Accounting Policies and Procedures Guide

Accounting Policies and Procedures Guide
2013 Edition
Copyright 2012 Bybee & Company, CPAs, PLLC

This book or parts thereof may not be reproduced in another document or manuscript in any
form without the permission of the publisher.
ii
Accounting Policies and Procedures Guide

Table of Contents
TAB
DESCRIPTION
PAGE
100
INTRODUCTION TO SMALL BUSINESS ACCOUNTING.................................................. 1-1
200
OVERVIEW OF THE ACCOUNTING PROCESS ............................................................... 2-1
300
PROCESSING SALES AND RECEIPTS............................................................................ 3-1
400
PROCESSING PURCHASES AND PAYMENTS ............................................................... 4-1
500
PROCESSING PAYROLLS ............................................................................................... 5-1
600
MAKING ACCOUNTING ADJUSTMENTS ......................................................................... 6-1
700
MAINTAINING THE GENERAL LEDGER .......................................................................... 7-1
800
PREPARING FINANCIAL REPORTS ................................................................................ 8-1
iii
iv
Introduction to Small Business Accounting
Table of Contents
Section
Description
Page
100
INTRODUCTION .................................................................................................... 1-1
105
WHO ARE THE ACCOUNTING STAFF? ............................................................. 1-1
110
WHAT DOES THE GUIDE COVER? ....................................................................... 1-2
115
HOW SHOULD THE GUIDE BE USED? ................................................................. 1-3
TOC 1-1
TOC 1-2

o
WHO ARE THE ACCOUNTING STAFF?
WHAT DOES THE GUIDE COVER?
HOW SHOULD THE GUIDE BE USED?
100 INTRODUCTION
100.01 Accounting staff are vital to the success of accounting departments of small to midsized companies. Yet, minimal guidance and few tools exist to help the typical staff persons
perform their duties. In most cases, employees are forced to develop their skills by trial and
error and constant on-the-job training, otherwise referred to as the school of hard knocks. This
approach generally leads to periods of frustration before staff persons finally become proficient
in their job.
100.02 This Guide provides the practical guidance to help fill this void. It provides how-to
guidance and numerous practice aids (workpapers, forms, and checklists) to help staff persons
master the various accounting tasks in small to mid-sized companies. The Guide focuses not
only on the day-to-day processing of accounting transactions (such as sales and receipts,
purchases and disbursements, and payroll) but also on monthly, quarterly, and annual tasks
such as general ledger closings.
100.03 This chapter introduces the Guide by answering the following three questions:
Who Are the Accounting Staff?
What Does the Guide Cover?
How Should the Guide Be Used?
105 WHO ARE THE ACCOUNTING STAFF?

105.01 In a small to mid-sized company, the accounting staff represents those persons
handling the accounting departments day-to-day activities. The term generally encompasses
all accounting department personnel below the controller level, including data entry personnel,
accounting clerks, and degreed and nondegreed accountants. In companies with small
accounting staffs, the controllers or head bookkeepers duties also frequently fall under the
umbrella of the accounting staffs role. The accounting staff individuals are crucial to properly
carrying out the traditional accounting functions of the department.
110 WHAT DOES THE GUIDE COVER?

110.01 This Guide covers the full range of the accounting staffs duties in the typical small to
mid sized company. It provides guidance on how to process the day-to-day transactions, close
the general ledger, and prepare financial reports. The following presents an overview of each
of the chapters.
1-1
1-2
Chapter 2: Overview of the Accounting Process. This chapter summarizes the

key elements of the accounting process. It discusses the types of source
documents, the day-to-day transaction processing covered in Chapters 3 through
5, and basic internal controls. This chapter is intended to give accounting staff a
big picture of the accounting process before jumping into the more detailed
discussion in the rest of the Guide.
Chapter 3: Processing Sales and Receipts. This chapter discusses the various
steps required to process sales invoices and cash receipts. The cash receipts
discussion addresses processing of both mail receipts and over-the-counter
receipts. The chapter also covers various period-end activities, such as reconciling
the bank accounts and the subsidiary ledger.
Chapter 4: Processing Purchases and Payments. This chapter provides

detailed guidance on processing vendor invoices, recording the invoices in the
accounting system, making the payments, and performing period-end
reconciliation and cutoff procedures. The chapter addresses common problem
areas, such as obtaining invoices from the various departments, obtaining
payment approvals, dealing with 1099 forms, and assigning proper general ledger
account codes.
Chapter 5: Processing Payrolls. This chapter begins by providing guidance on

