Bookkeeping Tip
Reviewing the General Ledger

Payroll Tip
Outsourcing Payroll Duties

Financial Management Tip
Cash Management - Disbursement Float

QuickBooks Tip
"Cleaning Up" The Chart of Accounts

Reviewing the General Ledger
As the general ledger is generated, bookkeeping personnel perform various procedures to help ensure its accuracy and thus the accuracy of the financial statements. This article deals primarily with how to perform an effective review of the general ledger to detect possible errors. The general ledger review tends to focus more on balance sheet accounts.

General Ledger Review
The review process for the general ledger generally consists of scanning the ending balances and the entries posted to each general ledger account to detect any unusual entries or unexpected ending balances. This review should be done by a bookkeeping person with an in depth knowledge of the general ledger accounts. Otherwise, the odds of identifying an entry that is out of the ordinary or an unreasonable ending balance will be low.

Although the review's effectiveness generally depends on the reviewer's abilities and experience, some common "red flags" that may indicate a problem in a specific account include the following:

• Debit vs. credit balance. Some accounts naturally carry debit balances (assets and expenses) and others carry credit balances (liability, equity, and revenues). If one of these accounts is unexpectedly in a debit or credit position, there may be a potential problem.
• Debit vs. credit postings. Similar to the above, some accounts normally receive debit entries (expense accounts) and others receive credit postings (revenues). If credit entries were posted to an expense account or debit entries were posted to a revenue account, further investigation may be warranted.
• Unusually large or small amounts. Most accounts have a normal monetary range of transactions. Unusually large or small amounts may indicate coding or data entry errors.
• Unexpected posting source. Some accounts primarily receive postings from specified journals. For example, entries to accounts receivable typically come from the sales and cash receipts journals. Entries to salaries and labor accounts typically come from the payroll journal. If entries from other journals are noted, the entries may have been misposted.
• Beginning and end of period balances. Balance sheet account balances are often comparable from one period to the next. If the ending balance for an account differs significantly from the balance at the beginning of the period, a potential problem could exist.
• Absence of an entry. Most accounts have one or more types of journal entries that are regularly posted to them each month. If one of these entries seems to be missing, bookkeeping personnel may need to follow up.

Normally, the extent of the general ledger review will depend on the effectiveness of other procedures. For example, if bookkeeping personnel maintain comprehensive supporting workpapers or perform an extensive analytical review of the financial statements, a less-detailed general ledger review will usually suffice.

When performing the general ledger review, bookkeeping personnel should typically make "review notes" on a separate sheet of paper. Each review comment should be sequentially numbered and, if possible, assigned to a specific person to resolve. Each comment should leave room for a response after the potential problem has been investigated.

After the review comments have been cleared, they should also be filed for future reference in the closing binder with other closing checklists and workpapers. If several bookkeeping persons will be answering the review comments, photocopies of the review comments should be given to all employees to respond to those comments assigned to them.

Outsourcing Payroll Duties
Many employers outsource some of their payroll and related tax duties to third-party payroll service providers. They can help assure filing deadlines and deposit requirements are met and greatly streamline business operations. Some of the services they provide are:

• Administering payroll and employment taxes on behalf of the employer, where the employer provides the funds initially to the third-party.
• Reporting, collecting and depositing employment taxes with state and federal authorities.

Employers who outsource some or all of their payroll responsibilities should consider the following:

• The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though the third-party is making the deposits, the employer is the responsible party. If the third-party fails to make the federal tax payments, the IRS may assess penalties and interest on the employer's account. The employer is liable for all taxes, penalties and interest due. The employer may also be held personally liable for certain unpaid federal taxes.
• If there are any issues with an account, the IRS will send correspondence to the employer at the address of record. The IRS strongly suggests that the employer does not change their address of record to that of the payroll service provider as it may significantly limit the employer's ability to be informed of tax matters involving their business.
• For the employer's protection, employers should ask the payroll service provider if they have a fiduciary bond in place. This could protect the employer in the event of default.
• Employers should ensure that their service providers are using EFTPS (Electronic Federal Tax Payment System) so the employer can confirm payments made on their behalf. Everyone should use EFTPS and Treasury regulations require electronic payment for payroll taxes over $200,000 in a calendar year. EFTPS maintains a business's payment history for 16 months and can be viewed on-line after enrollment. In addition, EFTPS allows employers to make any additional tax payments that their third-party provider is not making on their behalf such as estimated tax payments. The IRS recommends employers verify EFTPS payments as part of their bank account reconciliation process

EFTPS is secure, accurate, easy to use and provides an immediate confirmation for each transaction. The service is offered free of charge from the U.S. Department of Treasury and enables employers to make and verify federal tax payments electronically 24 hours a day, 7 days a week through the Internet, or by phone. For more information, employers can enroll online at EFTPS.gov, or call EFTPS Customer Service at (800) 555-4477 for an enrollment form.

