Arbaminch mechane eyesus

technology and business college

Accounting and Finance Level III

Learning guide
Unit of Competence: Administer, Monitor and Control General and
Subsidiary Ledgers
Module Title: AdministING, Monitoring and Controlling General and
Subsidiary Ledgers
TTLM Code : LSA ACF3 M02 1221
LO1: Review accounts receivable process
LO2: Identify bad and doubtful debts
LO3: Review compliance with terms and conditions and plan recovery
action
LO4: Prepare reports and file documentation
LO5 Distribute creditors invoices for authorization
LO6 Remit payments to creditors
LO7 Prepare accounts paid report and reconcile balances outstanding
LO8 Collect and record monies due

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Occupational Standard: Accounting and Finance Level III
Unit Title Administer, Monitor and Control General and Subsidiary Ledgers
Unit Code LSA ACF3 02 1221
Unit Descriptor This unit describes the performance outcomes, skills and knowledge
required to reconcile and monitor financial accounts receivable systems,
identify bad and doubtful debts and plan a recovery action and remit
payments to sundry creditors.

Elements Performance Criteria

1. Review accounts
1.1 Receipts entered into accounts receivable system are checked for
receivable process
accuracy, consistency and thoroughness
1.2 Incorrect entries are identified and accurately recorded according to
type and source of receipt
1.3 Discrepancies between monies owed and monies paid are
identified and investigated according to organization policy,
procedures and guidelines
1.4 Receipts entered into accounts receivable system are amended
according to established procedures
2. Identify bad and
2.1 Debtors ledger is regularly reviewed in accordance with
doubtful debts
organization policy and guidelines to identify outstanding monies
and further information, if required, sought from relevant sources
2.2 Bad or doubtful debt status is verified through liaison with debtors
2.3 Reporting procedures and appropriate documentation for bad and
doubtful debts are completed in accordance with organization
policy and guidelines
3. Review 3.1 Clients in default of trading terms are correctly identified according
compliance with to organization operating procedures and contacted promptly and
terms and courteously to make satisfactory arrangements to pay monies
conditions and outstanding
plan recovery 3.2 Monies owing that constitute breaches of organization credit policy
action are acted in accordance with organization policy and procedures
3.3 Previous activities and communication with clients are thoroughly
reviewed to establish adequacy of follow-up procedures, and
whether all usual organization recovery avenues have been
exhausted
3.4 Plans are developed to pursue debt recovery or to initiate legal
action with measures to collect monies completed in accordance
with organization policy, guidelines and timelines
4. Prepare reports 4.1 Reports are prepared which document accounts receivable, debt
and file recovery type, cause and recovery plan and distributed to
documentation supervisors, managers and other relevant parties
4.2 Documentation is filed promptly in accordance with organization
policy and procedures

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5. Distribute
5.1 Invoice discrepancies are identified, investigated and rectified and
creditors invoices
invoices encoded and recorded correctly
for authorization
5.2 Authorization for payment is requested from appropriate personnel
6. Remit payments 6.1 Cheque requisition is correctly drawn up and authorized and the
to creditors correct general ledger to be drawn against identified
6.2 Correct account is debited in a timely manner and in accordance
with legislative and compliance requirements
6.3 Creditors payments are prepared in an accurate manner
7. Prepare accounts 7.1 Data is collected and entered onto spreadsheet giving details of
paid report and creditors and amounts paid and a report prepared for ratification by
reconcile balances appropriate management
outstanding 7.2 Statements of outstanding balances are sought from suppliers where
required and balances outstanding are reconciled to invoices
received
8 Collect and record 8.1Status of debt is determined in accordance with organization
monies due policy and guidelines and legislative requirements
8.2 Transactions on account are accurately recorded and maintained
according to organization policy and guidelines
8.3 Records of customer contact are accurately maintained

Variable Range
Receipts May include but not limited to :
 bankers orders
 cash
 cash journal entry
 cheques:
 personal
 bank
 credit cards:
 direct
 mail
 telephone
 direct debits
 direct drawing
 postal order
Discrepancies  deduction of brokers or agents commissions
between monies  incorrect account allocation
owed and monies  key stroke errors
paid may occur as a  overpayments
result of:  part payments
 system errors
 termination of policies
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  under payments
Organisation policy, May include but not limited to :
procedures and  computer system documentation
guidelines  internal control guidelines
 legal obligations
 operations manuals
 overall organisation goals and objectives
 suspension of credit facilities
 trading terms and credit limits
Bad or doubtful debts  banks forgoing overdrafts
are identified  closure of business
through:  dishonoured cheques
 gazette listings
 letters from solicitors/legal representatives or accountants
 notices of administration
 returned mail
 sheriff/police notices or advertisements
 utilities being cut off
Clients May include but not limited to :
 accountants
 agents
 brokers
 customers
 intermediaries
 policy holders
 solicitors/ legal representatives
Reportsmay be May include but not limited to :
periodic or on  consumer statements
demand, manual or  legislative requirements
computer generated  statistical and financial or management reports
 user reports
Recovery plan and May include but not limited to :
measures to collect  advice to supervisors/managers/legal officers
monies  dunning/banking letters
 legal action
 letters of demand without prejudice
 letters of notice
 liaison with clients
 plaint
 return of goods
 summons
 third party intervention
 write-offs
Appropriate  industry and organisation requirements, and may include:
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personnel would  the board of directors; or
depend on:  a designated group from the board of directors such as the
executive
Relevant legislative May include but not limited to :
and compliance  consumer:
requirements  Trade practice and consumer protection proclamation
 Consumer Credit Code
 competition:
 Trade practice and consumer protection Authority
 prudential:
 Prevention and suppression of money laundering and the
financing of terrorism proclamation.
 Cheques and Payment Orders manuals
 Commercial code of Ethiopia
 Financial Institutions Code
 Financial Transaction Reports manuals
 Income Tax Proclamation.

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LO1.Reviewaccountsreceivableprocess

Introductionto AccountsReceivable andBadDebtsExpense

If weimagine buyingsomething,suchasgroceries, it'seasyto pictureourselves
standingatthecheckout, writing out a personal check, and taking possession of the goods. It's a
simpletransaction—weexchangeour moneyfor thestore'sgroceries.

In the world of business, however, many companies must be willing to sell their goods
(orservices) on credit. This would be equivalent to the grocer transferring ownership of
thegroceriestoyou,issuingasalesinvoice,andallowingyou topayforthe groceriesatalater date.

Whenever a seller decides to offer its goods or services on credit, two things happen: (1)
thesellerboostsitspotentialtoincrease revenuessincemanybuyers appreciate
theconvenienceandefficiency of making purchases on credit, and (2) the seller opens itself up to
potential losses ifitscustomers do not paythe sales invoiceamountwhenit becomes due.

