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Measure Twice, Cut Once - Verify your accounting entries before you post

I frequently run into companies whose accounting departments have developed a talent for posting a lot of transactions, followed by reversals of these transactions and posting of additional (supposedly correct) sets of transactions, replacing the flawed ones.

These usually range from customer invoices with errors, such as incorrect sales tax, or incorrect accounting for customer deposits, to incorrectly posted inventory receipts or incorrectly posted issues of material and labor to manufacturing work orders. Even manual journal entries often exhibit this behavior. Sometimes this process repeats itself several times until the correct transactions are successfully recorded.

Since accounting systems are set up to provide an audit trail of everything that was recorded in these systems, you often see many items (e.g., customer invoices, received inventory items, adjustments to GL account balances, etc.) that should not be there in the first place. The obvious effect is a lot of unnecessary clutter in the accounting system, more difficult access to the information you need and cumbersome and lengthier audits.

There is a popular woodworking phrase, “Measure Twice, Cut Once.” When you cut pieces of wood to be used in projects or construction, it is common sense to verify your measurements, which should result in a correct mark on the piece to be cut. Don’t do it and you risk cutting the piece too long or too short, having to redo your work and wasting material and time in the process.

This principle should also apply to accounting transactions. For example, when you prepare manual journal entries to be posted to your GL, make sure all amounts, GL accounts and orientation (debits and credits) are correct. If you use an upload template, this can be easily entered in the template and reviewed along with other batch journal entries for accuracy and completeness.

If your internal controls dictate (as they should) that all batch entries must be reviewed and approved by someone who did not prepare them, then you have fulfilled this principle.

Many small organizations do not have a formal internal control framework in place to mitigate risks in financial reporting. Most of these organizations have issues with segregation of duties, where one or more persons perform multiple tasks that should be performed under the preparer/reviewer set of controls (where the reviewer is never the same person who prepared the entries) in order to mitigate the risks of having material errors in transactions or financial fraud.

If one person is tasked, for example, to prepare and also post manual journal entries to the general journal, I strongly suggest that the proposed entries be entered into an upload worksheet with all GL accounts properly listed, comments entered for each line and also in the journal header, and amounts on each line verified. Make sure your debits and credits are correctly oriented and that the sum of all credits perfectly matches the sum of all debits.

As an extra step of caution, I often suggest that these journal entry batches be uploaded to the GL and not immediately posted (assuming you do both–which is not great but a common reality). Let it sit there for a day, then come back to it and if everything still looks good, then you can push that “post” button. A lot of unnecessary GL detail clutter can be eliminated this way.

This may seem trivial and unnecessary advice, but I have never seen a GL that did not have flawed entries followed by reversals and reposting of correct entries. Some of the GLs I reviewed contained excessive amounts of such transactions where the relevant detail was buried in transaction clutter. The same was true in sub-ledgers (e.g., AR, AP, inventory), all leading to many additional transactions, attempting to first reverse and then correct the original flawed entries.

These errors, if not caught, can be devastating to the financial statements.  The sage but simple advice, “Measure Twice, Cut Once,” can help avoid such costly and unnecessary mistakes in the future. 

Alan Hart is a former CFO with more than 30 years of experience in accounting, finance and management, and he currently works with Centage Corporation to evangelize driver-based budgeting and forecasting solutions.

Comments

Bruce Ficks
Title: CFO
Company: Value Financial Group
(CFO, Value Financial Group) |

Alan, in my past, I have "Journal Entry Correction" as an Accounting department KPI to focus attention to the issue. The corrections also delays the monthly close.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I have found that some of the increased error rates is that today's accountant/bookkeeper are only for the most part taught using computer accounting systems.

They are missing the learning experience and direct relationships that the old manual systems provided. Long gone are footing a green bar page and seeing the real effect of a post.

As an example: when was the last time you saw younger accountants using T-accounts to figure out the resultant effects of a proposed journal entry?

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