There have been recent prosecutions of individuals and companies who have, acting under the guise of a service provider, stolen funds intended for payment of employment taxes. For more information, visit the Examples of Employment Tax Investigations FY2008 Web page.

Remember, employers are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of social security and Medicare taxes.

Cash Management - Disbursement Float
The disbursement function is responsible for maximizing disbursement float. Disbursement float is the period of time between purchasing a product or service and the payment for that product or service being charged to a company's bank account. Disbursement float is affected by the timing of the following:

• Purchasing.
• Receiving.
• Converting raw materials to goods for sale.
• Disbursing.

As with collection float, a common sense approach must be used to increase disbursement float. The following paragraphs discuss some of the things that should be considered in increasing disbursement float.

Purchasing. Although the timing of purchases directly affects cash management, it is usually dictated by the company's sales and production needs. However, establishing control over purchases, including requiring proven authorization, assists in cash management. By controlling purchases, a company can eliminate unnecessary or duplicate purchases, take advantage of quantity discounts, and eliminate late fees. Some companies use sophisticated computer programs or formulas, such as economic order quantity calculations, to control purchases.

However, most small businesses simply order when the need becomes known. Failure to anticipate inventory requirements can result in unexpected cash shortages resulting from purchases made on short notice. When performing a cash management consulting engagement, the practitioner should consider the impact of purchasing on cash and the timing of disbursements.

Receiving. If receiving is unfavorably affecting the timing of payments, the reasons and impact should be understood.

Converting Raw Materials to Goods for Sale. Similar to receiving, the conversion process is included in cash management only to the extent that it is causing cash problems. Analysis of the conversion process generally requires an expert in that area.

Disbursing Funds. Disbursing funds is one of the most important elements of cash management because a company can exert the most control over it. For example, disbursements may be postponed by paying towards the end of the discount period, using the mail float, or using a zero-balance or controlled disbursement bank account system. These techniques are discussed in the following paragraphs.

• Establishing Control over Payables. Control over payables should be established as soon as invoices are received. By accounting for them immediately and centralizing control over them, the company can more efficiently schedule disbursements and plan for cash needs. Payables should be scheduled for payment by due date. This scheduling can be done by computer (many payables programs include a scheduling function) or by maintaining a tickler file.

Payment dates should consider any available discounts if the interest rate implicit in the discount is higher than the incremental borrowing rate to the company.

To illustrate application of the formula, assume an invoice contains 2/10, Net 30 terms. This means the company can take a 2% discount if the invoice is paid within 10 days. If the discount is not taken, the payment is due in 30 days.

If the company's policy is to pay after the discount period but before the due date, using the earlier date rather than the due date gives a better indication of the implicit interest rate. This calculation will result in a higher rate. Conversely, if a company pays after the due date without late payment penalties or interest charges, the date used should be the actual payment date. A lower implicit rate will be the result.

• When to Take the Discount. If the implicit interest rate is greater than a company's incremental borrowing rate, the discount should generally be taken. However, you should exercise caution before a company borrows funds to take discounts.

Some financial managers contend that discounts should be taken whether or not the payment terms are met. Some also believe that bills should be paid as late as possible regardless of payment terms. While this may conserve funds, it can alienate suppliers, cause increased administrative costs of resolving disputes, and impair the company's reputation in the business community. Accordingly, such an approach should be avoided.

• Mailing Checks. Checks should be mailed as late as possible (yet still meet the terms of the invoice) to increase the company's own use of funds as much as possible. For example, checks can be mailed late in the day to delay presentation to the bank. Delivery of checks mailed late in the week may be delayed by the weekend.

• Direct Payment through the (ACH) or Readily Collectible Payment Instruments. Some forms of payment--cash, wire transfers, and direct payments--are processed quickly through the banking system. Benefits of payments through the bank, especially recurring transactions of identical amounts, are reduced time spent processing payments, less chance of clerical error or opportunity for cash misappropriation, and lower postage and stationery costs. Also, the Company could be assured that the payments would be made just in time to be credited to the payee's account on the payment due date. Banks do not normally charge payors for ACH service. Also, some banks discount their loan rates for customers that use automatic bank drafts. Other forms of payment may require a bank fee.

• Fraud Reduction. Positive Pay is a fraud deterrent service offered by banks which allows commercial customers to monitor and control the payment of checks. It also provides assurance that the presented items have not been altered. The customer provides the bank with a listing (usually electronic) of all disbursements. Each check that is presented for payment is compared to this database (check number, amount, payee, date, etc.) and any checks not matched exactly are placed on an exception listing. The exceptions are available for review daily, online in most cases, so that the customer may make a final determination of payment. Reverse Positive Pay services provide the customer with a list of checks presented for payment, daily, by internet or fax, which can then be compared to disbursements made. The customer notifies the bank about any checks that should be returned. More information about these services is available from most commercial banks.