Under the accrual basis of accounting (which we will be using throughout our discussion)
asaleoncreditwill:

1. Increasesalesorsales revenues,which arereportedontheincomestatement,and

2. Increase the amount due from customers, which is reported as accounts receivable—
anassetreported on the balancesheet.

If abuyer doesnot paytheamount itowes,the sellerwill report:

1. Acreditlossor baddebtsexpense onitsincome statement,and

2. Areductionof accountsreceivableonitsbalancesheet.

With respect to financial statements, the seller should report its estimated credit losses as soon
aspossible using the allowance method. For income tax purposes, however, losses are reported at
alaterdate through theuseof the direct write-offmethod.

Recording ServicesProvided on Credit

Assume that on June 3, Malloy Design Co. provides $4,000 of graphic design service to one
ofitsclientswithcredittermsofnet30days.(Providingserviceswithcredittermsisalsoreferredtoas
providingservices on account.)

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Under the accrual basis of accounting, revenues are considered earned at the time when
theservicesareprovided.This means thaton June3Malloywillrecord the revenuesit
earned,eventhough Malloy will not receive the $4,000 until July. Below are the accounts
affected on June 3,thedaythe servicetransaction was completed:

In this transaction, the debit to Accounts Receivable increases Malloy's current assets,
totalassets, working capital, and stockholders' (or owner's) equity—all of which are reported on
itsbalancesheet.ThecredittoServiceRevenueswillincreaseMalloy'srevenuesandnetincome—
bothof which arereported on its income statement.

Recording SalesofGoodson Credit

When a company sells goods on credit, it reports the transaction on both its income
statementanditsbalancesheet.Ontheincomestatement,increasesarereportedinsalesrevenues,costo
fgoods sold, and (possibly) expenses. On the balance sheet, an increase is reported in
accountsreceivable, a decrease is reported in inventory, and a change is reported in
stockholders' equityforthe amount of thenet income earned on the sale.

If thesaleismadewiththetermsFOBShipping Point,theownershipofthegoodsistransferredat the

seller's dock. If the sale is made with the terms FOB Destination, the ownership of thegoodsis
transferred at the buyer'sdock.

Inprinciple,thesellershould
recordthesalestransactionwhentheownershipofthegoodsistransferred to the buyer. Practically
speaking, however, accountants typically record thetransactionat thetime thesales invoiceis
prepared andthegoods areshipped.

 FOBShippingPoint

QualityProductsCo.just soldandshipped $1,000worthofgoodsusingthetermsFOBShippingPoint.

With its cost of goods at 80% of sales value, Quality makes the following entries in
itsgeneralledger:

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(While there may be additional expenses with this transaction—such as commission expense—
wearenot consideringthem in ourexample.)

FOB Shipping Point means the ownership of the goods is transferred to the buyer at the
seller'sdock.Thismeansthatthebuyerisresponsible fortransportingthe
goodsfromQualityProduct'sshipping dock. Therefore, all shipping costs (as well as any damage
that might be incurredduringtransit) aretheresponsibilityof thebuyer.

 FOBDestination

FOB Destination means the ownership of the goods is transferred at the buyer's dock.
Thismeans the seller is responsible for transporting the goods to the customer's dock, and will
factorinthecost of shippingwhen it sets its priceforthegoods.

Let'sassumethatGemMerchandiseCo.makesasaleto acustomerthathasasalesvalueof
$1,050andacostofgoods soldat$800.Thistransactionaffects
thefollowingaccountsinGem'sgeneralledger:

BecauseGemchoosestoshipitsgoodsFOBDestination,theownershipof thegoodstransfersatthe
buyer's dock. Therefore, Gem Merchandise assumes all the risks and costs associated
withtransportingthegoods.

Now let's assume that Gem pays an independent shipping company $50 to transport the
goodsfromitswarehousetothebuyer'sdock.Gem recordsthe$50as anoperatingexpenseorselling

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expense (in an account such as Delivery Expense,Freight-Out Expense,orTransportation-
OutExpense).IftheshippingcompanyallowsGem topayin7 days,Gem
willmakethefollowingentryin itsgeneral ledger:

CreditTermswithDiscounts
Whenaseller offerscreditterms of net30 days,the netamountforthesalestransaction
isdue30daysafter thesales invoicedate.

To illustrate the meaning of net, assume that Gem Merchandise Co. sells $1,000 of goods to
acustomer. Upon receiving the goods the customer finds that $100 of the goods are
notacceptable.Thecustomer contactsGemandisinstructedtoreturntheunacceptable
goods.Thismeans that Gem's net sale ends up being $900; the customer's net purchase will also
be $900($1,000 minus the $100 returned). It also means that Gem's net receivable from this
customerwill be$900.

Unfortunately, companies who sell on credit often find that they don't receive payments
fromcustomers on time. In fact, one study found that if the credit term is net 30 days, the money,
onaverage, arrived 45 days after the invoice date. In order to speed up these payments,
somecompanies give credit terms that offer a discount to those customers who pay within a
shorterperiodoftime.Thediscount isreferred to asa sales discount,cash discount,or an
earlypaymentdiscount,and the shorterperiod oftimeis known asthediscount period. For
example,the
term2/10,net30 allowsacustomerto deduct2% ofthenetamountowed ifthecustomer payswithin
10 days of the invoice date. If a customer does not pay within the discount period of
10days,the net purchaseamount (withoutthe discount)is due30 daysafter theinvoicedate.

Using the example from above, let's illustrate how the credit term of 2/10, net 30 works.
GemMerchandiseCo.ships$1,000ofgoodsandthecustomerreturns$100of unacceptable
goodstoGem within a few days. At that point, the net amount owed by the customer is $900. If
thecustomer pays Gem within 10 days of the invoice date, the customer is allowed to deduct
$18(2%of$900)fromthenet purchaseof $900.Inotherwords, the$900amountcanbesettledfor
$882 if it is paid withinthe10-daydiscount period.

Let'sassumethat the sale abovetook placeonthefirst daythatGem was open forbusiness, June
1. OnJune6Gemreceivesthereturnedgoodsandrestocks them,andonJune11itreceives
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$882fromthebuyer.Gem'scostof goodsis80%
oftheiroriginalsellingprices(beforediscounts).Theabovetransactionsarereflected
inGem'sgeneral ledger asfollows:

If thecustomerwaits30days topayGem, theJune11 entryshown above willnot

occur.Initsplacewill bethe followingentryon July1:

ExamplesofAmountsDueUnderVaryingCreditTerms

Thefollowingchartshows theamountsa sellerwouldreceiveundervarious credittermsfor

amerchandisesale of$1,000 and an authorized returnof$100 ofgoods.

