We are all looking for controls in our processes to make sure we do the right thing. Especially when it comes to processes involving costs. Every cent we save in costs automatically increases our profitability.
One of the most interesting processes for me is the accrual process. How can we make sure the costs are booked in the correct period, how do we prevent costs are booked double, etc. In this blog, I point out the 7 control wonders of the accrual process.
Accrual expenses
First, what is an accrual? Accrued expense is a liability whose timing or amount is uncertain by virtue of the fact that an invoice has not yet been received.
Wonder 1: Control of the receipts
Receipts, in this case, are the registration of the delivered goods/services. Important thing is that the registration of the receipt happens by a person not involved in the invoice registration process.
The receipts determine the moment that the expenses are booked. As soon as someone registers the receipt (and the accounting is booked), we can see this and control the receipts.
The persons responsible for registering the receipts can be informed via the system, via a workflow or reminder emails when the expected delivery date is passed. The risk in here is that people enter receipts, just to stop the email reminders.
Accrual aging reports will give insight in the age of the accrual. It is normal to have accruals, but after a certain time for the accrual, an invoice should be received. The time period is different for every branch, company and type of cost.
Wonder 2: Control of the invoice matching
The second wonder is related to the invoice matching. As we are in the accrual process, we have at least 3-way matching (invoice, PO and receipt). The moment the invoice is matched to a PO, a set of system validations will occur. Is the received quantity equal or greater than the invoiced quantity? Does the price on the invoice match the PO price? Does the tax rate match?
Only when all validations are successfully passed an invoice gets paid. This gives us control of the invoices and also forces the internal organization to register receipts correct and match invoices correct.
Wonder 3: Prevent mismatch between receipt and invoice
This brings us to wonder 3. When an invoice is incorrectly matched or not matched at all, costs can be booked twice. Accrual reports will show that the received PO is not yet matched to an invoice. Reports that show non-PO related invoice lines, will help you investigating to find incorrectly matched invoices.
Wonder 4: Prevent undelivered receipts
This is one of the most difficult things to get control off, especially for expenses. Is the entered receipt correct? The moment you can find this out, is actually when the invoice comes, but who guarantees that the invoice correct? Communication with both supplier and receiver are key in this wonder. Companies, who have this part in control, are a step ahead of other companies.
Wonder 5: Control of prices
As already mentioned in wonder 2, when matching invoices to PO’s your accounting system will do a validation on the prices. Variances will result in holds on invoices and specific accounting. You can follow-up on these holds and specific accounting.
Incorrect PO prices should be corrected on the source: the PO. An incorrect invoice price means that the invoice should be returned to the supplier and the supplier should sent a new invoice with the correct price.
When you have average prices or FIFO/LIFO pricing for your inventory goods, you will have price variances. The price variances will give you insight in how correct the prices in your system are. It could be an update is needed, because the market shows some unexpected behavior.
Wonder 6: Control of uninvoiced receipts
Why only control your internal processes? When the registration of the delivered goods and services are in a good shape, also control your suppliers. They deliver ‘something’ we need and want (or can’t do better/cheaper). So we don’t have a problem paying them for that.
We can provide the supplier a list of uninvoiced receipts and ask them when the invoice will come. When the supplier shows that the invoice already has been sent, we can go back to wonder 2 and ask the payables department to correct the invoice matching.
Wonder 7: Control of your co-workers
The Germans have a saying: “Vertrauen ist gut, Kontrolle ist besser!” (“Trust is good but control is better”) which actually comes from Russian leader Lenin.
Having the accrual process under control gives us insight in co-workers causing discrepancies in the process. We now have the tooling to show them the discrepancies they’ve caused. Of course we do not blame them, but we give them training, explanations and user guides. We can pinpoint specifically to the co-workers that are not on the high standard we want them to be on, instead of sending out generic emails.
If you want to know more about the accrual process or how we can help you with our itax4apps solution, please feel free to contact us.
