Accounts Payable System: Period End Processing - Part 6
This is the 6th article in a series about Accounts Payable. This material is adapted from The Automated Accounting Systems and Procedures Handbook (John Wiley, New York 1991) Chapter 6.
6.3 Period End Processing
At the end of each accounting period, the accounts payable department uses the system to prepare several key reports. Before this reporting occurs, the accounts payable system forwards important distribution information to the general ledger.
GENERAL LEDGER INTERFACE
During period end processing the accounts payable system forwards to the general ledger the journal entries built during voucher creation and cash disbursements processing. After these journal entries are posted to the general ledger, the ledger will reflect up-to-date accounting information and the two systems will be in sync.
Normally all general ledger interface activity occurs during period end processing. But if necessary, this process can be carried out at any time.
Accrual versus Cash Basis Accounting Considerations. For businesses that use accrual accounting, the system makes the journal entries available for forwarding to the general ledger system any time after the voucher has been approved for payment. In rare cases in which a business uses cash basis accounting, the system will not make the voucher's distribution available to the general ledger until after the cash disbursement has been processed.
General Ledger Distribution. As an audit trail of this process, the system produces a report called the general ledger distribution, sometimes referred to as the accounts payable distribution. As Figure 6-14 shows, this is a complete accounting of all the activity forwarded to the general ledger during this run of the general ledger interface. The main purpose of this report is to provide an audit trail of all general ledger activity produced during the period.
Systems can vary in on their presentation and formatting of this information. One useful variation is to sort the report of journal entries by company, budget center, and natural account number. This produces subtotals by department that can be used to show departmental expenses for the period.
Accounting Period Considerations. During period end only those accounting entries for current and past periods are forwarded to the general ledger. Entries for future accounting periods are retained by the accounts payable system and not forwarded until the proper time. Because future period information is required when balancing system activity, most organizations routinely report this information at period end.
SAMPLE GENERAL LEDGER DISTRIBUTIONS
The accounts payable system can prepare general ledger journal entries for many specific reasons. The following examples of frequently occurring general ledger distributions are not intended to discuss the accounting treatment of these situations; they are intended to present the system's implementation of this accounting.
Voucher Distribution. The system will journalize the Net Invoice, Tax, and Freight amounts according to the information entered directly into the invoice entry screen. The example in Figure 6-6 will produce the following distribution:
DR Maintenance Equipment $1,220
DR Maintenance Expense 330
DR Sales Tax 77
DR Freight 59
CR Trade Accounts Payable $1,686
Usually the accounts debited are expense or asset accounts, but these can be liability accounts if, for example, the voucher is for payment of debt. In cases in which the system prorates the sales tax or freight amount back to the line items on the invoice, there would be no charge to the Sales Tax or Freight accounts. For example, if both are prorated, the previous example would appear as
DR Maintenance Equipment $1,327
DR Maintenance Expense 359
CR Trade Accounts Payable $1,686
Suspense Accounting. Any part of the voucher that cannot be accounted for during invoice entry can be posted to a suspense account:
DR Accounts Payable Suspense $1,550
DR Sales Tax 77
DR Freight 59
CR Trade Accounts Payable $1,686
An accountant must later resolve this activity once the correct accounting for this invoice is identified. This suspense can be relieved via a special general ledger adjustment transaction that reverses the previously recorded suspense amount. The accounts payable system operator can enter this transaction through a special screen for entering general ledger adjustments:
DR Maintenance Equipment $1,220
DR Maintenance Expense 330
CR Accounts Payable Suspense $1,550
This suspense account feature is used to help record the liability of the suspended invoice in a timely manner. Good accounting procedures will require timely follow-up and reversal of suspense account balances.
In an alternative, and easier, approach to this, an accountant can set the voucher's status to Suspended. And, as part of its routine period end processing, the system automatically accounts for all such vouchers by generating a reversing journal entry to the suspense account:
DR Accounts Payable Suspense $1,686
CR Trade Accounts Payable $1,686
Because it is a reversing journal entry, the transaction automatically reverses itself in the following period:
DR Trade Accounts Payable $1,686
CR Accounts Payable Suspense $1,686
The benefit to this approach is that it not only accounts for the liability but it also relieves the operator of having to perform the suspense accounting.
Standard Costing. The accounts payable system can assist with the costing of purchased material in a standard costing environment. One method for this uses a Purchase Price Variance account to accrue the difference between the standard purchase price and the actual purchase price. To begin this three-step transaction, the receiving system records the standard cost of inventory received when the goods arrive. Assuming 10 pieces were received with a standard cost of $500.00 each:
DR Raw Material Inventory $5,000
CR Purchase Price Variance $5,000
When the invoice arrives, the accounts payable system distributes the actual invoice amount against the clearing account:
DR Purchase Price Variance $5,200
CR Trade Accounts Payable $5,200
During the month the difference between actual and standard cost for all such transactions is accumulated in the Purchase Price Variance account. The third step occurs at period end when the account's balance is debited to separately account for inventory received, but not invoiced.