Credit
BriefDescription AmountToBeReceived
Terms

10
 Thenetamountisduewithin10daysoftheinvoi
Net10days cedate. $900

Thenetamountisduewithin30daysoftheinvoi
Net30days cedate. $900

Thenetamountisduewithin60daysoftheinvoi
Net60days cedate. $900

If paid within 10 days of the invoice date,

thebuyer may deduct 2% from the net amount.
2/10, n/30 ($900minus $18) $882

Ifpaidin30daysoftheinvoicedate,thenetamou
2/10, n/30 ntis due. $900

If paid within 10 days of the invoice date,

thebuyermaydeduct1%fromthenetamount.
1/10, n/60 ($900minus $9) $891

Ifpaidin60days
1/10, n/60 oftheinvoicedate,thenetamountis due. $900

The net amount is due within 10 days after

theend of the month (EOM). In other
NetEOM words,payment for any sale made in June is due
10 by July10. $900

CostsofDiscounts
Some people believe that the credit term of 2/10, net 30 is far too generous. They argue
thatwhena$900receivable issettledfor$882 (simplybecausethecustomer pays20daysearly)the

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seller is, in effect, giving the buyer the equivalent of a 36% annual interest rate (2% for 20
daysequates to 36% for 360 days). Some sellers won't offer terms such as 2/10, net 30 because
ofthesehighpercentage equivalents.Othersellers arediscouragedtofindthatsomecustomerstakethe
discount and ignoretheobligation to paywithin thestated discount period.

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LO2. Identify bad and doubtful
debtsCredit Risk
Whenasellerprovides goods orservicesoncredit,the resultantaccountreceivableisnormally
considered to be an unsecured claim against the buyer's assets. This makes the seller
(thesupplier) an unsecured creditor, meaning it does not have a lien on any of the buyer's assets
—notevenon thegoods that it just sold tothe buyer.

Sometimes a supplier's customer gets into financial difficulty and is forced to liquidate its
assets.In this situation the customer typically owes money to lending institutions as well as to
itssuppliers of goods and services. In such cases, it's the secured creditors (the banks and
otherlenders that have a lien on specific assets such as cash, receivables, inventory, equipment,
etc.)who are paid first from the sale of the assets. Often there is not enough money to pay what
isowed to the secured lenders, much less the unsecured creditors. In other words, the suppliers
willnever bepaid what theyareowed.

To avoid this kind of risk, some suppliers may decide not to sell anything on credit, but
requireinstead that all of its goods be paid for with cash or a credit card. Such a company,
however, mayloseout on sales to competitors who offer to sellon credit.

To minimize losses, sellers typically perform a thorough credit check on any new
customerbeforesellingtothemoncredit.Theyobtaincredit reportsandcheckfurnishedreferences.
Evenwhen a credit check is favorable, however, a credit loss can still occur. For example, a
first-ratecustomer may experience an unexpected financial hardship caused by one of its
customers,something that could not have been known when the credit check was done. The
point is this:any company that sells on credit to a large number of customers should assume
that, sooner orlater,it will probablyexperiencesomecredit losses alongthe way.

DirectWrite-offMethod
Generally accepted accounting principles (GAAP) require that companies use the
allowancemethod when preparing financial statements. The use of the allowance method isnot
permitted,however, for purposes of reporting income taxes in the United States because the
InternalRevenue Service (IRS) does not allow companies to anticipate these credit losses. As a
result,companiesmust use thedirect write-offmethod forincometaxreporting.

In the direct write-off method, a company will not use an allowance account to reduce
itsAccountsReceivable. AccountsReceivableisonlyreduced ifand
whenacompanyknowswithcertaintythat aspecificamountwillnot be collected from a
specificcustomer.

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Forexample,let's assumethat onOctober21,Gem MerchandiseCo.is convincedthat
aspecificcustomer's account receivable originating on June 5 in the amount of $1,238 is
definitelyuncollectible. Usingthedirect write-offmethod, thefollowingentryis made:

Usually many months will pass between the time of the sale on credit and the time that the
sellerknows with certainty that a customer is not going to pay. It is difficult to adhere to the
matchingprinciple and the concept of conservatism when a significant amount of time elapses
between thetime of the sales revenues and the time that the bad debts expense is reported. This is
why, forpurposes of financial reporting (not tax reporting), companies should use the allowance
methodratherthan thedirect write-off method.

AllowanceMethodfor ReportingCreditLosses
Accounts receivable are reported as a current asset on a company's balance sheet. Since
currentassets by definition are expected to turn to cash within one year (or within the operating
cycle,whichever is longer), a company's balance sheet could overstate its accounts receivable
(andthereforeits workingcapital and stockholders'equity) ifanypart ofits accountsreceivableis
notcollectible.

To guard against overstatement, a company will estimate how much of its accounts
receivablewill never be collected. This estimate is reported in a balance sheet contra asset
account calledAllowance for Doubtful Accounts. (Some companies call this account Provision
for DoubtfulAccountsorAllowance forUncollectibleAccounts.)AnyincreasestoAllowance
forDoubtfulAccounts are also recorded in the income statement account Bad Debts Expense
(orUncollectibleAccounts Expense).

This method of anticipating the uncollectible amount of receivables and recording it in

theAllowanceforDoubtfulAccountsisknown astheallowancemethod.(Ifa
companydoesnotuseanallowanceaccount,it isfollowingthe direct write-offmethod, whichis
discussedabove.)

 AllowanceforDoubtfulAccountsand BadDebts Expense-June

As we stated above, the account Allowance for Doubtful Accounts is a contra asset
accountcontaining the estimated amount of the accounts receivable that will not be collected.
Forexample,let'sassumethatGemMerchandiseCo.'sAccountsReceivablehasadebitbalanceof
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$100,000 at June 30. Gem anticipates that approximately $2,000 of this is not likely to turn
tocash, and as a result, Gem reports a credit balance of $2,000 in Allowance for
DoubtfulAccounts. The accounting entry to adjust the balance in the allowance account will
involve theincomestatement account Bad Debts Expense.

Since June was Gem's first month in business, its Allowance for Doubtful Accounts began
Junewith a zero balance. At June 30, when it issues its first balance sheet and income
statement, itsAllowance for Doubtful Accounts will have a credit balance of $2,000. This is
done using thefollowingadjustingjournal entry:

Herearesomeoftheaccounts ina T-accountformat:

With Allowance for Doubtful Accounts now reporting a credit balance of $2,000 and
AccountsReceivable reportingadebit balanceof$100,000,Gem'sbalancesheetwillreportanet
amount
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of $98,000. Since this net amount of $98,000 is the amount that is likely to turn to cash, it
isreferredtoas the net realizablevalueofthe accounts receivable.

