Month by month Accounting procedures


#1

This is a problem that came up in regard to the financial management of the bushiban where I used to work. I wonder if anyone with expertise in accounting can offer some coherent analysis?

In terms of instituting a “profit sharing plan” for certain key employees, it is obviously necessary to have a firm grasp of income and expenses. Let’s consider the situation for July and August, for example, which were our busiest months. Often as not, certain utility bills are paid on a two month cycle. In such an instance, the July/August water, electricity, etc. bills might be received and paid in September, or perhaps even October. However, these are clearly “July/August expenses”, and so I maintained that they should be entered in the accounting records for July/August.

However, our accounting personnel said that was too troublesome, and just entered them in the accounting records when they were actually paid.

In my opinion, using this latter method distorts the true picture of July/August expenses. In terms of overall financial management, how can you do future planning, (or how can you institute any sort of profit sharing plan) when you do not have a firm grasp of current and past financial data, or if the records are “out of synch”??

Comments anyone?


#2

In the UK this method of cash accounting would not be acceptable in a limited company for accounts to be filed to Companies House. Cash accounting is acceptable by a sole trader for VAT, but not for the calculation of income tax. Accruals accounting is generally used because it matches the income or expenditure with the period in which it occurred. Cash accounting merely indicates the period in which it was paid / received. It is not worth the fill of your arse of roasted snow.


#3

Richard, as mentioned by Hexuan this is cash accounting in its simplest form. As with so many so called accounting managers here there are not what we assume they are in terms of expertise etc, most are nothing more than basic level book-keepers.
It is perfectly legal and acceptable standard of operation here in Taiwan for companies to accrue expenses in the months in which they occured.
The opposite entry to this accrual is the accruals account in the balance sheet. This account would then require a likely adjustment when the invoice arrives as it is never to be exactly the same.
This obviously requires a little more work for the accounting staff - something in my experience they do not like doing.

If you would like i am more than happy for us to get together and discuss it further.


#4

Richard, are you using a Manual or Computerised system? BTW, by only entering the invoice at the time it is paid, you actually run the risk of not being able to claim any of the VAT back if included in the invoice total. This depends on how long after the invoice was raised you actually paid it.