obtaining key payroll information and computing wages. It then covers the steps
required to process each periods payroll. The last three sections address specific
monthly, quarterly, and annual payroll activities (including filing payroll tax reports)
that must be completed.
Chapter 6: Making Accounting Adjustments. The previous three chapters cover

the processing of day-to-day transactions. This chapter provides guidance on
preparing common period-end journal entries needed to put the accounting
records on a GAAP (generally accepted accounting principles) basis. It illustrates
and explains the debits and credits relating to recording cost of sales, making
accrual entries, adjusting asset valuations, recording depreciation expense, and
various other entries.
Chapter 7: Maintaining the General Ledger. This chapter builds on the previous
four chapters. After day-to-day transactions (Chapters 3 through 5) and various
adjustments (Chapter 4) have been posted to the general ledger, accounting
personnel are ready to complete the general ledger closeout. It shows how to
prepare key general ledger supporting workpapers, review the general ledger, and
protect and store files and records.
Chapter 8: Preparing Financial Reports. This chapter provides guidance on

generating the basic monthly financial statements and modifying the format and
presentation of the financial statements. It also shows how to prepare selected
other management reports, such as the owners weekly flash report and the
weekly cash flow report.
115 HOW SHOULD THE GUIDE BE USED?

115.01 This Guide contains in-depth guidance on all key aspects of the accounting department.
Because of the breadth of the materials and level of detail, it will generally not be read from
cover to cover. Instead, it will most often be used on an as-needed basis as situations arise. As
such, the Guide should be kept in an area within the accounting department that is visible and
accessible by all accounting staff. Some common expected uses for the Guide include the
following:
Addressing day-to-day questions. The Guide will frequently be used as a

reference tool to answer accounting staff questions as they arise. For example, the
accounts receivable staff person may need answers on how to handle exceptions
encountered while processing cash remittances or auditing the daily cash register
report. The accounting manager may have questions on when and how to file
various government reports, such as payroll tax returns and sales tax returns. The
detailed table of contents in each chapter allows easy answers to accounting staff
questions.
Improving key functions. The Guide may also be used to improve key functions
within the accounting department. The staff person responsible for certain
functions, such as processing vendor invoices or closing the general ledger, would
simply read the related chapter topic and compare the guidance with the
companys existing procedures. Any proposed recommendations should then be
brought to the controllers attention.
Cross training the accounting staff. The controller may use the Guide to cross
train staff to handle additional areas. This cross training will make it easier for staff
to take scheduled or unscheduled time off since one or more other staff persons
can help out temporarily.
Training new staff. The Guide may be used to help select and train staff that are
new to a particular function within the accounting department. The guidance will
ensure the staff person receives a proper foundation. Once the basic foundation is
set, the new person will better understand why and how to carry out the companys
policies and procedures in that area.
Learning new skills. Accounting staff sometimes become bored and complacent
because they work year after year in a single area with little challenge or
opportunities for improvement. The Guide can help those individuals expand their
accounting skills to prepare them for handling new accounting opportunities within
the company.
Each of the above uses for the Guide will eventually make the accounting staff as a whole more
knowledgeable and confident concerning the operations of all aspects of the accounting
department.
1-3
1-4
Overview of the Accounting Process
2
Table of Contents
Section
Description
Page
200
INTRODUCTION ................................................................................................... 2-1
205
TYPES OF FINANCIAL RECORDS........................................................................ 2-1

.03
.04
.08
.10
.13
210
2-6
2-6
2-7
2-8
2-9
2-10
Segregation of Duties ....................................................................................

Restricted Access ..........................................................................................
Document Controls ........................................................................................
Processing Controls .......................................................................................
Reconciliation Controls ..................................................................................
2-11
2-11
2-12
2-12
2-13
BOOKKEEPING SKILLS EVALUATION ................................................................. 2-13

.04
.06
225
Sales, Accounts Receivable, and Cash Receipts ...........................................

Purchasing, Accounts Payable, and Cash Disbursements .............................
Payrolls ..........................................................................................................
Inventories and Cost of Sales ........................................................................
Fixed Assets and Depreciation.......................................................................
General Ledger and Financial Statements .....................................................
BASIC INTERNAL ACCOUNTING CONTROLS ..................................................... 2-11

.03
.06
.08
.10
.11
220
2-3
2-3
2-4
2-5
2-5
PRIMARY ACCOUNTING PROCESSES ............................................................... 2-5

.02
.04
.06
.08
.11
.13
215
Source Documents ........................................................................................