Under the allowance method, the Gem Merchandise Co. does not need to know
specificallywhich customer will not pay, nor does it need to know the exact amount. This is
acceptablebecause accountantsbelieveitis bettertoreportan approximateamountthatis
uncollectibleratherthan implythateverypennyof the accounts receivable will be collected.

Gem's Bad Debts Expense will report credit losses of $2,000 on its June income statement.
Thisexpenseisbeingreportedeven thoughnoneoftheaccounts receivablesweredueinJune. (Recallthe
credit terms were net 30 days.) Gem is attempting to follow the matching principle bymatching
the bad debts expense as best it can to the accounting period in which the credit salestookplace.

Here's aTip

Since the net realizable value of a company's accounts receivable cannot be more than the
debitbalancein AccountsReceivable, the balancein theAllowanceforDoubtful Accountsmust
beacreditbalanceorazero balance.
AllowanceforDoubtfulAccountsand BadDebts Expense-July

Now let's assume that at July 31 the Gem Merchandise Co. has a debit balance in
AccountsReceivableof $230,000.(Thebalanceincreased duringJulybytheamountof its credit
salesandit decreased by the amount it collected from customers.) The Allowance for
UncollectibleAccounts still has the credit balance of $2,000 from the adjustment on June 30.
This meansGem's general ledger accounts before the July 31 adjustment to Allowance for
UncollectibleAccountswill bereportinganet realizable value of$228,000 ($230,000 minus
$2,000).

Gemreviews thedetailsofits accounts receivableand estimatesthat as ofJuly31 approximately

$10,000 of the $230,000 will not be collectible. In other words, the net realizable value (or
netcash value) of its accounts receivable as of July 31 is only $220,000 ($230,000 minus
$10,000).Before the July 31 financial statements are released, Gem must adjust the Allowance
forDoubtfulAccountsso thatitsendingbalanceisacreditof $10,000(insteadof
thepresentcreditbalanceof $2,000). Thisrequires thefollowing adjustingentry:

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After this journal entry is recorded, Gem's July 31 balance sheet will report the net
realizablevalueofits accountsreceivablesat $220,000($230,000debit balanceinAccounts
Receivableminusthe$10,000 credit balancein Allowance for Doubtful Accounts).

Here's arecapinT-accountform:

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As seen in the T-accounts above, Gem estimated that the total bad debts expense for the first
twomonthsof operations (Juneand July)is $10,000.It is likelythatas of July31 Gem willnot
knowthe precise amount of actual bad debts, nor will Gem know which customers are the ones
thatwon't be paying their account balances. However, the matching principleis better met by
Gemmaking these estimates and recording the credit loss as close as possible to the time the
salesweremade.

By reporting the $10,000 credit balance in Allowance for Doubtful Accounts, Gem is
alsoadhering to the accounting principle of conservatism. In other words, if there is some doubt
as towhether there are $10,000 of credit losses or no credit losses, Gem's accountant "breaks the
tie"bychoosingthealternativethatreportsasmalleramountofprofitandasmaller amountofassets. (It is
reporting a net realizable value of $220,000 instead of the $230,000 of accountsreceivable.) If a
company knows with certainty that every penny of its accounts receivable willbecollected,then
theAllowance for DoubtfulAccounts willreportazerobalance.However,ifitis likely that some of
the accounts receivable will not be collected in full, the principle ofconservatismrequires
thattherebeacreditbalancein Allowance forDoubtfulAccounts.

 WritingOff anAccountundertheAllowanceMethod

Under the allowance method, if a specific customer's accounts receivable is identified

asuncollectible, it is written off by removing the amount from Accounts Receivable. The entry
towrite off a bad account affects only balance sheet accounts: a debit to Allowance for
DoubtfulAccounts and a credit to Accounts Receivable. No expense or loss is reported on the
incomestatementbecausethis write-offis"covered"under
theearlieradjustingentriesforestimatedbaddebts expense.

Let'sillustratethe write-offwiththefollowingexample.OnJune3,acustomerpurchases$1,400of
goods on credit from Gem Merchandise Co. On August 24, that same customer informs
GemMerchandise Co. that it has filed for bankruptcy. The customer states that its bank has a lien
onall of its assets. It also states that the liquidation value of those assets is less than the amount
itowesthebank,and asa result Gemwillreceivenothingtowardits$1,400accountsreceivable.
After confirming this information, Gem concludes that it should remove, or write off,
thecustomer'saccount balanceof $1,400.

Undertheallowancemethodof recordingcredit losses,Gem's entryto

writeoffthecustomer'saccountbalanceis asfollows:

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Thetwo accounts affected bythis entrycontain this information:

Note that prior to the August 24 entry of $1,400 to write off the uncollectible amount, the
netrealizable value of the accounts receivables was $230,000 ($240,000 debit balance in
AccountsReceivable and $10,000 credit balance in Allowance for Doubtful Accounts). After
writing offthe bad account on August 24, the net realizable value of the accounts receivable is
still $230,000($238,600 debit balance in Accounts Receivable and $8,600 credit balance in
Allowance forDoubtfulAccounts).

The Bad Debts Expense remains at $10,000; it is not directly affected by the journal entry write-
off.Thebad debtsexpense recorded on June30 and July31 hadanticipated acredit loss suchas

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this.Itwould bedoublecountingforGemto recordboth ananticipated estimateof
acreditlossandthe actual creditloss.

 Recoveryof AccountunderAllowanceMethod

Afterasellerhaswritten offanaccountsreceivable,itispossiblethatthesellerispaidpartor allof the

account balance that was written off. Under the allowance method, if such a payment isreceived
(whether directly from the customer or as a result of a court action) the seller will
takethefollowingtwo steps:

1. Reinstate the account that was written off by reversing the write-off entry. If we
assumethatthe$1,400 writtenoff
onAug24iscollectedonOctober10,thereinstatementoftheaccountlooks like this:

2. Processthe$1,400receivedonOctober10:

Theseller'saccountingrecordsnow showthattheaccountreceivable waspaid,

makingitmorelikelythat the seller might do futurebusiness with this customer.

 BadDebtsExpenseasaPercentofSales

Another waysellers applytheallowancemethodofrecordingbad debts expense is byusing

thepercentageofcreditsalesapproach.This approachautomaticallyexpenses
apercentageofitscreditsales based on pasthistory.

For example, let's assume that a company prepares weekly financial statements. Past
experienceindicates that 0.3% of its sales on credit will never be collected. Using the percentage
of creditsalesapproach,thiscompanyautomaticallydebitsBad
DebtsExpenseandcreditsAllowanceforDoubtfulAccountsfor0.3%ofeachweek'screditsales.Let'sas
sumethatinthecurrentweek
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this company sells $500,000 of goods on credit. It estimates its bad debts expense to be
$1,500(0.003x$500,000)and records thefollowingjournal entry:

The percentage of credit sales approach focuses on the income statement and the
matchingprinciple. Sales revenues of $500,000 are immediately matched with $1,500 of bad
debtsexpense. The balance in the account Allowance for Doubtful Accounts is ignored at the
time ofthe weekly entries. However, at some later date, the balance in the allowance account
must bereviewed and perhaps further adjusted, so that the balance sheet will report the correct
netrealizablevalue. If theseller isanewcompany,
itmightcalculateitsbaddebtsexpensebyusinganindustryaverageuntil it develops its own
experiencerate.

