Archive | WikiCFO

General Ledger Reconciliation and Analysis

See also:
Account Reconciliation
Standard Chart of Accounts
Problems in Chart of Account Design
Cash Flow Statement
Income Statement
Subsidiary Ledger

General Ledger Reconciliation and Analysis Definition

Define a general ledger as the financial record of every transaction of a company. Commonly, it is referred to as the “books” of the company. In the general ledger, record each of the transactions twice as both a subtraction (debit) and addition (credit). The general ledger is the main accounting record of the company.

Consequently, general ledger reconciliation is the process of ensuring that accounts contained in the general ledger are correct. In short, reconciliation makes sure you place the appropriate credit and debit in the associated accounts. Seemingly simple, this process requires an experienced bookkeeper when applied to small companies. Complicated applications require the hand of a trained CFO or equivalent controller. In either situation, a general ledger reconciliation policy must by enacted to ensure consistency.


Download The CEO's Guide to Keeping Score


General Ledger Reconciliation Explanation

Not every general ledger account has a detail subsidiary ledger to reconcile to. Monthly all balance sheet accounts should be analyzed for accuracy. In addition, periodically it may be necessary to reconcile revenue accounts, expense accounts and miscellaneous balance sheet accounts.

In these cases the procedures are similar to reconciling an account to a subsidiary ledger. Print a detail general ledger transaction report for the account. Then, eliminate reversing journal entries correcting errors. Finally, investigate any transactions that are unusual in nature. For example a debit entry or decrease to a revenue account would be unusual.

Finally, prepare a detailed schedule of transactions remaining in the final balance.

General Ledger Reconciliation Process

Some wonder “what is general ledger reconciliation?”. Others wonder how to do general ledger reconciliation. For bookkeepers, adhere to the following process:

First, study the accounting policy of the company. Ignorance to this is missing the essential foundation of the process; knowing the rules is key.

Then, gather information. These include receipts, invoices, account statements, invoices, and related financial reports. This data is the information the accounting staff puts into accounts.

Third, ask questions about the accounts. What items did the company purchase? Do they relate to company policy? Why are they included in the given account? When were they spent/made?

Finally, document your work. Proper documentation ensures properly reconciled accounts as much as it ensures effective bookkeeping in the first place.

General Ledger Reconciliation Template

A general ledger reconciliations template can be found at: Microsoft Templates.

The CEO's Guide to Keeping Score


Is your closing process as efficient as it could be? Access our Complete Monthly Close Checklist to use when closing your company’s or your client’s monthly books.

Periodic inventory System

 

Overhead Expense Reduction

Originally posted by Jim Wilkinson on July 23, 2013. 

9

Overhead Expense Reduction

See Also:
Predetermined Overhead Rate
Activity Based Costing vs Traditional Costing
Activity Based Cost Allocation
Standard Cost

Overhead Expense Reduction

As a general precursor to Overhead expense reduction, Group Purchasing Organizations, Co-ops and Consortiums always lead to lower prices because they aggregate spends and create buying power. This may be true for smaller spends but as spends get larger ($100,000+ annually), you will often do better on your own when a supplier can customize a program to your specific purchasing patterns and needs.


Download eBook 28 Ways to Improve Your Business's Cash Flow


Category Specific Expertise

In reducing overhead expenses, expertise in purchasing for one cost category or in the request for proposal process will produce similar results in another cost category. What expertise in purchasing really means is an understanding of the unique data requirements and what drives supplier pricing to achieve the best results. You may use the same process in different categories. But without the category specific information, the results may not be the same at all.

Category specific information includes changes in the industry, contract nuances, and benchmark data.

Stay Loyal to The Supplier

Loyalty to a supplier always translates into the best value for your company (value = price + service) as well as the best opportunity to reduce overhead expenses. Quite often, long time loyalty leads to complacency from both the supplier and the purchaser. Industries and companies change over time and vendors providing operating supplies and services are no exception. Modest price increases year after year may seem acceptable when in reality the market may have changed, and the cost should actually be going down year after year. Compounding increases add up over the years.

How To Reduce Overhead Expenses

There are three things that you can do to reduce overhead expenses:

  1. Lower Costs with Incumbent Suppliers
  2. Ask Vendors to Help Manage Spend
  3. Create a Competitive Environment for Each Category

Lower Costs With Incumbent Suppliers

Ask your incumbent suppliers what you can do that will result in lower costs from them. Lower Cost can lead to a smaller Overhead-Rate which ultimately can lead to a reduction in overhead expenses. Work with your vendor as a team member – not as an adversary. If you can change a process or an ordering habit in your organization that reduces your vendor’s expense, then your vendor should reward you with lower prices which can lead to reduced overhead expenses.

