Best Practices for Account Reconciliation

Account reconciliation is an under appreciated yet critical control to help ensure an organization's financial integrity. Weaknesses and inefficiencies in the reconciliation process often lead to mistakes on the balance sheet and overall inaccuracies in the financial close. 

Since the enactment of Sarbanes Oxley (SOX) in 2002 and other rules and regulations that have followed, ensuring the accuracy of account reconciliations has become increasingly important. In the past, if an external auditor found a material error during review of a company's financial statements, it could still be corrected by the company with an adjusting entry. In most cases, the controller wouldn't have to issue a restatement, nor would the auditor have to report the error. 

With the advent of SOX, the call for compliance has risen to another level. If the auditor finds a material error, the company may be required to disclose a failure of controls. And, if the auditor finds a misstatement while reviewing the quarterly or annual SEC reports that the company cannot prove it would have found on its own, then the error is determined to be a material misstatement and a material weakness that could also require disclosure. 

An efficient, accurate, and timely financial close cycle (beginning with the account reconciliation process) can create a foundation for evaluating business performance, supporting organizational decisions, and satisfying external reporting requirements. Automation of the account reconciliation process is a critical step on the road to achieving "balance sheet integrity" - and ultimately, a timely and efficient financial close. However, software alone will not ensure account reconciliations are accurate.

Following this best practices list will send you on your way to error-free account reconciliations and a more efficient financial close:

Account reconciliations should be complete - no account left behind!

• Ensure all appropriate accounts are being reconciled, including new accounts.
• Ensure that there is an overall reconciliation policy and that it is adhered to company wide.
• Ensure that each reconciliation includes a title, description of the account, and procedures and/or instructions on how to complete the reconciliation (applicable contacts, reports to run or obtain, etc.).
• Documentation supporting the account balance should be included with the reconciliation.

Account reconciliations should be accurate.

• The individual preparing and reviewing the account should have a basic understanding of what the account is used for and what should be used to support the balance. For example, cash accounts will most often need the general ledger and a bank statement in order to perform the reconciliation.
• Ensure that the correct, most updated balances are being reconciled.
• Ensure that the reconciliation actually supports the balance and is not just a repeat of the general ledger or a roll-forward of the balance.
• Watch for accounts that have unusual balances (such as an accrual with a debit balance or a receivable account with a credit balance).

Account reconciliations should be completed and reviewed in a timely manner.

• Create due dates for the reconciliations. 
• Have a mechanism to track the status of each reconciliation.
• Make the high-risk account reconciliations due early on in the close cycle to identify any potential problems.
• Review the unidentified differences and post the necessary adjustments while the accounting period is still open.

Account reconciliations should support the appropriate accounting principles.

• Account reconciliations should follow their local accounting principles. 
• Ensure the reconciliations follow the principles, such as historical cost, matching, and full disclosure.
• Ensure the reconciliations are objective, that they identify material unidentified differences, that they are consistent, and that the transactions behind the general ledger balance followed the convention of conservatism.
• Reconciliations should follow company policies.

The account reconciliation process should be constantly reviewed and improved.

• Review the account reconciliation policy to ensure it accurately reflects the company's position.
• Review the overall process routinely to identify improvements that help drive quality and timeliness.
• Review the reconciliation procedures and/or instructions to ensure they answer: What? When? Who? Why? How Much?
• Use standard templates for the various types of reconciliations for consistency and ease of reviewing for accuracy and completeness.

Good tools and processes provide a framework for ensuring quality, accuracy, and completeness. They provide a means to track assignments, due dates, and work completion. A robust, automated account reconciliation process will focus the right people on the right activities and give management real-time information around the close process.

Source : http://www.accountingweb.com/technology/accounting-software/best-practices-for-account-reconciliation

What is 401(k) plan?

401(k) plan is an arrangement that allows an employee to choose between taking compensation in cash or deferring a percentage of it to an account under the plan. The amount deferred is usually not taxable to the employee until it is withdrawn or distributed from the plan. However, if the plan permits, an employee can make 401(k) contributions on an after-tax basis, and these amounts are tax-free when withdrawn. 401(k) plans are a type of retirement plan known as a qualified plan, which means that this plan is governed by the regulations stipulated in the Employee Retirement Income Security Act of 1974 and the tax code.

Definition of notes receivable

Note receivable is a claim that requires a formal instrument as proof of debt and usually provides for payment of interest by the debtor.

Notes receivable are also called promissory notes. That is, they require the debtor to pay the promised amount at a definite time or on demand. One making the promise (i.e., debtor) is called the maker, while one to whom the note is payable (i.e., the creditor) is called the payee. Due (maturity) date is the date when the note receivable is to be paid.

Let’s assume that on April 1, 20X3 Vapaus Company (a fictitious entity) has a $10,000 past due account from Aanbod Company. Vacaus accepts a 60-day, 12% note receivable from Aanbod for $10,000. On April 1, 20X3 Vapaus would make the following journal entry to record the receipt of note receivable:

Account Titles	Debit	Credit
Notes Receivable-Aanbod	$10,000
Accounts Receivable-Aanbod		$10,000

On May 30,20X3 – when the note receivable matures -- Vapaus Company would record interest revenue of $200 (i.e., $10,000 x 2%). If Aanbod pays the note receivable, Vapaus would record cash receipt. However, if Aanbod fails to pay the note receivable, Vapaus would transfer dishonored note receivable and interest into accounts receivable account; and if the account receivable account is deemed uncollectible, the company would write it off against the allowance for doubtful accounts.  In either case, Vacaus would record an Interest Revenue of $200.