DifferencebetweenExpenseandAllowance

The account Bad Debts Expense reports the credit losses that occur during the period of
timecovered by the income statement. Bad Debts Expense is a temporary account on the
incomestatement, meaning it is closed at the end of each accounting year. (Closed means the
accountbalance is transferred to retained earnings, perhaps through an income summary
account.) ByclosingBadDebts Expenseand resettingits balanceto zero,theaccountisreadyto
receiveandtallythe credit losses for the next accountingyear.

The Allowance for Doubtful Accounts reports on the balance sheet the estimated amount
ofuncollectible accounts that are included in Accounts Receivable. Balance sheet accounts
arealmostalwayspermanent accounts,meaningtheir balances carryforwardto
thenextaccountingperiod. In other words,theyarenotclosed and theirbalances arenotreset tozero.

Because the Bad Debts Expense account is closed each year, while the Allowance for
DoubtfulAccountsisnot,thesetwobalances willmostlikelynotbe equal
afterthecompany'sfirstyearofoperations.

For example, let's assume that at the end of its first year of operations a company's Bad
DebtsExpense had a debit balance of $14,000 and its Allowance for Doubtful Accounts had a
creditbalanceof$14,000. Becausetheincomestatementaccount balancesare
closedattheendoftheyear,thecompany'sopeningbalanceinBadDebtsExpenseforthesecondyearofo
perationsis
$0. The credit balance of $14,000 in Allowance for Doubtful Accounts, however, carries
forwardtothesecondyear. If an adjustingentryof$3,000ismadeduringyear2, BadDebtsExpensewill
22
reporta$3,000debit balance,while AllowanceforDoubtfulAccounts
mightreportacreditbalanceof $17,000.

Again, the reasons for the account balance differences are 1) Bad Debts Expense is a
temporaryaccount that reports credit losses only for the period shown on the income statement,
and 2)Allowance for Doubtful Accounts is a permanent account that reports an estimated
amount forall of the uncollectible receivables reported in the asset Accounts Receivable as of
the balancesheetdate.

Agingof AccountsReceivable
The general ledger account Accounts Receivable usually contains only summary amounts and
isreferred to as a control account. The details for the control account—each credit sale for
everycustomer—isfoundinthesubsidiaryledgerforAccountsReceivable.The total amountofall
thedetailsin thesubsidiaryledgermust beequal tothe totalamount reportedin thecontrol account.

Thedetailed information intheaccounts receivablesubsidiaryledger is usedto

prepareareportknown as the aging of accounts receivable. This report directs management's
attention toaccounts that are slow to pay. It is also useful in determining the balance amount
needed in theaccountAllowancefor Doubtful Accounts.

Theagingof accounts receivablereport is typicallygenerated bysortingunpaid sales invoices inthe

subsidiary ledger—first by customer and then by the date of the sales invoices. If a
companysells merchandise (or provides services) and allows customers to pay 30 days later, this
reportwill indicate how much of its accounts receivable is past due. It also reports how far past
due theaccountsare.

With the click of a mouse, most accounting software will provide the aging of
accountsreceivable report. For example, Gem Merchandise Co.'s software looks at each of its
customer'saccountsreceivable activityandcompares the date of each unpaidsales invoicetothedate
ofthereport. If we assume the report is dated August 31 and that Gem's credit terms are net 30
days,any unpaid sales invoices with an August date will be classified as current. Any unpaid
invoiceswith a date in July are classified as 1 - 30 days past due. Any unpaid invoices with a
date of Juneare classified as 31 - 60 days past due, and so on. The sorted information is present
in a reportthatlooks similar to thefollowing:

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If a customer realizes that one of its suppliers is lax about collecting its account receivable
ontime, it may take advantage by further postponing payment in order to pay more
demandingsuppliers on time. This puts the seller at risk since an older, unpaid accounts
receivable is morelikely to end up as a credit loss. The aging of accounts receivable report
helps managementmonitorand collect theaccounts receivablein amoretimelymanner.

AgingUsedin CalculatingtheAllowance

The aging of accounts receivable can also be used to estimate the credit balance needed in
acompany's Allowance for Doubtful Accounts. For example, based on past experience, a
companymight make the assumption that accounts not past due have a 99% probability of being
collectedin full.Accountsthatare1-30dayspastdue havea 97%
probabilityofbeingcollectedinfull,and the accounts 31-60 days past due have a 90% probability.
The company estimates thataccounts more than 60 days past due have only a 60% chance of
being collected. With theseprobabilities of collection, the probability of not collecting is 1%, 3%,
10%, and 40%respectively.

If wemultiplythe totalsfrom the agingof accounts receivable reportbytheprobabilities

ofnotcollecting, we arrive at the expected amount of uncollectible receivables. This is
illustratedbelow:

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Thiscomputationestimatesthebalanceneededfor AllowanceforDoubtfulAccountsatAugust31to
be acredit balanceof$8,585.

LO3:Reviewcompliancewithtermsandconditionsandplanrecoveryaction

INTRODUCTION

Journal is subdivided into various parts known as subsidiary books or subdivisions

ofjournal.Eachoneofthesubsidiarybooksisaspecialjournalandabookoforiginalorprimeentr
y. Therearenojournalentries whenrecordsare madeinthesebooks.
Recording the transactions in a special journal and then in the ledger accounts is
thepractical system of accounting which is also referred to as English System. Though
theusual type of journal entries are not passed in these sub-divided journals, the double
entryprinciplesofaccountingarestrictlyfollowed.

BASICDOCUMENTFORSUBSIDIARY BOOKS

InwardInvoice:

Thisisthe documentsentbythesuppliers of goodsgivingdetailsof goodssent,

price,value,discountetc.Itisthebasisforentriesinpurchasesbook.

OutwardInvoice:

This is a document sent by the firm to the customers, showing the details of
goodssupplied,theirpriceandvalue,discountsetc.,itisthebasisforwritingsalesbook.

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DebitNote:

It is a simple statement sent by a person to another person showing the amount debited
tothe account of the latter along with a brief explanation. The debit notes are issued by
atrader relating to purchase returns in order to put up his claim for abatement of his dues
tothe other party. Debit notes are serially numbered and are similar to invoices
althoughtheyareusuallyprintedinredink.