Overall, this approach is dangerous because it relies on an offsetting invoice t transaction to correctly state Purchase Price Variance. One mistake, such as an, invoice not processed, and the variance can be grossly misstated. A second, simpler approach combines the first two steps to account for all activity when the invoice is received. With this approach, the system computes the purchase price variance as the difference between this standard inventory cost and the actual invoice amount for each item:
DR Raw Material Inventory $5,000
DR Purchase Price Variance 200
CR Trade Accounts Payable $5,200
As with the previous approach, this approach also requires the operator to enter the actual cost (and quantity) for each line item on the invoice.
Accruing for Products Received, But Not Billed. In each of these situations, a need exists to account for all items for which the goods have been received, but the vendor invoice has not. This is particularly important when the amount of these items is materially significant. The system performs this computation by examining purchase orders with received quantities that are unmatched to any invoices. From this information, the system can generate a reversing (accrual) entry, recording the liability:
DR Inventory Received, not Billed $1,540
CR Trade Accounts Payable $1,540
Cash Disbursements. The system will generate general ledger journal entries for any payments that is makes. Included in this is any discounts taken. For example,
DR Trade Accounts Payable $1,686
CR Cash $1,670
CR Cash Discount 16
might be the general ledger journal that results from paying the $1,686 invoice used in earlier examples.
PERIOD END REPORTS
Forwarding journal entries to the general ledger is an important part of period end. The accounts payable system may also reset certain period-to-date information in its files during period end processing. But the most visible of all the period end system activities is period end reporting. Three common period end reports are
· The Open Voucher Report.
· Exception Voucher Listings.
· Annual 1099 Reporting.
The Open Voucher Report. The open voucher report shows open vouchers and credit/debit memos that remain unpaid (or unmatched, in the case of memos). Businesses often age this report, as shown in Figure 6-15. This format allows quick identification of older vouchers, or by the status code, vouchers on payment hold. Other uses for this report include
· Period end balancing procedures.
· Applying credit memos for payment.
· “Housecleaning” of the accounts.
· Verifying the vendor's customer statements against accounts payable records.
In addition to the sort sequence shown here, this report can be useful when sorted by vendor number or vendor name.
Exception Voucher Listings. To assist with specific period end accounts payable department procedures, the system can print detailed reports of exception vouchers at period end. Examples include
· A list of open credit memos.
· A list of vouchers on payment hold.
The procedures for reviewing and resolving this information help the accounts payable department keep an orderly environment.
Annual 1099 Reporting. The Internal Revenue Service requires a business to file an information return reporting payments made to certain vendors. The system can accomplish this by accruing reportable amounts on the vendor file throughout the year and preparing this report at calendar year end, which may be different than the organization's fiscal year end. Even information on payments made to temporary vendors can be reported at this time. The system sorts this report by the vendor's tax ID.
Under certain conditions, the Internal Revenue Service may require that this information be submitted on magnetic computer media such as diskette or computer tape, instead of the paper 1099 forms. The tax regulations specify the conditions under which this magnetic media reporting must occur. When it is a requirement, the accounts payable system should support magnetic media reporting by creating computer-readable 1099 information.
Next Month's topic: File Maintenance and System Structure
| About this article and the author: |
Doug Potter is the owner of The Newport Consulting Group a professional management consulting organization that provides clients with information systems planning, selection, and implementation services. He can be reached at dpotter@newportconsulting.com or through his Web site, http://www.newportconsulting.com.
Note: The contents of this article were excerpted from Mr. Potters book "Automated Accounting Systems and Procedures Handbook" Copyright 1991 by Douglas A. Potter, published by John Wiley & Sons, Inc. New York
|
|
|
|
|
Sponsor Messags & Links
Red Wing Software
With more than 25 years of experience developing accounting software, Red Wing Software knows businesses. We specialize in providing software at a reasonable price to companies who are outgrowing their current software and need more functionality, especially where inventory is concerned. Red Wing Software offers a complete suite of software products that can integrate and work together, including General Ledger, Accounts Payable, Accounts Receivable, Inventory, Order Entry, Purchase Orders, and Payroll. For more information about Red Wing Software products, please call 800-732-9464, or...
Visit Red Wing for more details
AS411 - Software Search Service
Tired of searching for software?
AS411's complimentary software search service will help you locate professionals in your area who can help you with all your software needs. It's simple, easy and only takes a few minutes.
Click Here to learn more
|
|
|