Lean Accounting: Steps to Producing Financial Statements
The accounting department is responsible for many activities, but its best-known products are the financial statements. The financials contain time-critical information, so it is of considerable importance to issue them as soon as possible after the end of an accounting period. A controller who is intent on achieving a lean accounting department might cut back on departmental funding to such an extent that it takes longer than normal to issue financial statements. This would be a mistake, for the information in the financial statements is of great value, and the utility of that information degrades the longer its issuance is delayed. Consequently, our definition of “lean” must change when dealing with financial statements. Instead of using minimal resources, a lean accounting department must focus on lean timing – that is, issuing financial statements as rapidly as possible.
Most controllers have arrived at a reasonable set of processing steps that eventually yield an accurate set of financial statements. The exact steps required will vary by type of business, but the basic process flow is:
- Invoicing. As soon as the accounting period has been completed, obtain all remaining shipping documentation from the shipping department and issue invoices to customers. If the company bills for services, then contact employees to enter their billable hours into the timekeeping system, and wait for them to do so before issuing invoices. In the latter case, this may require a delay of several days before invoices can be issued.
- Cost of goods sold. Either conduct a physical count at month-end (under the periodic inventory system) or derive ending inventory from a month-end inventory report (under the perpetual inventory system). In either case, compare the resulting cost of goods sold to revenue for reasonableness, and investigate the ending inventory information if the gross margin varies significantly from historical results.
- Bank reconciliation. Upon receipt of the period-end bank statement, conduct a bank reconciliation and book any differences to the company’s accounts.
- Accrue payables. If suppliers have not submitted invoices after a few days have passed, accrue expenses for the amounts estimated to be on those invoices, and set them to automatically reverse in the following period.
- Calculate depreciation. Once the accounts payable portion of the closing process has been completed, update the fixed asset records with any fixed assets that were purchased (or disposed of) during the period, and calculate and record depreciation.
- Accrue payroll. Wait for hours worked to be recorded by all employees through the end of the reporting period. If there were any unpaid hours as of the end of the period, accrue an expense for these hours, and set the entry to automatically reverse in the following period.
- Update reserves. After sales, accounts receivable, and inventory have been finalized, review all related reserve accounts (such as for sales returns, doubtful accounts, and obsolete inventory) to see if they require adjustments.
- Reconcile accounts. A prudent controller will at least examine the contents of the larger balance sheet accounts, to ensure that nothing should have been charged to revenue or expense in the period. This may call for the comparison of detailed reports to the accounts, such as the reports for accounts receivable, accounts payable, and fixed assets.
- Review financials. Print the financial statements and review them for errors. At a minimum, there are likely to have been entries that were made into the wrong accounts, which will require adjusting entries. Several iterations of this step may be necessary.
- Accrue taxes. If the financial statements appear to be correct, accrue income taxes if there are taxable earnings.
- Create disclosures. If the financial statements are to be distributed outside of the company, add any disclosures mandated by accounting standards. If the company is publicly held, then also calculate earnings per share and add this information to the financials.
- Distribute financials. Issue the financial statements to the distribution list. In many organizations, different reports may be issued to each person on the list. For example, the company president receives the entire financial statement package, while the sales manager receives just the income statement and a detailed report on the expenses incurred by the sales department – and so on.
- Close the period. Most accounting software packages require that an accounting period be formally closed in the accounting records and the next period opened. Doing so ensures that the transactions related to the next period will not be inadvertently recorded in the wrong period.
This excerpt was pulled from Steven Bragg's course The Lean Accounting Guidebook.
by Sue Anderson - Based on 30 years of experience in continuing education for accountants. Currently program director for online CPE provider, CPE Link. Formerly with the California CPA Education Foundation managing key operational areas including marketing, program development, and distance learning.