CreditNote:

It is nothing but a statement sent by one person to another person showing the
amountcreditedtotheaccountof
thelatteralongwithabriefexplanation.Thecreditnotesareused for sales return in order to
intimate related abatement and are similar to invoicealthoughtheyare usuallyprintedin red
ink.

CashReceiptsandVouchers:

Thesearethevouchersandreceiptsforcashreceivedandpaid.Entriesincashbookaremade on
the strength of the vouchers and receipts. They are also useful for auditingpurpose.

ContraEntries

Foranysingletransactionthesameaccountcannotbedebitedandcredited.

But since cash and bank accounts are maintained in the cash book, the debit and
creditmay be found in the two different accounts in the Cash Book. They are
transactionswhichaffectboththesidesof theCashBook.
Forinstance,whencashisdepositedintothebank,bankaccount shouldbe
debitedandcashaccountshouldbecredited.

Hence,onthedebitsideoftheCashBook.„ToCash‟iswrittenintheparticularscolumnand the
amount is entered in the bank column. Similarly, on the credit side of the CashBook, „By
Bank‟ is written in the particulars column and the amount is entered in thecashcolumn.

Whencashiswithdrawnfromthe bank,onthe debitside oftheCash Book,

„ToBank‟iswrittenintheparticularscolumnandtheamountiswritteninthecashcolumn.
Likewise,onthecreditsideoftheCashBook,„By

Cash‟iswrittenintheparticularscolumnandamountisenteredinthebankcolumn.

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Therefore,thoseentrieswhichappearonboththesidesoftheCashBookarecalled

ContraEntriesandtheyareidentifiedanddenotedintheCashBookitselfbywritingtheletter
„C‟ in the Ledger Folio Columns on either side. For these transactions, as doubleentry
procedure is completed in the cash book itself, no further positing is made in theledger.

InathreecolumnarCashBook,cashandbankcolumns arebalancedasanyotherledgeraccount
and discount columns are imply totaled. To know the balance of the discountcolumns, a
separate account, viz., discount account is opened in the ledger. While thecash column
will always show a debit balance, the bank column may show a creditbalance at times.
The credit balance in the bank column represents nothing but bankoverdraft.

KINDSOFSUBSIDIARYBOOKS

There are different types of subsidiary books which are commonly used in any
bigbusinessconcern.Theyare:

 PurchasesBook
 SalesBook
 Purchases ReturnsBooks
 SalesReturnsBooks
 BillsReceivableBooks
 BillsPayableBooks
 JournalProper
 CashBook
 PurchasesBook

This book is used to record all credit purchases made by the business concern from
itssuppliers.Thisbookisalsoknownas„PurchasesBooks‟,
„PurchasesJournal‟or„InvoiceBook‟. It contains five columns, viz., Date, Particulars,
Ledger Folio, Inward InvoiceNumber and Amount. Whenever any credit purchase is
made, the date on which thetransaction has taken place is entered in the „Date Column‟,
the name of the party fromwhom the purchase has been made the particulars column, the
inward invoice numberwithwhich thepurchasehasbeen made inthe „inwardInvoice

NumberColumn‟andthemoneyvalueofthepurchaseinthe„AmountColumn‟.The

„L.F.Column‟istorecordtheledgerfolionumberwhilepostingismade.

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Posting:Thetotal ofpurchasesbookforaspecifiedperiodisdebited
tothepurchasesaccount in the Ledger. The personal accounts are posted by crediting
the individualaccounts.

 Salesbooks

Thisbookisusedtorecordallcreditsaleseffectedbythebusinesstoitscustomers.Thisbook is
also called as „Sales Book‟, „sales Journal‟ or „Sold Book‟. It contains fivecolumns,
viz., Date, Particulars, L.F., Outward Invoice Number and Amount. When
anycreditsalesiseffected,thedateisenteredinthe„DateColumn‟,thenameofthepartytowhom
the sale is made in the „Particulars Column‟, the invoice number with which
thesaleshavebeeneffectedinthe„Out-wardInvoice

NumberColumn‟andthemoneyvalueofthesalesinthe„AmountColumn‟,TheLFcolumnisenter
edwhilepostingisaffected.

Posting:Thetotal oftheSalesBookforaspecifiedperiodiscreditedtothe

SalesAccountintheLedger.Thepersonalaccountispostedbydebitingtheindividualaccount
s

 PurchasesReturnsBooks

Thisbook isused torecordalltransactions relatingtothe goods

returnedtosuppliers.Thisbookisalsoknownas„PurchasesReturnsjournal‟or„Returns

OutwardBook‟

 SalesReturnsBooks

Thisbook isused torecordalltransactions

relatingtogoodsreturnedbycustomers.Thisbookisalsoknownas„SalesReturnJournal‟or„Re
turnsInwards

Book‟,

 BillsReceivableBook:

Thisbookisusedtorecordallthe billsreceivedbythebusinessfromitscustomers.Itcontains
details regarding the name of the acceptor, date of the bill, place of
payment,termofthebill,duedateandtheamountofthebill.

 BillsPayableBook:

Thisbookisusedtorecordallthe billsacceptedbythebusinessdrawnbyitscreditors.Itcontains
details regarding the name of the drawer, payee and date of acceptance,

28
duedate,placeofpayment,termandamountofthebill.

29
  JournalProper

Thisbook isused torecordalltheresidualtransactions whichcannot findplaceinanyofthe

subsidiary books. While recording, the entries are made in the journal covering boththe
aspects of the transaction. The following are some of the examples of
transactionswhichareenteredinthisbook.

1. Opening entries and closingentries.

2. Adjustingentries

3. Transferentriesfromoneaccounttoanotheraccount.

4. Rectificationentries.

5. Billsof ExchangeEntries

6. CreditPurchase/saleofanassetother thangoods.

 CashBook

CashBookisasub-divisionof
Journalrecordingtransactionspertainingtocashreceiptsandpayments.Firstly,allcashtransac
tionsarerecordedintheCash

Bookwherefromtheyarepostedsubsequentlytotherespectiveledgeraccounts.The

Cash Book is maintained in the form of a ledger with the required explanation called
asnarration and hence, it plays a dual role of a journal as well as ledger. All cash
receiptsare recorded on the debit side and all cash payments are recorded on the credit
side. Allcashtransactions are recorded chronologicallyin the CashBook. The Cash

Book will always show a debit balance since payments cannot exceed the receipts at
anytime.

