A picky controller who wants perfect financial statements has a tendency to create far too many journal entries to polish up every account, sometimes for extremely small amounts that most people would consider well below the lower limits of materiality. Small journal entries also arise when they were originally created to handle much larger dollar amounts, and were never eliminated when the reasons for the entries shrank in size. In either case, immaterial journal entries waste time during the closing process and should be eliminated. This post emphazie and discuss this approach in much more detail and deeper.: being smart with small journal entries, why and when to use journal entry checklist, why and when to use recuring journal entries. So, read on…
Being Smart with Immaterial Journa Entries
The decision to use a journal entry is quite simple: when in doubt, leave it out. In other words, there must be a clear and discernible improvement in the financial statements as the result of a journal entry. This approach also applies to the use of accruals to park smaller unrecognized expenses in prepaid asset accounts. It takes time to create the journal entry, prepare a detailed analysis of the asset account, and reverse the entry in a later period when the expense needs to be recognized. In exchange for the immediate recognition of the expense, avoid all these steps by not making the journal entry.
Being Smart with Journal Entry Checklist
There can easily be dozens or even hundreds of journal entries created during a single reporting period. With so many being created, it is difficult to wade through them all to see if the key entries are being made every month and if they are using the same accounts from period to period. If not, the reported financial results will be extremely inconsistent. For example, if a wage accrual entry is only made sporadically, the reported level of wage expense will “increase when the entry is used and decline when it is not”.
To fix this problem, begin with a standard checklist of journal entries to be completed as part of the closing. The checklist should include a check-off box or space for initials to indicate completion, the approximate timing of the entries, and a reference number to show the name of the journal entry template as it is stored in the accounting system. An example of such a checklist is shown below:
The reference number shown in the above example uses a two-letter designation for the functional area most closely related to the journal entry, plus a number to indicate the volume of templates within that functional area. For example: the first reference number in the table is IN01, which indicates the first inventory journal entry. Similarly, the last entry in the table is designated GL04, which is the fourth general ledger entry. Some computer systems allow for very large file names, so less cryptic designations can be used.
As just noted, a key part of journal entry standardization is the use of a template. This is a blank journal entry kept in the accounting software, which may be called a template, format, or memorized transaction, depending on the software being used. Users simply go to the journal entry checklist to find the stored name of each template, enter numbers in the template, and save it in the correct accounting period.
Templates are intended for any journal entries used on a repetitive basis for which the account numbers stay the same but the dollar amounts of the entries vary. One should occasionally review the templates to verify that the account numbers listed within them are still correct—a quarterly review is sufficient.
Being Smart with Recurring Journal Entries
Most closing processes require the use of some journal entries, and frequently a great many of them. Because some of these entries can be complex, there is a high likelihood that some account numbers or dollar figures will be entered incorrectly. Another very common problem is transposing entries, so debits are recorded as credits, and vice versa. These errors are difficult to spot, and always time-consuming to correct. If not found, they can have a significant impact on reported financial results.
One solution is to use the recurring journal entry feature in the accounting software. This allows users to record a journal entry, with all account numbers and dollar figures, and then state the number of accounting periods over which it shall be in effect. The system will take matters from there, automatically recording journal entries in succeeding periods until entries have been recorded for the full range of designated months. In the interim, the accounting staff has no work to do, which can make a small dent in the length of the closing process.
The recurring entry is best used for transactions that have no chance of requiring adjustments over the period when they are preloaded to run, such as the amortization of a specific value for a designated period. It can also be used for large journal entries where some changes are likely each month, but revising the recurring entry is still less time-consuming than using a template. An example is a depreciation expense entry where there are continuing updates to dollar values in the entry based on asset additions and dispositions.
When using recurring entries, it is useful to create a printed list of all such entries and compare it to the entries appearing in the general ledger each month. This step ensures that all recurring entries are running that are supposed to run. Also, consider inspecting in detail any recurring entry that is in its final month of activation. These entries may require slight adjustments so that the total value of a series of recurring entries matches the goal amount. For example, if the objective of a series of recurring entries was to amortize an initial value of $12,003 over 12 months, the monthly entry may have been $1,000, which leaves an extra $3 to adjust in the final recurring entry in order to completely eliminate the initial value.
Being Completely Smart With Journal Entries
It is not especially difficult to learn how to create a journal entry in a company’s accounting software. This can have the same impact as giving the family car to a teenager with a learner’s permit—havoc can ensue. The problem is that more than one person may create a journal entry for the same transaction, resulting in duplicate entries or [if there is no adequate standard procedure in place for a closing activity] a cluster of slightly different entries. When this happens, someone must spend time reviewing the journal entry list for duplications, determine which one is correct, and delete the others. Also, if a person making a journal entry does not have adequate accounting training, the entry may be to the wrong accounts or have flipped the debits and credits.
To keep these problems from occurring, one well-trained person should be designated the general ledger accountant, and be solely responsible for all journal entries. If the computer system allows it, consider using passwords to lock out all other users from journal entry. The net effect of cleaning up and standardizing journal entries is a small improvement in the speed of closing, but can be substantially greater if the original closing process included a large quantity of unregulated journal entries.