Summary Journals .........................................................................................
Subsidiary Ledgers ........................................................................................
General Ledger ..............................................................................................
Financial Statements .....................................................................................
Reference Checking ...................................................................................... 2-13

Pre-employment Testing ................................................................................ 2-14
SUMMARY ............................................................................................................. 2-14
TOC 2-1
TOC 2-2

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TYPES OF FINANCIAL RECORDS
PRIMARY ACCOUNTING PROCESSES
BASIC INTERNAL ACCOUNTING CONTROLS
BOOKKEEPING SKILLS EVALUATION
200
INTRODUCTION
200.01 Understanding the overall accounting process is often crucial to the success of any
small business accounting function. For full-charge bookkeepers and accounting staff who work
with multiple accounting areas, getting a big picture understanding is essential. Even
accounting staff who work primarily in one or two areas, such as accounts receivable or
inventory, should have a basic idea of how their area interacts with others.
200.02 This chapter provides a broad overview of the small business accounting process. The
following sections are covered:
205
Types of Financial Records. Section 205 briefly discusses the five

types of financial records (source documents, summary journals,
subsidiary ledgers, general ledger, and financial statements) used in
most small businesses.
Primary Accounting Processes.

Section 210 covers the six
accounting processes found in most small businesses, consisting of (1)
purchasing, accounts payable, and cash disbursements; (2) sales,
accounts receivable, and cash receipts; (3) payroll; (4) inventories and
costs of sales; (5) fixed assets and depreciation; and (6) general ledger
and financial statements.
Basic Internal Accounting Controls. Section 215 provides a brief

overview of the basic small business internal accounting controls.
Bookkeeping Skills Evaluation. Section 220 provides guidance to help

accounting managers and supervisors evaluate basic bookkeeping skills
before making a hiring decision.
TYPES OF FINANCIAL RECORDS

205.01 The accounting system in each company is responsible for distilling the hundreds or
thousands of monthly transactions into a manageable format (i.e., the month-end general ledger
and financial statements). The monthly financial transactions in most small businesses start with
one or more source documents (such as invoices, cash receipts, and time cards), which are
2-1
summarized throughout the month and posted to specified general ledger accounts. The ending
monthly general ledger balances are then used to generate the companys financial statements.
205.02 Exhibit 2-1 presents an inverted pyramid to show how the various source documents
and other financial records are processed throughout each period to produce the companys
month-end financial information. The following paragraphs briefly discuss the types of financial
records shown in Exhibit 2-1 and the accounting departments involvement with the records.
Exhibit 2-1
2-2
Flow of Basic Accounting Records
Source Documents
205.03 Each accounting transaction begins with some type of source document, which differs
depending on the type of transaction. The source documents that account for most financial
transactions include:
Purchases. Vendor invoices and supporting documentation, such as

purchase orders, packing slips, and receiving reports, are the primary
source documents for purchases of inventory and various other goods
and services.
Sales. Customer sales invoices and supporting documentation, such as

sales orders and shipping documents, are the primary source documents
for recording sales transactions for companies other than retailers. Cash
register tapes, cash receipt forms, and daily cash-register reports are the
primary source documents for most small retail businesses.
Cash receipts. Remittance advices and deposit slips are the primary
source documents for recording cash received from customers on credit
sales. For retailers and other companies that do not extend credit to
customers, the cash receipt source document also serves as the sales
document.
Cash disbursements. Company checks (accompanied by previously

approved vendor invoices and other documents supporting the
purchase) are the primary supporting document for recording cash
disbursements.
Payroll. Time cards, time reports, or other documents showing time

worked by employees are the primary supporting documents for
recording payroll costs. Payroll checks are the primary documents
supporting the payment of payroll costs.
Whenever possible, appropriate controls (such as using prenumbered source documents)
should exist to help ensure that all transactions are captured and recorded. Section 215 briefly
discusses some basic internal controls that small businesses should consider.
Summary Journals
205.04 Once individual transactions have been captured on source documents, the
accounting system summarizes them by transaction type and general ledger accounts using a
chart of accounts and summary journals. The companys chart of accounts identifies specific
general ledger account numbers for recording the various financial transactions. Once
transactions have been coded with the appropriate general ledger account numbers, the
amounts are grouped together for general ledger posting using summary journals.
205.05 Each of the basic types of source documents discussed previously usually has a
separate summary journal. Thus, summary journals generally include:
a. Purchases journal.
b. Sales journal.
2-3
c. Cash receipts journal.

