advanced revenue management

Accounting Periods

What are Accounting Periods?

 

Accounting periods are an artificial method used to make it easier to organize financial records and allow comparison between different time periods. Organisations deal with accounting periods by detailing transactions on an ongoing basis, but compiling the figures into totals for the period. This compilation process requires the organisation to carry out an administrative task that effectively resets the ongoing transaction record before recording new transactions in the new accounting period.

The importance of Accounting Periods in accounting

 

An accounting system has three broad purposes:

  1. To record all financial (in the broadest sense, not just cash) transactions
  2. To meet all legal and taxation requirements
  3. To provide information to allow managers and/or owners to make business decisions.

Accounting periods are irrelevant for the first purpose because such transactions are on-going but they are essential for the other objectives.

There are several assumptions that accountants make when preparing financial statements and analysts make when reading the statements. These are considered fundamental principles of accounting, more so than the financial standards developed by an individual company. Some key assumptions include that the business is a separate entity, that it is actively trading, and that it uses a consistent monetary unit.

Another key assumption is that the company’s activities can be divided into even and individual time periods. This is artificial, as a company’s trading activities are continuous and ongoing but is necessary to make sure there are regular and comparable sets of financial statements. Most commonly, a company will produce annual accounts, but it may also produce quarterly or monthly figures.

In the UK, limited companies have to produce regular accounts that can be audited both for registration with Companies House and for HMRC for corporation tax assessment. They also need periodic registration of VAT due and paid to calculate net VAT due to HMRC.

In order to ensure that such official reports are accurate – and remain accurate – it is highly advisable to both use and close off accounting periods. This is to prevent the possibility that future transactions (including journals or perhaps changes in currency rates) do not impact earlier reports.

 

Using Accounting Periods

 

The use of accounting periods means that a company carries out procedures in a consistent and repeated pattern.

This consists of two types of cycle: individual transaction and closing period.

Individual transaction.

This usually involves the transaction taking place, the company preparing the relevant documentation like an invoice, the company valuing the transaction and listing it in a relevant journal like that for sales or purchases, and the company copying across the transaction from this journal to the general ledger that acts as a combined record of all transactions. Note that most companies use a double-entry system by which each transaction is recorded in two ways in a journal; for example, a sale is listed once for the receipt of money and once for the loss of the item from stock.

Closing Period

The second cycle is the set of steps followed at the end of each accounting period. This involves verifying that the two sets of transaction listing in each journal add up to the same totals, correcting any errors, copying the details from each journal to the general ledger, preparing financial statements, and posting closing journal entries. This means that although the various journals like sales records are ongoing, there are clear boundaries between the accounting periods, and it’s easy to see the current total for any particular period.

NetSuite Period Close Checklist

This checklist describes the standard required tasks in sequence. Restrictions contained by this sequence can be overridden with the necessary permissions.

  • To close a period, first lock out transactions that post to Accounts Payable and Accounts Receivable.
  • Review accounts and perform any necessary adjustments. These adjustments can include transactions generated by the system such as intercompany adjustments and foreign currency balance revaluations in OneWorld accounts. Also, if using NetSuite OneWorld, update consolidated exchange rates to ensure that consolidated financials are accurate, and eliminate intercompany transactions if using the Intercompany Auto Elimination feature.
  • Reconcile negative inventory, correct transaction/period date mismatches, and validate gapless General Ledger audit numbering.
  • If Multi-Book Accounting is used, each accounting book can be individually closed and reopened.
  • Close the period to exclude all posting transactions. Later, if additional postings are required, the period can be reopened.
accounting

New Revenue Recognition Standards – IFRS 15 – should you be concerned?

The new accounting standards for revenue recognition that has been agreed by both IASB (International Accounting Standards) and the US FASB (Financial Accounting Standards Board) comes into effect 1st January 2018 applying to accounts that commence in 2018.

You may think that revenue recognition only applies to organisations delivering projects with complex contractual and payment terms. But that is no longer the case with IFRS 15. It now applies to any circumstance where the invoicing does not coincide with the delivery of goods or services, with certain pre-defined exclusions.

The exceptions are:

  • lease contracts under IAS 17;
  • insurance contracts under IFRS 4;
  • financial instruments under IFRS9, IFRS 10, IFRS 11, IAS 27 and IAS 28
  • non-monetary exchange between entities in the same line of business to facilitate sales

You may think that your organisation only provides goods rather than services, so how could is apply to you? One example is that if a product e.g. a washing machine is sold with a three-year maintenance under IFRS 15 part of the price paid should be considered as applying to the maintenance and should therefore be recognised in the accounts as and when the maintenance is delivered.

Another example could be if you sell a product which requires a deposit. At what stage are you entitled, under IFRS 15, to take that deposit to revenue? How does IFRS 15 apply to distributors with ‘sale or return’ arrangements with their customers?

For many service organisations its implications are clear (even if implementation details require a lot of consideration). Project organisations of any size are probably familiar with accounting with revenue recognition but will have to adapt their accounting from earlier ones (which will depend on a number of factors). But now many organisations that charges an annual fee for a service – software licence, maintenance, internet hosting for example – will have to take account of IFRS 15.

Is your organisation affected?

Definitely yes if your organisation currently handles revenue recognition under existing non-excluded IFRS rules you will need to change to the new standards.

Currently no if your organisation only ever supplies goods and/or services that are invoiced (or paid for) in line with the supply of the goods and/or services (and intends to restrict business to such) or only supplies the financial products excepted from IFRS 15.

All other organisations should consider their situation and discuss with their auditor and/or accountant.

When should you consider IFRS 15?

There is less than eighteen months before the standard comes into effect. Of course if your accounts run from September, October, November or December you have at least two years before you are required to implement it. Note that IASB are happy for organisations to implement IFRS 15 immediately so there is no need to wait until the last minute.

I suggest you do two things right away:

  • discuss with your accountant/auditor whether you will be affected
  • find out whether your existing accounting system effectively handles IFRS 15 (Note that NetSuite with Advanced Revenue Manager has a fully integrated module that fully supports IFRS 15)

I further suggest that anyone considering a change to the accounting system adds full integrated support for IFRS 15 to their requirements. After all, do you really want your future business plans impacted by a lack of such support?