Accounting System Reporting

Current accounting systems should provide the following options for report generation:

1) PDF

2) Text Format

3) Drill-down Print Preview

4) Excel spreadsheet

To accomplish this, many accounting software products are now re-tooled to use external report generators. Some make the process look transparent. Others do not show report options on menus but rather instruct you to use an external report generator to create the report you want and save it to the menu for repeated use.

Some accounting systems have combined the latest programming technologies to make it that when you generate a print preview version of a report, you may drill down on clickable cells to see the detail behind summary values.

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Allocate Inventory in Sales Order

When entering an item into a sales order-

is it enough to commit quantity in general or is it as important to allocate and lock in the committed quantity from a specific warehouse bin?

By allocating, you are making sure that the quantity cannot be grabbed by another order. This comes into place especially in an environment where an order can be put on hold for delivery a week or two later. Without allocation, an order for the same item that can be shipped in the next day or two will grab the quantity, possibly leaving a shortage to fill the other order when the release date comes up.

You may counter that allocation doesn’t matter because you don’t allow a sale if quantity is not available. However, without locking the bin location, especially if the item may be found in multiple bins- there is no easy audit to determine what goes wrong when the computer indicates there is stock on hand but the order cannot be filled.

Furthermore, some businesses do permit items to be sold even when there is zero or negative available and will hold the order until the item has been restocked. With order allocation, the items are locked in for specific orders and orders entered when stock is not available will have to wait. The downside is that you may be protecting an order that has a customer requested hold date for a few weeks.

Order allocation is not a standard feature in most accounting
software systems and may require customization.

 

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Multiple Bin Inventory

Some businesses require assignment of multiple bins to an item number and to track quantity in each.  However, not all accounting software packages have this feature built into them. The decision maker needs to weigh the cost of canned software that does not have multiple bin inventory tracking against the expense of paying for modifications to an accounting software package that permits enhancing the programming code.

Issues related to multiple bins-

1) Physical inventory count processing must be enacted for each bin of an item.

2) Receiving an item into stock must be recorded to specific bins for that item.

3) A sales order may need to be allocated from each specific bin. The bins appear on the picking slip document so that the warehouse person knows how much to pull from each one. When order is shipped, quantity must be relieved from each specific bin.

 

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Why Cost of Sales Can Go Wrong

It is typical in accounting software for the cost of sales to be assigned at the time the invoice by taking the fifo or oldest purchase or build cost of the item still in stock. This presumes that there is a legitimate item in inventory with a valid unit cost.

Where this can go wrong is when the item being sold is not in stock because the receipt of the item is delayed from being entered into inventory. The system then has to decide on a backup strategy to assign the cost of sale. It is either the last cost or possibly the average cost. It should be set in the system option for one or the other but not left as an arbitrary choice. Inconsistent profit reporting will result if the average or last cost is significantly different than the fifo cost.

What happens if this is the first time the item is being sold and there is no last or average cost?  (Its receipt has not been entered into the inventory on time.) In this case, the cost of sale will be recorded as zero. This will also result in a false sense of profit in the general ledger.

Procedure and discipline should be put into place to not allow an item to be invoiced if there is no quantity on hand or no assigned cost to it in inventory. This may require a bit of customization to the software. If you are using accounting software that does not allow modification, then you must be aware of this issue and not be surprised when it happens. You must also be prepared to have access to reporting that lets you find where zero cost of sales has been assigned as well as when the cost appears to be out of line with the expected cost of sales.

In some situations, the cost of an item may be irregular because it is an item built using a bill of materials. One of the components may not have a correct cost or be out of stock but the work order is still permitted to be generated. The production person may be aware that the raw material is available and ignores its status in the computer. Again, there must be a procedure and discipline to avoid this in order to maintain true inventory costs.

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Bill of Material Options

Two typical options for implementing Bill of Material into an accounting system:

  1. Full-blown MRP (Material Resource Planning) and Work Order system.
  2. After-the-fact Bill of Material module

Option 1- the full-blown solution- can cost into the thousands and requires properly disciplined production personnel to utilize and work the system.

Option 2- an inexpensive solution where material production and maintenance is kept outside the accounting system. In the accounting system, you enter a build assembly record that a quantity is produced after the item is put together . It doesn’t matter if the item is a final or sub-assembly. The computer will subtract the raw components from stock, add the new assembly to stock and calculate the cost of the item by taking the extended cost of each raw component plus optionally assigned overhead and labor costs.

With option 2, the computer will advise you if there is enough raw components to build the item even if it has already been done. If you receive a warning that there is a shortage of a component, it is most likely that the stock on the component is not being properly maintained in the computer. So even if the manufacturing process is being handled outside the accounting system, there still is a check and balance for accuracy in inventory control.

Cost between the two options alone shouldn’t drive your choice. If you have the resources to install the MRP and work order system, you must also have the right personnel willing to and/or capable of maintaining it.

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Accounts Payable Bill Payment Reporting

An accounting software system should allow for these two ways to determine which open invoices to pay:

Cash Flow and Aging.

1) Cash Flow Reporting lists open invoices based on selected periodic intervals based on due date cutoffs.  In other words, how much money is obligated to be used to pay invoices in one week, in two weeks, etc.

The report shows if discounts are taken or lost when paid by the cutoff date. Let’s say you are given a two percent discount when paid by a certain date. It will show up on the cash flow report as a savings if within the selected cutoff date and a loss of discount if paid after that cutoff date.

