Page 242 - Accounting Best Practices

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12–6 Automate the Cutoff
entries is to create a schedule of entry updates, so a controller knows the exact
month or year in which a recurring entry is scheduled to change and can ignore it
in the meantime. Either approach gives a sufficient amount of control over this
type of journal entry, while still reducing the total amount of accounting time
allocated to it.
Cost: Installation time:

12–6 AUTOMATE THE CUTOFF

The single most difficult issue at the time of each financial statement closing is
the cutoff. This involves matching the invoices from suppliers with receipts to
ensure that all expenses carry with them a corresponding benefit within the same
period. The main problem in this area is the cost of goods sold, where large quan-
tities of goods are received every day, usually comprising the bulk of all expendi-
tures. If even a single high-value delivery is recorded in the wrong period, the
cost of goods sold can be off significantly, either too high, because an expense is
recorded without the corresponding receipt, or vice versa. To exacerbate the
problem, the incorrect entry will reverse itself in the following accounting period,
resulting in a continual fluctuation in the cost of goods sold, one period being too
high and the next too low. This can be very embarrassing for a controller and is a
grave matter for publicly held companies, which can be sued by shareholders for
incorrectly reporting financial results. To avoid this problem, most controllers
allocate an inordinate amount of manpower to the comparison of accounts
payable and inventory records.
To avoid the entire cutoff problem, it is absolutely mandatory that a company
strictly adhere to a policy of turning away from the receiving dock any deliveries
that do not have an accompanying purchase order number. By closely following
this policy, it is possible to entirely automate the period-end cutoff. The reason
why automation then becomes easy is that by immediately logging in all receipts
against purchase orders in the computer system (thus the additional need for
immediate data entry), it is possible to generate a computer report that compares
all inventory receipts to the purchase orders entered into the computer system, as
well as all received supplier invoices that match up against the purchase orders.
The net result of this report is a complete list of all receipts for which there are no
supplier invoices, making it a simple matter to accrue for all missing invoices.
This carries with it the double benefits of not only avoiding the manual labor of
determining a clean cutoff, but also eliminating the wait time that would other-
wise be required before supplier invoices arrive.
Unfortunately, there are several problems with this excellent approach that
limit a controller’s ability to install it. One is that it requires the cooperation of
the computer services and warehousing departments—the first to program the
changes needed to make it run in the computer system and the latter to agree to