d. Cash disbursements journal.
e. Payroll journal.
205.06 Each of the journals generally include individual transaction amounts or quantities
(and selected other key source document information) and an aggregate general ledger posting
amount. Depending on the type of accounting system, the summary journal information may be
presented in a single report or more than one report. For example, some systems present
detailed source document information (such as customer name, customer number, amount
received, and date) in a detailed batch-level report. The system then summarizes the
information for each batch and transfers it to a separate report for posting to the general ledger.
205.07 Thus, summary journals not only provide a trail showing amounts posted to the
general ledger, but they also show the detailed components making up each general ledger
posting. This detail makes it easier for accounting personnel to locate original source
documents when questions arise at a later date.
Subsidiary Ledgers
205.08 As the system posts summary journal totals to the general ledger, most systems also
generate subsidiary ledgers for selected balance sheet accounts, such as accounts receivable,
inventory, property and equipment, and accounts payable. These subsidiary ledgers show the
composition of ending general ledger account balances as follows:
a. Accounts receivable. The accounts receivable subsidiary ledger (often
called the aged trial balance) typically shows the balance owed by
customer. Amounts owed are typically divided into a current column and
several past due columns.
b. Inventory. The inventory subsidiary ledger typically lists the quantity,
unit cost, and extended cost of each inventory part number. (Because of
the time required to maintain an inventory subsidiary ledger, some
smaller companies do not maintain an ongoing subsidiary ledger.
Instead, they periodically prepare an inventory listing by counting the
inventory on-hand.)
c. Property and equipment. The property and equipment subsidiary
ledger shows the ending asset and accumulated depreciation balances
for each fixed asset. The subsidiary ledger may also show the current
depreciation charge for each asset.
d. Accounts payable. The accounts payable subsidiary ledger lists the
balance due each vendor by invoice. Depending on the system, the
ledger may also be segregated by the payment due date.
205.09 Subsidiary ledgers are the key financial records used for managing each of these
balance sheet accounts on a day-to-day basis. Thus, it is crucial that accounting staff persons
post individual transactions accurately and on a timely basis to ensure that the subsidiary
ledgers remain useful and in agreement with the related general ledger balances.
2-4
General Ledger
205.10 As mentioned previously, summary journals group amounts by general ledger
accounts so the system can post and update the general ledger. Accounting personnel also
update the general ledger by preparing manual journal entries for transactions (such as prepaid
amortization or period-end accruals) that are not accumulated and posted automatically through
summary journals.
205.11 The general ledger lists the period-end balance for each general ledger account.
Depending on the type of general ledger system, it may also show month-to-date or year-todate activity totals posted to each general ledger account.
205.12 General ledger accounts are comprised of assets, liabilities, and equity accounts
(called balance sheet accounts) and revenue and expense accounts (called income statement
accounts). For the general ledger to be in balance, the periods total debits must equal the
total credits. Also, the revenues less expenses must equal the net income added to retained
earnings.
Financial Statements
205.13 Financial statements simply represent a further summarization and grouping of
period-end general ledger amounts into designated financial statement captions (such as cash,
trade receivables, inventories, trade payables, revenues, and cost of sales). The accounting
softwares report writer package defines which general ledger accounts are grouped into which
financial statement captions.
205.14 Common financial statements include a balance sheet, income statement, and
statement of cash flows. The balance sheet and income statement are taken directly from the
corresponding general ledger accounts. The cash flow statement is typically derived from the
balance sheet and income statement.
210
PRIMARY ACCOUNTING PROCESSES

210.01 Accounting activities generally fall into one of several natural accounting processes
(or cycles). Accounting personnel may be responsible for all or only a part of a cycle. In either
case, it is important that they have at least a basic understanding of the complete cycle. Primary
cycles include:
Sales, accounts receivable, and cash receipts.
Purchasing, accounts payable, and cash disbursements.
Payrolls.
Inventory and cost of sales.
Fixed assets and depreciation.
General ledger and financial statements.
2-5
Each cycle is briefly discussed below.