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LO4:Preparereportsandfiledocumentation

PreparingRequiredDocumentation

Prepareaseparate work
paperforeachbalancesheetaccounttodocumentthereconciliation.Thework paper must contain
the followinginformation:

a. Thebalancesheet accountnumberand accountname.

b. Astatement ofpurposeforthe account.

c. Abriefdescriptionof thedebit/credit activitythat normallyprocesses

throughtheaccount.

d. Theaccountingperiodfor whichtheanalysisis beingcompleted.

e. Keyasto thepresentation intheaccount(e.g.,is creditshown

asapositiveornegativenumber).

f. Activityfortheperiod- presentation willbe determined basedon

thenatureoftheaccount and thevolumeofactivitythat is recorded monthlyin
thataccount.

g. Substantiation of the account's ending balance through review of underlying

supportingdocumentation.

h. Thename and phonenumberof individualpreparingthereconciliation.

i. Thedatethe reconciliationwascompleted.

j. Alistofcontactnamesandphonenumbers/emailaddresses
forquestionsrelatingtotheaccount.

k. Keepaccountinformationupdatedfor changesin processingandotherinformation.

CompletingtheAnalysis

Performthefollowingactivitiesaftereachmonthendclose:

a. Confirmtheopeningbalancewithprevious workpapers, orthatbalancewaszero ifthisisa

new account.

b. Reviewtheactivitypostedto theaccountto ensurethat detailitems are:

31
1. Properlyclassifiedtothe account,

32
2. AuthorizedinaccordancewithUniversitypolicies, Stateand
Federallawsandregulations,andspecific sponsorordonorrequirements
orrestrictions, and

3. Withintheguidelinesofthe statedpurposeoftheaccount.

c. Ensurethatallexpected charges,receiptsorother activityappearsin the account.

d. Takeappropriate actionstorecordnecessaryadjustments.

e. Takeimmediateactiontoresolveerrorsordiscrepanciesnotedduringthe
reconciliationprocessandfollow up to ensurethat errorsare corrected.

f. Maintaincopies ofsupportingdocumentation for activityprocessedfortheaccount.

g. Confirmtheendingbalanceperthereconciliationagreestothegeneralledgerbalance.

ReviewingtheAnalysis

Submittheaccountanalysisattheendofeachquarterfor reviewtothe
OfficeoftheController.Thereviewer verifies that:

a. Analysisincludesallofthefundswithinthisbalancesheetaccount.

b. Endingbalancesagreesto thegeneralledger.

c. Endingbalancesaresubstantiatedwith supportingdocuments.

d. Allactivityis appropriateandreasonable.

e. Adjustmentsorcorrections,ifnecessary,havebeeninitiated.

f. Theaccount(fund andreportingcategory) hasbeenassessed fortheneed toretain.

RetainingDocumentation

Supporting documentation for detail items comprising the balance in the account should
beretained until open items have cleared. Supporting documentation for items relating to
periodactivity(AccountsReceivablerecords,Vendor
Invoices,CashReceipts,JournalEntries,etc.)intheaccountanalysis shouldbekept inaccordance
with recordretentionguidelines.

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LO5Distributecreditorsinvoicesforauthorization

MailingStatementstoCustomers

To improve the probability of collection (and avoid bad debts expense) many sellers prepare
andmail monthly statements to all customers that have accounts receivable balances. If
wordedskillfully,thesellercanusethestatementtosay"thank youforyour continuedbusiness"while
atthe same time "reminding" the customer that receivables are being monitored and payment
isexpected.Tofurtherpromptcustomerstopay inatimely manner,thestatementmayindicatethat past
due accounts are assessed interest at an annual rate of 18% (1.5% per month).
Becausetransactions are usually itemized on the statement, some customers use the statement as
a meanstocompareits records with thoseofthe seller.

PledgingorSellingAccountsReceivable

Acompany'saccountsreceivable areconsideredtobeatypeof asset,andassuchcanbepledgedas

collateralfora loan.Asset-basedlenderswill oftenlend a companyan amountequal to80%ofthe
value ofits accounts receivable.

Some companies sell their accounts receivable to a factor. A factor buys the accounts
receivablesatadiscount andthengoesabout thebusinessof collectingand
keepingthemoneyowedthroughthe receivables. Sometimes the factor will purchase the accounts
receivables with recourse. Thismeans the company that sold the receivables remains financially
responsible if a customer doesnot remit the full amount to the factor. When the factor purchases
the receivables withoutrecourse,the companysellingthe receivables is not responsible forunpaid
amounts.

AccountsReceivableRatios

Therearetwocommonlyusedfinancialratiosthataddresstherelationshipbetweenthe amountof a
company's accounts receivable as reported on the balance sheet and the amount of creditsalesas
reported on the income statement. Theseratios are:

1. Accountsreceivableturnoverratio,and

2. Day‟ssalesinaccountsreceivable.

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LO6Remitpaymentstocreditors

Remittanceadvice
Adocument that describes paymentsthat arebeingmade. The personorcompanythat
ismaking the payment will sometimes include a remittance advice, which is like a receipt of
thepayment. A remittance advice is usually used by companies processing either a purchase or
afiledclaim. This term is frequentlyusedin theUnited Kingdom.

CreditorReference

The Creditor Reference (also called the Structured Creditor Reference) is an

internationalbusiness standard based on ISO(International Organization for Standardization)
11649,implementedat theend of 2008.

Using Creditor Reference, a company can automatically match its remittance information
toitsaccountreceivable.Thismeansthatthecompany'sfinancialsupplychainsstraightthroughproce
ssingwill beincreased.

The Creditor Reference was first implemented within the SEPA(Single Euro
PaymentArea)rulebook 3.2.

Implementationofcreditorreference

A vendor adds the Creditor Reference to its invoices. When a customer pays the invoice,
thecompanywrites theCreditorReferenceinsteadofthe
invoicenumberinthemessagesection,orplacesa CreditorReferencefield in its payment ledger.

Whenthe vendorreceives the payment,it canautomaticallymatch theremittanceinformation

toitsAccounts Receivablesystem.

CustomerAccountSettings

To view an account's settings within the Customers table or Administrators table, click on the
IDnumberoftheaccount.

Each customer account has a variety of settings you can configure - depending on the
customertype or how you wish to manage customers. Note that not all fields need to be used,
dependingonthe account type.To viewthe fulllist of customer accountsettings.

35
LO7Prepareaccountspaidreportandreconcilebalancesoutstanding

Whatismeantbyreconcilinganaccount?
Reconciling an account often means proving or documenting that an account balance is
correct.For example, we reconcile the balance in the general ledger account Cash in Checking to
thebalanceshownonthebankstatement. Theobjectiveisto report thecorrect
amountinthegeneralledgeraccount Cashin Checking.You willoftenneedto adjust the
generalledger
account balance for items appearing on the bank statement that were not entered in the
generalledgeraccount.

