Below are 8 best practices you can apply to help tighten up your accrual accounting process today.
As helpful and flexible as spreadsheets are to accountants, there is simply too much data in a standard accruals process (POs, invoices, etc.) to aggregate and calculate in a consistently accurate manner. Leveraging accruals management platforms allow accountants to spend less time on spreadsheet-based tasks that are prone to error — and focus more efforts on the review and analytics necessary to ensure the accurate recording of accrual transactions.
Given the criticality of accurate accruals to making key financial decisions, finance leaders must ensure there are enough capable team members dedicated to accruals during the month-end close. For example, only assigning a single accountant to both prepare and review unbilled expenses for several hundred vendors, within a condensed time frame, represents a lack of segregation of duties that can increase the risk of mistakes.
Many different tools exist to collect, estimate, and analyze accruals (e.g., open PO review, thresholds, review procedures, etc). Documenting your processes and procedures helps to ensure your entire function is aligned on how to conduct their accruals-related responsibilities — in addition to ensuring these procedures are performed consistently month-over-month.
No matter how sophisticated our estimation methods, there is still no better approach to determining your unbilled expenses than confirming the amounts with your vendors directly. Vendors, not accountants, possess the prerequisite knowledge and data required to accurately estimate their accruals. Therefore, reaching out for confirmations is the most reliable method of estimation.
Not everyone thinks like an accountant, so when we request that vendors or internal business partners provide estimates of unbilled expenses incurred during a given period, there may be confusion. Take the time periodically — semi-annually, for example — to engage these parties. Provide the necessary context and background for why accrual confirmation requests are performed. Equally important, ask vendors/partners to re-share these instructions with their teams to further ensure alignment. These time investments will improve the quality of the accrual confirmations you receive and therefore limit misstatements due to miscommunication.
Many accounting teams record their final accrual entries well before their hard close. If the gap between these two milestones is longer, incorporate a step into your close process (the day before or day of hard-close) to review any subsequent invoices received after the AP subledger is closed. This will help to identify any missed or significantly inaccurate accruals.
We’ve encountered many organizations who start their accruals process far too early (e.g., before Day 0). In fast-growing businesses where spend is less predictable, accountants are at a disadvantage when they start too early because accrual trends are harder to estimate that far out. Given the volume and variety of vendors, don’t risk having to double back and re-do your work because you started too early.
POs make it easier for accountants to know which accounts, departments, or cost-centers to use when booking their accrual JEs, in addition to enabling the team to perform an Open PO review as part of their close. This is beneficial as Open PO reviews are one of the most effective ways to capture accruals.
Gappify, founded in 2016, is a cloud-based provider of accrual automation solutions for mid-market and enterprise accounting teams. The company is headquartered in New York City, with offices in Berkeley, California, Washington DC, and Manila, Philippines.
Its team consists of accountants and CPA’s from Big Four accounting firms and software innovators. Gappify is also supported by strategic advisors from some of the world’s most recognized technology companies and is affiliated with the top companies & accounting organizations.