The Fast Close, Part 6 (#21)
/In this episode, we discuss how the use of journal entries can be altered in order to improve the closing speed. The general concept is to only create journal entries for larger amounts, ignoring all smaller ones that will have a minimal impact on the financial statements. Key points discussed are noted below.
The Journal Entry Problem
People don’t normally think of journal entry management as impacting the fast close, but it can – and usually in a negative way. The problem is that people tend to use too many journal entries, and they don’t exercise much control over them. This leads to several ways in which the close can be delayed.
For example, you may have a nitpicky controller who insists on creating entries for all kinds of accruals, even ones for tiny amounts. The intention in this case is to create an absolutely perfect set of financial statements. However, what people forget is that the financials are not perfect, and in fact they are more of an opinion regarding the financial status of a company at specific point in time. If you create dozens of tiny accruals, the result is probably not going to be appreciably more accurate, because there are too many estimates involved. Instead, it’s much easier to use a small number of large accruals, and skip everything else.
So how do you tell when a journal entry is needed? There is no perfect approach, because what constitutes a material entry will vary by company. However, your best bet is to simply schedule an accruals review perhaps once a quarter – outside of the closing period, of course – and decide if any accruals that used to be material have shrunk to the point where you can safely eliminate them. Or, to use the old saying, “when in doubt, leave it out.”
Reduce the Number of Journal Entries
Reducing the number of entries helps the close in several ways. First, the general ledger accountant has to monitor far fewer entries, and so can use the saved time to help with other parts of the close.
Also, this reduces the risk that someone will forget to reverse the entries in the next accounting period, if that’s required. Also, if the accrual is being parked in an asset or liability account for some time, then this means there are fewer accrued amounts to monitor in those accounts.
Now, earlier, I referred to how companies don’t exercise much control over their journal entries. This involves a couple of issues. First, there may be no standard list of entries to make, so for example you may have a wage accrual in one month but not in the next – and this gives you inconsistent results in the financial statements. Another issue is that no one person may have been assigned control over the journal entries, so that the same entry might be made by several people. If duplication occurs, then you have to spend time locating the problem and reversing the extra entry – and this will slow down the closing process.
Enhance Journal Entry Controls
How do you fix these control problems? It’s really simple. First, assign responsibility for journal entries to just one person, or as few as possible, and lock out anyone else from being able to make entries in the computer system. Next, create a standard list of journal entries that have to be completed, and set up standard journal entry templates for them in the accounting software. By taking these steps, you ensure that exactly the same entries are made every time, and in the same format. Also, when you use journal entry templates, the software normally allows you to set a reversal flag, so the entry will automatically reverse itself in the next reporting period, if that’s what you want. This avoids the really irritating problem of sometimes forgetting to set an entry for reversal, and then having to investigate and correct the problem later on.
Use Recurring Entries
Another way to make the journal entry creation process even easier is to set up a few of them as recurring entries that will automatically run in each period. These are used in cases where the amount of the entry won’t change much from period to period. A good example of this is depreciation, where you could even ignore the entry for a few months and let it repeat itself, and then review it maybe once a quarter and correct it as needed. One point about recurring entries is that they are usually set to expire at some point in the future, so scan the monthly list of journal entries in the system, just to make sure that they’re still running.
Define Accounts
If you have a number of divisions with different charts of accounts, you might run into a problem where different divisions assume that an account is used for different things, so you end up having to investigate the amounts being fed into the corporate general ledger. This can also cause a lot of inconsistency in where numbers are stored from period to period. If this is a problem, you might consider creating a brief definition for each account. Or, even better, only create a definition for the accounts that tend to confuse people, so the definitions list will be nice and short. Even better, try to build the definition right into the account name, or re-write the name to make it more understandable.