Month-end Oversight

month end oversight - accrual, not cash

Accrual, not Cash

Generally Accepted Accounting Principles (GAAP) include the Matching Principle. Income matches the time period when it is earned. For example, a customer invoice shows in Accounts Receivable, before receipt of cash. Expenses match the time period when incurred. For example, a supplier bill shows in Accounts Payable, before issuance of cash.

Usually, an Accounting System that does not follow GAAP may not be approved by DCAA.

Other accounts reflect non-cash transactions at or before the end of each (accounting or) fiscal month. Purchase of a high-dollar asset with a useful life of more than one year is not expensed. Instead the whole purchase price increases Assets. Depreciation (or amortization) Expense tracks use of the Asset during each period of time the company uses up the useful life; a contra-account, accumulated depreciation, lowers the net value of the asset. Recording the asset purchase during its useful life, instead of expensing the price at purchase, matches the true Expense with the period the Expense is incurred.

Cash payment of an insurance premium covers future months. This pre-paid Asset is similarly expensed as used. Receipt of cash for the last month of sublet offices represents a Liability, until the income is earned. Transactions that match records to the applicable time period precede “closing the books.” This means that financial statements for the last day of each month reflect accurate income and expenses for events during that month. Timing accuracy is especially important for customer invoices, based on financial reports on the last day of the month, on a cost reimbursable award. This also affects reports of cost versus percentage of completion.

Consider payroll and employer-paid payroll-related Expenses. On the last day of the month, the company usually owes these expenses. They are not due and not paid in cash; however, the employees already earned the money. GAAP requires that the General Ledger reflect expenses incurred, during the period incurred.

Journal Entries

Most matching transactions affect Expense accounts in the General Ledger by recording Journal Entries on the last day of each month. Some of these are reversed by Journal Entries on the first day of the following month, in anticipation of cash payments. Note that an Adjusting Journal Entry represents changes required by external audit. Internally initiated changes to accounting data, such as month-end matching (and other) corrections, use a Journal Entry.

Especially for companies switching from Cash Basis to Accrual Basis accounting, we suggest that an accounting professional record or review all Journal Entries. Completeness, with no missed Journal Entries – more than accuracy – improves financial reports and the Accounting System.

Adequate Support

We recommend that an employee or consultant, who gained exceptional knowledge of compliance with the Federal Acquisition Regulations (FAR), review Expenses and reimbursements. Especially during the first six months after significant new policies and procedures are implemented by management, review for adequate supporting documentation helps train (or re-train) staff. Inaccurate and/or incomplete support precludes recording Expenses in allowable accounts of the General Ledger. Preferably, the requestor or user corrects and/or supplements documented support. Recording the transaction to an unallowable account reduces company profit.

Proposals, based on historical costs, cannot consider unallowable Cost of Goods and Services Sold. Forward pricing rates (and other proposed indirect rates), based on historical Expenses, cannot consider unallowable Expenses. Customer invoices cannot consider unallowables. The company certifies these submissions for U.S. Government (USG) funds. Having certified that the basis of the submission is in compliance with the FAR, the burden of proof falls to the company.

DCAA audits expect receipts for all lodging (regardless of cost), detailed receipts that show what goods/services were purchased – not that they were actually purchased, and evidence of competition or other basis of reasonableness. An audit of the Accounting System drills down from customer invoices or the General Ledger to source documents (e.g., timecards, receipts, printouts from websites that compare competitive pricing). The company has the burden to retain adequate support for each allowable transaction recorded.