• Reduction in Float Time. The Check Clearing for the 21st Century Act (Check 21), which became effective in October 2004, permits banks to electronically transfer check images instead of physically transferring paper checks. This new process results in a significant reduction in the amount of available float time for disbursements made by check. Thus, fewer opportunities may now be available to improve cash flow by maximizing float.

Practical Suggestions
The following are some practical suggestions for maximizing disbursement float:

• Pay invoices only when due.
• Consider taking advantage of purchase discounts.
• Time the mailing of payments to maximize float.
• Consider using a controlled disbursement or zero-balance account system.
• Consider using an Automated Clearing House (ACH) Network or readily collectible instruments.

"Cleaning Up" The Chart of Accounts
One of the most common periodic functions QuickBooks users should perform is "cleaning up" the chart of accounts. This article discusses some of the ways that QuickBooks users can "clean up" their charts of accounts after the accounts already have been set up.

QuickBooks users can review their chart of accounts by selecting "Accountant & Taxes" and then "Account Listing" from the "Reports" menu. The "Account Listing" report displays the account type, balance, description, and tax line for each active account. Many users create accounts that are not needed or that are duplicates of existing accounts. Users may want to remove such accounts from the chart of accounts. QuickBooks allows users to remove accounts by deleting, merging, or inactivating them.

Deleting Accounts. QuickBooks allows users to delete accounts that never have been used. Users can delete unused accounts as follows:

• Select "Chart of Accounts" from the "Lists" menu.
• Select the account to be deleted.
• Select "Delete" from the "Account" menu button.

Users cannot delete an account that (a) has subaccounts associated with it, (b) has items assigned to it or that is used by payroll items, or (c) has transactions posted to it or that is used in transactions. However, users can delete an account that has subaccounts associated with it if they either (a) delete the subaccounts or (b) associate the subaccounts with a different parent account before deleting the account. Likewise, users can delete an account that has items assigned to it by assigning a different account to the item before deleting the account. Even though an account that has transactions posted to it cannot be deleted, users can merge the account with a similar account if the account is a duplicate of another account that also has transactions posted to it. The following paragraph discusses merging accounts.

Merging Accounts. Users may want to merge accounts if you used two or more similar accounts for posting the same type transactions. Accounts can be merged as follows:

• Select "Chart of Accounts" from the "Lists" menu.
• Select the accounts to be merged and select "Edit" from the "Account" menu button.
• Verify that the accounts to be merged are the same "Type" and at the same level (i.e., both are parent accounts or both are subaccounts).
• Edit the accounts to be merged if they are not the same "Type" or at the same level.
• Change the name of the account that will not continue in use to the name of the account with which it is being merged.

Please note: QuickBooks users should be aware that merging accounts is irreversible and that merged accounts lose their history. If accounts need to be separated after they have been merged, users must set up a new account and record a journal entry to move transactions from the merged account to the new account

Inactivating Accounts. QuickBooks users may want to inactivate an account rather than deleting it or merging it with another account. (For example, an account used for tax purposes in a prior year may not be needed in the current year.) QuickBooks does not display inactive accounts in the chart of accounts or in drop-down lists that use accounts. However, QuickBooks retains the information associated with inactive accounts and displays the balances of inactive accounts in the general ledger and financial reports. Users can inactivate accounts as follows:

• Select "Chart of Accounts" from the "Lists" menu.
• Select the account to be inactivated.
• Select "Make Account Inactive" from the "Account" menu button.

QuickBooks allows users to inactivate accounts that have transactions posted to them, as well as accounts that have subaccounts associated with them. If an account with subaccounts is inactivated, QuickBooks automatically inactivates the subaccounts as well. However, inactivating a subaccount does not automatically inactivate the parent account.

If QuickBooks users want to activate inactive accounts, they should:

• Select "Chart of Accounts" from the "Lists" menu.
• Check the "Include inactive" box at the bottom right of the "Chart of Accounts" window.
• Click the "X" symbol beside an inactive account to activate the account.

Changing the Account Type. QuickBooks users often associate accounts with the wrong account type. Incorrect account types can cause financial reports to be incorrect since QuickBooks summarizes financial reports based on account type. Consequently, users may need to change the account type associated with a particular account. For example, merged accounts must be the same account type. Each account must be associated with one of the following account types:

• Bank.
• Accounts Receivable.
• Other Current Asset.
• Fixed Asset.
• Other Asset.
• Accounts Payable.
• Credit Card.
• Other Current Liability.
• Long Term Liability.
• Equity.
• Income.
• Cost of Goods Sold.
• Expense.
• Other Income.
• Other Expense.