I recall being asked to reconcile the general ledger account Freight Payable. What I needed to
dowas providedocumentationthat thebalance inFreight Payablewas proper.Iproceeded to
lookattheshipments ofrecentsales andthen determined howmuch we would beobligated to
payforthe freight on those sales. We then adjusted the balance inFreight Payable to my
documentedamount. This reconciliation was done to have the correct account balance and to
provide theoutsideauditors with documentation which couldeasilybereviewed.

Ialso reconciled thebalancein Utilities Payablebycomputingthe dailycost of each utilitythatthe

company used. The cost per day was then multiplied by the number of days since the lastmeter
reading date shown on the utility bills already entered in our accounting system. We
thenadjustedthe Utilities Payableaccount balancetobeequal tothedocumented amount.

Reconciliationof BalanceSheetAccounts
Reconciliation is the process of comparing information that exists in two systems or
locations,analyzing differences and making corrections so that the information is accurate,
complete andconsistent in both locations. Balance sheet accounts must be reconciled on a
periodic and timelybasis to verify that all items were correctly posted to the account. All funds
within the balancesheet account must be included in the reconciliation unless previous
arrangements have beenmade. Without performing reconciliations, inaccurate recording of
transactions may occur thatwouldresult in incorrect reportingand couldimpact resources.
The Office of the Controller will maintain a master list of balance sheet account
assignments.Thislistwillshowtheunitandpersonresponsible
forcompletingindividualaccountanalysisona monthly basis, where the supporting files (system
and documents) are located and the periodthroughwhich accounts havebeen reviewed.

36
BudgetReconciliation
Thisinformationisintendedtoprovideguidelinesforaregularbudgetreconciliationprocess.Pleasereviewallof
the contentprovidedinthesections below.

Whatis budget reconciliation, andwhy doweneedtodoit?

Definition:Budgetreconciliationistheprocessofreviewingtransactionsandsupportingdocumentation,andresol
vinganydiscrepancies thatarediscovered.

Theprocessencompassestwodifferentactivitiesorroles:

 Detailedreviewoftransactionsandsupportingdocumentation(department staff)
 Highlevel budgetreviewandanalysisbyapersonaccountableforthebudget(budgetreviewer).

Purpose: Regular reconciliation should be done in your department to provide reasonable assurance
thattransactionsareauthorized,reasonable,allowable, andcorrect.

Whoshouldreconcile?

All colleges, schools, departments and units should perform regular budget reconciliation for all
budgettypes.

(Note: For the purposes of these guidelines, we will use “department” as the standard word for
anyuniversityorganization, whether college,school, department, orunit)

Department staff knowledgeable of University and departmental policies, budget restrictions,

andreconciliationguidelinesshouldbeinvolvedinregularreconciliationofdepartmentbudgets.Thisoftenincludes
departmentAdministrators and FiscalSpecialists.

Ideally, the reconciliation process involves someone who did not initiate, record, or authorize
thetransactions. Your department process should have separation of duties. This means that no one
personhassolecontroloverthelifespanof atransaction.

Abudgetreviewerreviewsbudget activityforreasonablenessandappropriateness.Areviewerissomeone:

 Accountableforthebudget
 Conversantwithallrulesandregulationsapplicabletothebudget
 Whodoesnot poseanyseparationof dutiesconflicts

Special Notes on Sponsored Budgets: The Principal Investigator (PI) is responsible for their
grantbudgets,unlessthe PIhasdelegated authorityto anotherpersonwhohasdirect knowledge
oftheneedsoftheproject. SeeReconciliationBestPractices foradditionalguidance.

Howoftenshouldwereconcile?

37
When possible reconciliation should be completed monthly, within 45 days of month-end close, but
nolessfrequentlythanquarterly.Forsponsoredagreementsafinalreconciliationshouldbecompletedwithin45
days of the budget end date. Keep in mind that special situations such as biennium close may takelonger
to finish than “regular” months.

WhatdoesBudgetReconciliationCover?

1) Reviewtransactions

 Reviewalldepartmentaltransactions.
 When reviewing transaction amounts, keep in mind that sales tax may not have been charged
bythe vendor. The transaction amount posted to UW systems will typically include sales or use
tax,andmaytherefore differ fromthe vendorchargeamount.
 Lookforanysuspicioustransactions orabruptchangesfroman establishedpatternortrend.

2) Matchtransactionswith supportingdocumentation

Validate that supporting documentation (electronic or paper), including source documents,

matchesexpense or revenue transactions on the official university record (e.g. MyFD Transaction
Summary orReconciliationReport, Enterprise DataWarehouse(EDW)Reports,BAR).

Atransactionmaybereconciledwithout physicallymatchingsupportingdocumentationif:

 The person accountable for the budget has knowledge of the nature of the transaction, is able
toexplain what it is for, and the transaction originated from a UW source. The source
documentneedstobereproducibleandavailableaccordingto
therecordretentionschedule.Examplesmayinclude: regular salary charges originating in UW
payroll system, and internal recharges (e.gISDs,CTIs).
 It islessthan$75andyourdepartment hasothercompensatingcontrolsinplace regarding
expenditures. The strength of your department‟s documented internal controls over
purchasingand receiving may affect the depth of your reconciling activity, and departments
may choose tobemore restrictive with theirthresholdof review.

Special Note on Federally-Sponsored Budgets: Federal auditors may ask you to provide
supportingdocumentationforthesetransactions.Ifsufficientdocumentationisnotavailable,yourdepartment
mayberesponsibleforreimbursingforthese charges.

3) ManagesupportingdocumentationasspecifiedbyRecordsManagement:

 StateandEndowment budgets
 Grantand Contractbudgets

4) Investigateandresolveany discrepanciesorconcerns

Yourdepartmentalreconciliationproceduresshoulddocument
whoisresponsibleforinvestigatingandresolvingdiscrepancies,takingintoaccountappropriateseparation
ofduties.
38
For errors involving transactions of $10 or less, see guidance provided in GIM 15 Attachment B:
CostTransferMinimumThresholds (appliesto all budgettypes).

5) Highlevel review andanalysisofbudgetactivitybysomeoneaccountableforthebudget

WhenBudgetReconciliationIsConsideredComplete?

 Transactionshavebeenreviewedandmatchedasdescribedabove,
 Errorshavebeendetectedand resolved,and
 Anycorrectionsinitiatedhavebeenverifiedascomplete.

FinalWordsandRecommendations

Rememberthatdepartmentrecordsshouldprovideevidencethat thebudgetreconciliationhasbeencompletedand
reviewed.

We recommend that departments document their reconciliation policies and procedures, addressing
anyareas that are not in accordance with the reconciliation guidelines provided here.
Documenteddepartmentalreconciliationpolicies andprocedures should bekeptcurrent.

If your department does not maintain its own budget reconciliation policy, auditors may use
theseReconciliationGuidelinesand/ordepartmentinternalcontrolstoassessyourreconciliationpracticesaspart
ofan audit.

39