance in P&L account. Ideally, it should have been booked
to the severance expense account. Hence, a reclass is done to transfer the severance
amount to the particular severance expense account and to the severance tax account
related to severance.