Question: How does one make things better?

Answer: One Notch (step) at a time. Incrementally. 

Notch 1 was getting current on invoices, or getting them in the correct period. It was pretty simple, just took you a day to set up the AP Module, modify the COA and to set up Cutoffs. [See the first post in the series here].

Notch 2 is the next step in capturing all other expenses that belong in the current period. 

 

Notch #2

Accrue Expenses

Simply stated, account for expenses incurred in the current period that were not processed in the system by the month-end cutoff.

This Notch is a little more involved and will take you 2 to 3 hours at month end to work thru. This notch will bring your books up to the accrual method as far as expenses are concerned. Your Leadership will now have a complete picture with respect to expenses and related liabilities each month to facilitate informed decision making.

Where this comes into play

Imagine this scenario playing out on a monthly basis:
In reviewing the budget vs actual, Church Leadership asks why there’s a gain to budget in utilities. Research is done, and the answer comes back – one or more bills were not processed. Then, the next month, there’s a loss to budget in utilities. The answer – 2 months bills were processed. Now, multiply that a few times in other budget line items each month.

Too much time is spent on these gains and losses that are due to timing differences. Eventually, Leadership just ignores variances, at least to a degree. By accruing items that are missing from the current month eliminates this back and forth and increases the credibility of the Financial Statements and thus the Finance Personnel.

Couple of Set-up Items

Add an Accrued Payables account to the COA. Credit this account when making an entry accruing these expenses. As mentioned in my Notch 1 post, you’ll need to decide whether you want a liability account for Accrued Unrestricted Payables and one for Accrued Restricted Payables.

Establish thresholds to qualify for accrual.  Think thru how much something has to be to be considered material enough to accrue. Do what makes sense for you and your church. Consider items in the aggregate as well.

Let’s Address Two Areas

#1. Normal, ongoing expenses that are typically invoiced, but missed the month-end cutoff:

I call these Receipts, No Invoices. (RNI). These would be for both received goods or completed services.

Some Examples:

Curriculum
Office Supplies
Ministry Expenses
Repair or Maintenance Work
Utility Bills
Printing Charges
Lease Payments

Accumulate invoices that arrive after the AP cutoff and review for items that belong in the period being closed.

The point is to be aware and inquire of staff as needed, particularly at each quarter end. Inquire of work, services completed or goods received towards the end of the month where the invoice was not received by your AP cutoff. If you use a PO system or record receipts, consult it to get the process going.

#2. Normal, ongoing expenses that are typically NOT invoiced:

In thinking about these, I’m just going to list a few items that can cause consternation or swings in the monthly budget to actual for now. (Although these are consistent with Accrual Accounting). In a later notch, I’ll speak to items of a more technical accounting nature for you to consider.

Mission payments that are based upon a percentage of giving. These can be substantial amounts depending and are typically paid in arrears. (Typically want to close books, reconcile giving and bank accounts before making payment). One advantage to making accruals for items like this that are never invoiced is that it ensures these kind of payments don’t get lost in the day to day and actually get paid.

Payroll and Associated Payroll Taxes. Accrue from the last date of pay to the end of the period. For example, assume a biweekly payroll. the last payday was on the 23rd. The end of the period is the 30th. Accrue 7 days of payroll.

Retirement Matching/Funding. Accrue from the last date of pay to the end of the period.

Interest Expense. Calculate the interest incurred from the date of the last payment to the end of the period. Or, the principal and interest on the note if you’re not splitting those out yet. (We will cover classification of transactions in a future notch)

 

Now that you’ve accrued these items on your books via journal entry, the first thing to do in the following period is to reverse them.

 

In closing:
What have the first two notches accomplished for us?

We have captured all expenses and placed them within the period they were incurred. Thus we have eliminated the timing differences that are inherent to cash accounting.

We have captured our outstanding liabilities or future commitments of cash.

The results – more accurate financial statements and a fuller picture of the financial condition of the church. This enables informed decision making.

 

See the next post in the series – Notch 3. 

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