Ask Vendor to Help Manage Spend

Then, ask your vendor to help you manage the spend. A proactive approach must be taken to reduce overhead expense. Are you leveraging the vendor’s platforms for ordering and managing information? Or can they track purchases by department and provide invoices already allocated to departments to ease the work of your Accounting Department? Can they inform you if employees do not follow established business rules (e.g., buy-off contract)? Do they have the technology to prevent your employees from buying off contract without proper approval?

Create Competitive Environment for Each Category

Finally, create a competitive environment for each category. Let your team and vendors know that there are no “sacred cows“. Have someone other than the supplier’s daily contact manage the expense review process. This enables greater objectivity and keeps personal relationships out of the process. Then give suppliers all of the information they need to sharpen their pencils and minimize their risk. The more they know about your usage and requirements, the better. Customers who inspire confidence and minimize the suppliers’ risk are rewarded with the most aggressive pricing. Reducing overhead expense requires an understanding of both your personnel, as well as the vendor’s.

When you know your overhead and how much you need to reduce it by, you can add real value to your organization.

The CEO's Guide to Improving Cash Flow


Overhead Expense Reduction

Originally posted by Jim Wilkinson on July 24, 2013. 

0

Payroll Accounting

See also:
Commission Accounting
PEO Arrangement Compared to Outsourcing Payroll
Direct Labor
Pension Plans
Federal Unemployment Tax Act (FUTA)

Payroll Accounting

Payroll Accounting is the function of calculating and distributing wages, salaries, and withholdings to employees and certain agencies. It is generally done through different documents such as time sheets, paychecks, and a payroll ledger. Payroll Accounting also involves the process of issuing reports to upper management, so that they are able to make informed decisions about the company’s labor-cost data.

Payroll Accounts

Below are some payroll basic accounts that are used in association with accounting payroll entries as well as a description of each one and the relevance towards payroll.

Assets

Cash is the petty cash account which is used to empty the accrued payroll account when the payroll is distributed to the company’s employees.

Liabilities

Accrued Payroll represents a liability calculated by taking the gross pay and subtracting all deductions, or the amount that is due to the employees.

Federal Income Taxes Withheld

This account serves as a deduction from the gross pay or payroll account. It is an accumulation of payroll taxes as a percentage amount which is due to the U.S. Government. Payroll tax rates differ from business to business.

Federal Insurance Contributions Act (FICA) Taxes Payable

The FICA Taxes Payable represents a liability that is due to the U.S. Government. It is then used to fund institutions like Medicare and the Social Security Administration.

Insurance Withheld

Insurance withheld is another deduction from the gross pay and represents a contribution to the employee’s insurance provided by the employer.

Note: Other voluntary payroll deductions and withholdings can be present like bond or stock withholdings that a company would use for investments on the employee’s behalf. Other deductions include union dues or pension funds that the company may hold for its employees.

Expenses

The payroll account is the gross pay that is calculated by a payroll accountant (i.e. the salary payment or the hourly rate times the number of hours worked).

Payroll Accounting Journal Entries

This is a typical accounting payroll example of journal entries when a company is calculating and distributing the payroll.

Account                           Dr.               Cr.

Calculation:
Payroll                           xxxx

Federal Income Taxes Withheld                       xxxx

FICA Taxes Payable                                  xxxx

Union Dues Withheld                                 xxxx

Bond Withholdings                                   xxxx

Accrued Payroll                                     xxxx
Distribution:
Accrued Payroll                   xxxx
Cash                                                xxxx

Payroll Accountant Duties

Oftentimes, companies outsource their payroll accounting to specialized firms. These firms can perform the same function for a much lower cost than if the company generated them in-house.


Click here to download: The Guide to Outsourcing Your Bookkeeping & Accounting for SMBs


There are six major job functions that the payroll department or specialized company must perform throughout the year, including the following:

1)  Compute gross pay (hourly or salary)

2)  Compute the total amount of deductions (FICA, taxes, etc.)

3)  Calculate the total amount due to employees i.e. the gross pay minus the amount of deductions.

4)  Authorize the amount of payments due to employees.

5)  Distribute the payroll once authorized.

6)  Issue reports to upper management concerning labor-cost data.

Accounting Payroll System

In the past, accounting payroll systems consisted of two journals. The first is the payroll journal. Then, the second is the payroll disbursements journal. Companies used the payroll journal to accrue for salaries and wages towards employees as well as government obligations withheld from the employee’s paycheck. Thus, companies used disbursements journal to pay off these accumulated accruals when they became due.

But thanks to computer systems like Peachtree and Quickbooks, they have combined both of these journals into a payroll ledger. Furthermore, you can outsource these payroll functions at a lower cost and efficiency for a company.

Guide to Outsourcing Your Business's Bookkeeping and Accounting


Payroll Accounting

Originally posted by Jim Wilkinson on July 24, 2013. 

