Wednesday, November 23rd, 2016
“What are accounting policies and procedures?”
Written accounting policies and procedures can facilitate significantly the accounting system audit. This article will offer guidance with respect to establishing and documenting accounting policies and procedures.
The first question to be asked is, “What are accounting policies and procedures?”
Simply put, they are written statements. Accounting policies provide broad conceptual guidance. They express “what” is to be done. Procedures tell “how” the policy statements are to be implemented. Procedures are subsidiary to policy statements.
Why are accounting policies and procedures important? They provide a basis for what is or is not done in the company, as well as how things are or are not done. They make for the soundness and reliability of the accounting system. They also make for the consistency over time of the accounting system.
FAR Part 9 states that contractor qualifications should include “the necessary organization, experience, accounting and operations controls, and technical skills” for a government contract. Also, more and more today, government solicitations contain the requirement that an offeror must have an acceptable accounting system in order to submit a bid for the procurement. Written policies and procedures will go a long way to assure that the accounting system is acceptable. Moreover, they can be an invaluable tool if a company’s accounting system is ever audited.
To some degree, accounting systems will vary from company to company. However, there remain common elements. Below is a checklist of topics that should be addressed in a company’s accounting policies and procedures. All the elements share the need for proper internal controls.
- Flowchart of Accounting and Reporting System. The flowchart can provide a valuable overview of the system.
- Type of System. The description should identify the system, for example, manual, electronic, etc., as well as specific characteristics.
- Chart of Accounts – Establishes the basic structure of the accounting system. It is essential that the chart of accounts be in the government format.
- Costs – Must be grouped in the government format, especially, direct, indirect, and unallowable costs.
- Budgeting – Valuable tool for tracing a business’s progress against plans. Can also help with important decisions, such as hiring of staff and making major purchases.
- Accounting for Revenue – Timely preparation and distribution of invoices, prompt processing of payments, and accuracy of records are imperative.
- Accounting for Assets
• Cash Management. Planning and control are critical.
• Accounts Receivable – Valuation, probability of collection, discounts.
• Inventories – Cost determination.
• Property, plant, and equipment – Acquisition costs, valuation.
• Capitalization – Types of assets and dollar thresholds.
• Depreciation – Asset cost, service life, residual value, and method of cost allocation.
- Accounting for Liabilities – Key ideas: recording, payment, valuation.
- Purchasing – Major concerns: Process and responsibilities.
- Timekeeping – System should be able to track labor costs from time cards to jobs/contracts.
- Payroll – Validity and accuracy of transactions are critical. Related to payroll are employee hiring and new employee orientation, job descriptions, salary adjustments, performance appraisals, and disciplinary actions.
- Office Tasks and Reporting – For small businesses, division of duties can be critical.
- Bank Statements – Who has responsibility for reconciliations and what is the frequency of the reconciliations?
- Records Management – Procedures to manage records should be clearly defined.
- Financial Statements – Types and uses of statements should be primary focus.
One final note: written Accounting Policies and Procedures should be reviewed periodically and updated as necessary.
Pricing Matters is a regular feature by Ronald Marta. Watch for future posts on a wide range of pricing issues.
More about Procurement Technical Assistance Centers (PTACs)
Ninety-eight PTACs – with over 300 local offices – form a nationwide network of procurement professionals dedicated procurement professionals working to help local businesses compete successfully in the government marketplace. Funded under the Defense Logistics Agency’s Procurement Technical Assistance Program through cooperative agreements with state and local governments and non-profit organizations, PTACs are the bridge between buyer and supplier, bringing to bear their knowledge of both government contracting and the capabilities of contractors to maximize fast, reliable service to our government with better quality and at lower costs.