Are you a controller or accountant of a company and fear the dreaded list of adjusting entries you receive at the end of the audit that you are required to make?  Here are five adjusting entries you can avoid and how to avoid them.

1. Balancing retained earnings

This entry generally comes about when entries are made after your back up is sent to your accountant.

Key ways to avoid:

  • Do not record any more entries to your accounting software once you’ve sent the records to the accountant. If you need something recorded contact your accountant.
  • Never post to the retained earnings account unless requested by your accountant. 

2. Entries to adjust accounts receivable/payable

This entry generally comes about when the balance in your GL does not agree to your accounts receivable/payable listings generated from your accounting software.

Key ways to avoid:

  • Run listings of your A/R or A/P monthly to ensure they match the balance on the GL. The sooner you catch any discrepancies, the easier it is to correct them. At a minimum, run the listings prior to sending your accountant the back up at year end.
  • Never post directly to these accounts. Always use the receivables or payables modules. General journal entries can cause discrepancies in these accounts if the modules are not used.

3. Prepaids adjustments

This entry occurs when an organization pays for an expense that benefits them for a period that extends beyond their year end date. Most common is your insurance or major memberships or dues.  Your accountant will most likely have a prepaid expenses schedule that indicates which expenses they adjust. You can request this at any time and record the entries yourself, either monthly or at year end. 

Key ways to avoid:

  • Request the schedule from your accountant and record monthly entries.
  • Always review at year end and reconcile to what is showing in your GL.

4. Capitalizing expenditures

This entry occurs when the auditor identifies an item that was recorded as an expense by the client, but that meets the definition of an asset. An organization’s capitalization policy helps determine when an expenditure is capitalized instead of being expensed.

Key ways to avoid:

  • Talk with your accountant to determine the capitalization policy of the organization (typically larger value items that have a useful life greater than 1 year).
  • At year end, review the major expenses incurred to determine if any of them should have been recorded as capital assets instead of expenses.
  • If you are ever unsure just give your accountant a quick phone call and ask their advice.

5. Interest on long term debt

This entry generally comes about when the full amount of loan payments are recorded to the loan account without separating out the interest portion.  Most loan statements will indicate the interest portion and if not, your accountant will have a loan amortization schedule you can follow.

Key ways to avoid:

  • Using monthly statements to record loan payments and reconcile monthly.
  • Or at minimum obtain a loan statement as at the end of the fiscal year and agree the loan balance on the statement to the loan balance on your general ledger before sending in your back up.

Following these key steps will allow you to shorten that dreaded long list of adjustments that comes at the end of your audit.  Key thing to remember if you are ever unsure, ask your accountant, they are here to help. 

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