0

PEO or Outsource Payroll

See Also:
Advantages of a PEO
What is a PEO?
How to Select a PEO
Professional Employer Organizations FAQ’s
Service Department Costs

PEO or Outsource Payroll

Do you have a PEO or outsource payroll? Under the PEO Arrangement, there is a co-employment relationship in which both the PEO and the Business Owner have an employment relationship with the employees. Contractually, the PEO and the Business Owner allocate and share many of the traditional employer responsibilities and liabilities. For example, the PEO assumes responsibilities and liability for employment related matters such as Payroll and Payroll Taxes, Employee Benefits, Human Resources Management, and Safety and Risk Management. As a result, the Business Owner can concentrate 100% on growing their Business.


Click here to download: The Guide to Outsourcing Your Bookkeeping & Accounting for SMBs


Outsourcing is a contractual arrangement, absent an employment relationship, with a vendor (and its supervised personnel), for services, either on the customer’s premises or off-site at the vendor’s location, to perform a function or run a department that was previously staffed and supervised by the customer directly. Furthermore, examples include: Payroll Processing, Financial Auditing, Agent of Record Services, and Legal Services.

Today’s Professional Employer Organization (PEO) is a “hybrid” of all of the honorable characteristics of the Staff Leasing Business Model. In addition, combine it with all of the efficiencies of the Outsourcing Business Model.

Guide to Outsourcing Your Business's Bookkeeping and Accounting


If you’re interested in becoming the trusted advisor your CEO needs, then download your free How to be a Wingman guide here.

PEO or Outsource Payroll

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

PEO or Outsource Payroll

Originally posted by Jim Wilkinson on July 24, 2013. 

0

Single Member LLC Definition

Single Member LLC Definition

A Single Member LLC definition is a limited liability company with one member. It’s a type of entity that has caught on across the United States. It was created to satisfy emerging needs from the rapidly changing business world. One example of this is the owner/member requirements of limited liability companies. The owners are often not required to be individuals, citizens, or a specific type of business. This gives more flexibility to single member limited liability companies as well as conventional limited liability companies.

One LLC variable that varies from state to state is whether a husband and a wife can own a single member LLC. Some states allow this, while others prohibit it. As you can see, many questions and possibilities arise when forming this type of entity. If you are unsure, then seek professional advice to make sure that you are fully protected and acting within the law.

Why File For a Single Member LLC

LLCs have been very widespread since their invention. There are many different advantages of having an limited liability company. One of the broad advantages is the flexibility of taxes. Determine whether you want your LLC profit to flow-through to your personal income or whether it will be taxed as a corporation. The limited liability that this structure offers its members is another large advantage. LLCs’ liabilities are separate from the members as long as the corporate veil stays intact. One more significant benefit of limited liability companies is the ease of formation and lack of upkeep. LLCs have less stringent requirements than corporations and are faster, cheaper entities to form.


Download The CEO's Guide to Increasing Profits


Things to Consider First

If you’ve decided that an LLC or single member LLC is right for your business, then consider the following questions:

  • Will you be reinvesting a majority of profits into the business? If so, consider opting to be taxed as a corporation.
  • Are you going to do business internationally?
  • Is the single member LLC for you?
  • Are there multiple owners? Is your operating agreement thorough enough?
  • What are your state’s laws regarding LLCs?

The CEO's Guide to Increasing Profits: 5 Steps to a Profitable Business


See also:
Corporate Veil

Originally posted by Jim Wilkinson on June 6, 2014. 

Single Member LLC definition

0

Mining the Balance Sheet for Working Capital

Mining the Balance Sheet for Working Capital

Let’s face it… There has been significant liquidity in the marketplace over the past couple of years. Debt and equity capital has been relatively easy to find and commercial banks have been very willing participants as capital providers; however, many of the commercial banks have admitted that this robust marketplace is a prolonged cycle and not a permanent or semi-permanent marketplace shift. By definition as a cycle, what goes up must come down.


Download The CEO's Guide to Keeping Score


Asset Based Lending Versus Commercial Bank Cash Flow Lending

Already, many of the commercial banks are starting to whisper about declining portfolio quality and tighter credit standards. This has been attributed to issues regarding the subprime mortgage market, rising energy costs, and other economic factors. These issues have resulted in some companies experiencing a weaker balance sheet and a decline in cash flow results.

As banks start to tighten their credit standards, many companies may find they have less access or no access to working capital from commercial banks. Banks may elect not to renew certain loans that come due. Also, companies that have tripped a covenant or are in a technical default may find that their commercial bank is not as patient and will ask to refinance that loan.

So, how can a company still access adequate working capital in a changing bank marketplace? One way is to go about mining the balance sheet assets through an asset based, working capital line of credit.