2) The Aging Report ignores discounts. It ignores due dates. Instead, it looks at how long an invoice is unpaid based on the original invoice date. Those who use this method most likely look at the typical thirty day cycle of cash in and out as more important than taking advantage of discounts and when the vendor wants to be paid.

Those who use the Cash Flow Report to decide which invoices are paid are not as concerned with the thirty day cycle but rather take advantage of discounts as well as maintaining a steady cycle of paying bills.

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Accounts Payable Invoice Payment Options

A computerized accounting software system should consider that:
1) bills may be paid up front as well as on a scheduled basis;
2) there must be protection against paying a bill before its time;
3) not all payments are the result of a printed check.

When entering an AP invoice, there should be an option to
record that it has already been paid or to be able to print a
check while entering it. There should also be an option to
subsequently reflag an open invoice as already paid to avoid
accidentally printing a check for it.

The best method to protect against paying an invoice not intended
until later is to mark it when it goes into the open invoice file as
HELD. Subsequently, there should be a maintenance routine that
allows the user to reflag selected invoices as RELEASED and only
print checks for the RELEASED invoices.

Not all invoices need to be printed. Some payments are made
electronically. A good accounting software system should provide
the option to generate an ACH formatted file that will be accepted
by the bank as an advisory to remit payment to the vendor.

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EDI Implementation Choices

Today, just about anyone who wants to sell to a mass retailer is required to implement EDI , Electronic Data Interchange, to communicate with their trading partner. EDI has been around for a long time. In the 1970s it emerged as the electronic option of choice for railroad piggyback freight forwarders to track where their rail cars were at any given moment. By the 1980s it morphed into system-wide acceptance by major retailers for use as advance shipper notices, purchase orders and invoices.

Pricing Components:
1. Fee charged per transaction/document.
2. Monthly fee for maintaining an electronic mailbox or VAN for sending and receiving docuements.
3. Some solution providers also charge for the number of bytes sent.

Method of Access:
In-house EDI transalation software vs. Web-based document form service.

Translation software may cost a few thousand dollars to install and set up bridges to existing accounting software. It gives you control of both inbound and outbound documents in a way that eliminates the locked in procedures for web-based
forms.

With web based forms, you will still need to program how to take data in and out of your accounting system with the push of a button rather than enter the information twice. Having an in-house EDI translator makes the process more seamless after the required enhancements are programmed.

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Work Order Processing Decisions

A manufacturing business uses work orders whether it is generated manually or using software. When manual, pieces of paper documents are passed from one factory area to another to identify the process being performed, the end product and the quantity. If the foreman or a salesperson wants to know the status of the production, he or she has to chase around to find out where it is, what has been done so far and when it will all be ready.

In the computerized model, as the paperwork travels in stages to its final destination, someone records its status. The foreman or salesperson simply checks its status using the designated software.

Some items are built for stock, others for specific customer orders. Those that need a faster track to finished production status can be a dilemma to the decision maker on the method to speed up the process.

Should a customer order for an item that needs to be produced automatically trigger the creation of a production work order? Or should it trigger a report that helps a factory worker decide to create the work order?

If a sales order triggers an automatic work order it may cause issues related to being able to produce the item especially if raw material is allocated for previously generated work orders. If a work order is only generated when human interaction decides so, then the business is reliant on properly trained workers to make the proper decision making on a timely basis.

There is also a third choice- no automatic linkage of work orders to sales orders and no manual assignment of work order. Instead, Manufacturer Resource Planning (MRP) is used to evaluate how many of an item is required for production based on commitments and prior sales along with how much raw material is available in stock. Even if MRP is performed once a week, it may still delay delivery of a customer order but it keeps workflow disciplined.

Or maybe a business uses all three options depending on the situation. The decision maker at a manufacturer type business establishes the policy rules for production and relies on computer support personnel to help achieve the results that works best for them.

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FIFO vs LIFO Costing of Inventory

Computerized accounting systems allow one to choose the method of costing inventory. The two most common methods are FIFO (first in, first out) and LIFO (last in, first out).

Most businesses utilize FIFO as it represents the truest evaluation of inventory. Every time an item is received into stock, the computer stamps the date and unit cost. It keeps track of it until the quantity received at that date stamp has been exhausted. If one receives stock of the item multiple times before it is sold or used in the manufacturing process, one will be able to see the variations on the cost of items on hand from purchase to purchase. When one sells the item, it will use the oldest time stamp to relieve from inventory and assign the cost of that purchase as the cost of sale.

For example: item XYZ sells for 5.00 each. The oldest date stamp
still in stock shows it is purchased at a cost of $3.00 each. There may be more recent purchases at $3.25 each, but the cost of goods sold for the sales transaction is $3.00 when using FIFO. Even if the cost is higher on the older dated transaction than on more recent purchases, it still uses the oldest date still in stock.

On an inventory valuation report, the extended total of all dated records for an item that correspond to what is on hand is its value when using either the FIFO or LIFO method. If using average cost method, the computer will grab the calculated average unit cost and extend it against the on hand to determine its valuation. This reporting method is useful when looking more at the big picture than exact numbers.

LIFO is used by some businesses who determine that the recent cost of an item reflects the most reasonable value especially in times of inflationary price pressure. The IRS, however, does not allow a business to switch back and forth between LIFO and FIFO to suit their pleasure.

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