If Aanbod pays the note receivable, Vacaus would make the following journal entry on May 30, 20X3:

Account Titles	Debit	Credit
Cash	$10,200
Notes Receivable-Aanbod		$10,000
Interest Revenue		$200

When a note matures in the later fiscal period, the company holding the note receivable recognizes interest revenue at the end of each accounting period (i.e., along with interest receivable) for that period. Interest revenue is usually reported as Other Income.

Accounting for cash (sales) discounts

Let's see how the credit term of 2/10, n/30 works in an example.

Michael & Co Ltd. ships $1,000 of goods to a customer. If the customer pays Michael & Co Ltd. within 10 days of the invoice date, the customer is allowed to deduct $20 (2% of $1,000) from the purchase of $1,000. In other words, the $1,000 amount can be settled for $980 if it is paid within the 10-day discount period.

In the situation when the buyer is paying the account payable to Michael & Co Ltd. for $1,000 early enough to receive a 2% discount, the following entry is made by the buyer:

Account Titles	Debit	Credit
Accounts Payable	1,000
Purchases Discount		20
Cash		980

On the other hand, in the case when we are receiving payment from the Customer for a $1,000 account receivable early enough to offer a 2% discount, the seller would make the following entry:

Account Titles	Debit	Credit
Cash	980
Sales Discount	20
Accounts Receivable		1,000

The method of recording the cash (sales) discounts is called the Gross Method.

Also see : Explanation of 2/10, n/30 credit terms

Explanation of 2/10, n/30 credit terms

Indication "2/10, n/30" (or "2/10 net 30") on an invoice represents a cash (sales) discount provided by the seller to the buyer for prompt payment.

The term 2/10, n/30 is a typical credit term and means the following:

• "2" shows the discount percentage offered by the seller.
• "10" indicates the number of days (from the invoice date) within which the buyer should pay the invoice in order to receive the discount.
• "n/30" states that if the buyer does not pay the (full) invoice amount within the 10 days to qualify for the discount, then the net amount is due within 30 days after the sales invoice date.

The terms offered by the seller usually depend on the trade custom. Some variations of the cash discount terms, among others, may be "2/15, n/30" (2% discount for the payment within 15 days and the full amount to be paid within 30 days) or "n/10 EOM" (the invoice is due and payable 10 days after the end of the month in which the sale occurred).

In accounting, a cash (sales) discount represents an expense to the seller. The account used to recognize the expense may be called "Sales Discount" or "Discount on Sales."

The buyer treats such a discount as a reduction of the cost and uses the account called "Purchases Discount" or "Discount on Purchases."

Accounts Payable

When a company orders and receives goods (or services) in advance of paying for them, we say that the company is purchasing the goods on account or on credit. The supplier (or vendor) of the goods on credit is also referred to as a creditor. If the company receiving the goods does not sign a promissory note, the vendor's bill or invoice will be recorded by the company in its liability account Accounts Payable (or Trade Payables).

As is expected for a liability account, Accounts Payable will normally have a credit balance. Hence, when a vendor invoice is recorded, Accounts Payable will be credited and another account must be debited (as required by double-entry accounting). When an account payable is paid, Accounts Payable will be debited and Cash will be credited. Therefore, the credit balance in Accounts Payable should be equal to the amount of vendor invoices that have been recorded but have not yet been paid.Under the accrual method of accounting, the company receiving goods or services on credit must report the liability no later than the date they were received. The same date is used to record the debit entry to an expense or asset account as appropriate. Hence, accountants say that under the accrual method of accounting expenses are reported when they are incurred (not when they are paid).The term accounts payable can also refer to the person or staff that processes vendor invoices and pays the company's bills. That's why a supplier who hasn't received payment from a customer will phone and ask to speak with "accounts payable."The accounts payable process involves reviewing an enormous amount of detail to ensure that only legitimate and accurate amounts are entered in the accounting system. Much of the information that needs to be reviewed will be found in the following documents:

purchase orders issued by the company

receiving reports issued by the company

invoices from the company's vendors

contracts and other agreements

The accuracy and completeness of a company's financial statements are dependent on the accounts payable process. A well-run accounts payable process will include:

the timely processing of accurate and legitimate vendor invoices,

accurate recording in the appropriate general ledger accounts, and

the accrual of obligations and expenses that have not yet been completely processed.

The efficiency and effectiveness of the accounts payable process will also affect the company's cash position, credit rating, and relationships with its suppliers.

Excel - VLOOKUP Easy Explanation

To build a VLOOKUP, you need 4 parameters

·        First parameter of the function contains a value you want to search.

·        Second parameter is the range of cells where you want to make your research.

·        Third parameter indicates the column number you want to return.

·        The last parameter is 0 or FALSE (means exact match) or 1 or TRUE (means approaching).