Comparison

Asset based lending is more common than ever and has become for many companies a more aggressive way to grow their business. Asset based lenders look beyond a company’s cash flow and balance sheet ratios to leverage the business assets for working capital purposes. They also provide an ease of doing business and typically have less restrictive operating covenants than commercial banks.

Commercial Banks

Commercial banks typically underwrite and grant credit by emphasizing in the following order:

1) Balance Sheet Strength/Cash flow

2) Management/Guarantors

3) Collateral/Assets

Asset Based Lenders

Asset based lenders assume there is some fundamental weakness to #1 above (at least by commercial bank standards) and then flips the above equation upside down. The result is asset based lenders typically underwrite or grant credit by emphasizing in the following order:

1) Collateral/Assets

2) Management/Guarantors

3) Balance sheet strength/Cash flow

By emphasizing the value of a company’s assets as security and collateral for a working capital line of credit, an asset based lender has greater patience and tolerance for the bumps in the road and inconsistencies in the marketplace that many companies will face on a regular basis. Asset based lenders typically will provide a revolving line of credit against accounts receivables and inventory as collateral. Many asset based lenders will also provide term loans against equipment and possibly real estate.

Obviously, asset based lending is not the answer for every company’s need for working capital. It’s because not all companies generate these types of assets. Companies selling at retail or on cash terms don’t typically generate commercial accounts receivable, which is the asset that most asset based lenders leverage as the base for a loan; however, if a company is involved in manufacturing, distribution and many of the service industries, then chances are they would generate the types of assets favored by asset based lenders.

Benefit of Asset Based Lending

The benefit of this type of lending is that the loan availability can grow as a company’s assets grow and, therefore, is not as restrictive as traditional commercial bank cash flow lending – especially in rapid growth situations. Since asset based lenders rely primarily on the company’s collateral versus its cash flow results, they embrace greater credit risk. They also accept inconsistent cash flow results versus commercial banks.

So as the marketplace changes and as commercial banks start to tighten up, remember that accessing adequate working capital may be as simple as mining the balance sheet through asset based lending.

The CEO's Guide to Keeping Score


See Also:
Categories of Banks
Working Capital from Real Estate

Originally posted by Jim Wilkinson on July 24, 2013.

Mining the Balance Sheet, Balance sheet for working capital

0

Accounting Fraud Prevention Using Quickbooks

See Also:
Accounting Depreciation
Account Reconciliation
Cash Flow Projections
How to Develop a Daily Cash Report
Future of the Accounting Workforce

Accounting Fraud Prevention Using Quickbooks

A small business owner typically cannot afford to hire enough people to have proper separation of duties to gain the internal controls needed to prevent accounting fraud.

Using Internal Controls

Stephen King, CEO of GrowthForce, says that, “Internal controls can help reduce the risk of fraud, make it easier to train and manage staff, and help your company run efficiently by having solid processes and control activities in place.” The place where most companies encounter fraud is in their own company, so it’s critical that every company sets up internal controls and continues to update them as changes occur.


Download eBook The CEO's Guide to Reducing Fraud


Prevent Accounting Fraud

Every business owner can achieve accounting fraud prevention by taking these simple steps:

1. Open the Bank Statement Yourself

Every small business owner should receive the unopened bank statement. Then they should review each check for authorized payee and signature and approve electronic payments. Only after they do the above should they give it to the bookkeeper.

2. Don’t Let Your Bookkeeper Reconcile the Bank Account

The person who pays the bills should never reconcile the bank account. That’s how they cover their tracks. If you don’t have someone else to do it, then this is an easy function to outsource.

3. Close the Prior Accounting Periods

QuickBooks now has a way to lock down the prior periods. Once you produce a financial statement, that period should be “closed”. As a result, this reduces the risk of hiding a fraudulent transaction in a prior year.

4. Attach Scanned Images to Each Accounting Transaction

Most fraud occurs from check tampering. For example, the bookkeeper changes the payee to themselves. Prevent accounting fraud by scanning the bill and linking it to each accounting transaction inside QuickBooks. Thus, this makes it harder to fake a bill.

5. Set Up Username for Each User

QuickBooks now has an audit trail report which can never be turned off; however, if your staff login as “Administrator,” then you have no idea who made what entry. Set up a username for each user that way you can track who did what and when.

6. Restrict User Access

QuickBooks Enterprise Solutions has the ability to restrict access per user per screen. Make sure you have separation of duties between authorization, record keeping, and custodial responsibilities for each accounting transaction.

No system of internal control should be built on trust. The best accounting practice is to separate out the following functions: authorization, record keeping, and custodial responsibility for assets in each accounting transaction.

The CEO's Guide to Reducing Fraud


Originally posted by Jim Wilkinson on July 23, 2013. 

accounting fraud prevention using quickbooks

1