QuickBooks users that want to change account types should:

• Select "Chart of Accounts" from the "Lists" menu.
• Select the applicable account.
• Select "Edit" from the "Account" menu button.
• Select the appropriate "Type" from the drop-down list in the "Edit Account" window.

QuickBooks does not allow users to change the account type for an account with subaccounts. Likewise, QuickBooks does not allow users to change the account type for a subaccount. The account type for a subaccount must match the account type for the parent account. Consequently, to change the account type for a parent account and each of its subaccounts, QuickBooks users must temporarily change subaccounts to parent accounts as follows:

• Select "Chart of Accounts" from the "Lists" menu.
• Select the applicable subaccount.
• Move the mouse to the small diamond symbol at the left of the subaccount name. When the mouse pointer touches the diamond, the pointer changes to a four-headed arrow that allows the subaccount to be dragged to a new level in the chart of accounts.
• Click and drag the diamond to the left until the subaccount name is aligned the same as the parent account.
• Repeat the preceding steps for each subaccount associated with the applicable parent account.

Next, users should change the account type for the parent account. Users then can change the account type for the associated subaccounts and correspondingly check the subaccount box and select the name of the applicable parent account in the "Edit Account" window. (Alternatively, users can click and drag the diamond beside each subaccount to the right and below the parent account name in the chart of accounts after changing the account type for the subaccount.)

Please Note: QuickBooks users cannot change accounts receivable or accounts payable accounts to other account types. Likewise, users cannot change the types associated with other accounts to accounts receivable or accounts payable types. In other words, QuickBooks does not allow users to change an account’s type to or from accounts receivable or accounts payable. In addition, QuickBooks does not allow users to change the account type associated with automatically created accounts, such as sales tax payable, undeposited funds, retained earnings, and opening balance equity.

Collapsing Accounts.QuickBooks users may want to collapse accounts when printing financial reports. The collapse feature in QuickBooks allows users to hide subaccounts and print only parent accounts. The collapse feature is available when generating certain financial reports from the "Reports" menu. Users can click the "Collapse" button in the top row of the report to hide subaccounts. After collapsing a report, users can click the "Expand" button to display subaccounts. QuickBooks automatically generates reports that display subaccounts. QuickBooks does not allow users to set up collapsed reports as a preference.

"Require Accounts" Preference
QuickBooks users who work with outside professionals, i.e., QuickBooks advisors, CPBs or CPAs, may want to turn on the "Require accounts" preference. The "Require accounts" preference prohibits clients from processing a transaction without assigning an account. Users can turn on the preference by (a) selecting "Preferences" from the "Edit" menu, (b) selecting "Accounting" from the "Preferences" scroll box, and (c) checking the "Require accounts" box in the "Company Preferences" tab.

Although it seems logical to turn on the "Require accounts" preference, some professionals may prefer that their clients not assign any account rather than assign an incorrect account when processing a transaction. Because of the "Uncategorized Expenses" and "Uncategorized Income" accounts discussed in the following paragraph, outsourced professionals may find it easier to correct an uncategorized transaction than to correct an incorrectly posted transaction. In that case, the "Require accounts" preference should not be checked.

Uncategorized Expenses and Income. If the "Require accounts" preference is not checked, QuickBooks users can process transactions (such as writing checks) without assigning an account for posting the transaction. QuickBooks automatically posts all transactions processed without an account to the "Uncategorized Expenses" or "Uncategorized Income" accounts. QuickBooks automatically creates the "Uncategorized Expenses" account the first time a user enters an opening balance for a vendor. Similarly, QuickBooks automatically creates the "Uncategorized Income" account the first time a user enters an opening balance for a customer. Even if a user does not post an opening balance for any vendor or customer, QuickBooks automatically creates the "Uncategorized Expenses" and "Uncategorized Income" accounts the first time a user processes a transaction without an account if the "Require accounts" preference is not checked.

If the "Require accounts" preference is not checked, your outsourced professional should instruct you not to assign accounts when they are not sure which account to assign to a particular transaction. The professional then can review the transactions posted to the "Uncategorized Expenses" and "Uncategorized Income" accounts and assign those transactions to the correct accounts.

"Ask My Accountant" Account. If the "Require accounts" preference is checked, QuickBooks users must assign an account when posting a transaction. QuickBooks 2008 automatically creates an "Ask My Accountant" account. Your outsourced professional should instruct you to assign transactions to the "Ask My Accountant" account when they are unsure which account to assign. The professional can then review the transactions posted to the "Ask My Accountant" account and assign those transactions to the correct accounts.

Please note: QuickBooks users using QuickBooks 2007 or earlier will have to create an "Ask Accountant" account and assign transactions to the "Ask Accountant" account when they are unsure which account to assign. Your outsourced professional can then review the transactions posted to the "Ask Accountant" account and assign those transactions to the correct accounts.