Sales, Accounts Receivable, and Cash Receipts
210.02 This process or cycle consists of selling goods or services and receiving payment
from customers. The accounting departments role in this process generally consists of the
following activities:
Data entry (invoices). Entering the sales invoices (including any debit
or credit memos) into the accounting system to produce the sales
journal.
General ledger posting (invoices). Posting the sales journal to the

aged trial balance and the applicable general ledger accounts (debit to
accounts receivable and credit to sales).
Data entry (customer remittances). Applying customer payments

against applicable open sales invoices to produce the cash receipts
journal.
General ledger posting (remittances). Posting the cash receipts

journal to the aged trial balance and the appropriate general ledger
accounts (debit cash and credit accounts receivable).
Reconciliation. Keeping the aged trial balance in balance with the

ending general ledger balance.
Account maintenance. Setting up new customer accounts and credit

limits and deleting/changing existing accounts.
Chapter 3, Processing Sales and Receipts, discusses this process in more detail.
210.03 A crucial part of this process is ensuring that invoices, remittances, and any
adjustments are posted accurately and on a timely basis. If the timing is delayed or transactions
are posted inaccurately, the aged trial balance will become unreliable for managing receivables,
customer complaints will become common place, and financial statement accuracy could
diminish.
Purchasing, Accounts Payable, and Cash Disbursements
210.04 This process or cycle consists of the purchase of goods or services and the
subsequent payment of those goods or services. The accounting departments role in this
process generally consists of:
Account coding. Ensuring that vendor invoices have been coded with
the appropriate general ledger account numbers based on the approved
chart of accounts. Proper account coding requires accounting personnel
to have a strong understanding of the companys chart of accounts.
2-6
Data entry (invoices). Entering the vendor invoice amounts (including

any debit or credit memos) into the accounting system to produce the
purchases journal.
General ledger posting (invoices). Posting the purchases journal to the
accounts payable subsidiary ledger and the various general ledger
accounts. For instance, recording a debit to the appropriate asset
(inventory or fixed asset) or expense accounts and a credit to accounts
payable.
Check preparation. Selecting invoices to pay and preparing checks for
paying specific vendor purchases to produce the cash disbursements
journal.
General ledger posting (checks). Posting the cash disbursements
journal to the accounts payable subsidiary ledger and the general ledger
(debit to accounts payable and credit to cash).
Reconciliation. Keeping the accounts payable subsidiary ledger in
balance with the ending general ledger balance.
Account maintenance. Setting up new vendor accounts and deleting old
accounts.
Chapter 4, Processing Purchases and Payments, provides in-depth discussion of this process.
210.05 Ensuring that vendor invoices have been recorded accurately and coded with the
appropriate general ledger account numbers are crucial steps in this process. Any undetected
errors at this stage could affect vendor payments, financial statement accuracy, and tax return
amounts. Thus, accounting personnel should exercise great care at this stage and follow
established internal controls (see Section 215).
Payrolls
210.06 The payroll process consists of processing payrolls and remitting amounts due to
employees, government, and others (health insurers, retirement plan trustees, etc.). The
accounting departments role in this process generally consists of the following activities:
Time cards processing. Checking mathematical accuracy of time

cards.
Data entry. Entering time distribution by employee, including hours

worked, time off, and overtime hours into the accounting system to
produce the payroll journal.
General ledger posting (payroll). Posting the payroll journal to the

general ledger. For example, debit compensation expense and credit
liability accounts for net payroll and payroll taxes.
Check preparation. Preparing and distributing employee payroll checks

to produce the payroll check register.
2-7
General ledger posting. Posting the payroll check register to the

general ledger. For example, debit liability accounts and credit cash.
Tax reports preparation and deposits. Preparing payroll tax reports

and making required tax deposits to state and federal agencies.
Account maintenance. Setting up new employees, deleting terminated

employees, changing pay rates and tax rates, revising employee
withholding amounts, etc.
Chapter 5, Processing Payrolls, covers all aspects of this process in great detail.
210.07 Preparing timely and accurate paychecks is obviously important to accounting
personnel, since to do otherwise will often bring an immediate response from affected
employees. Also, failing to file accurate and timely payroll tax reports subjects the company and
key employees (possibly even some supervisory accounting personnel) to tax penalties.
Inventories and Cost of Sales
210.08 The inventory and cost of sales process consists of properly accounting for incoming
and outgoing inventory. The extent of the accounting departments involvement in this area
varies greatly with the nature of the companys business (retailer, wholesaler, or manufacturer)
and the type of inventory accounting system. In many small businesses, CPAs (both internal
and external) are heavily involved in this area because of its complexity and importance to the
businesss success.
210.09 The accounting departments role in this process generally includes:
Data entry (purchases). Entering inventory purchases is typically done
as part of the purchasing process discussed in Paragraphs 210.04-.05.
In addition, posting the purchases journal typically updates the inventory
subsidiary ledger if one is maintained.
Cost of sales. As mentioned above, the method used to record cost of
sales varies greatly among small businesses. If a separate inventory
subsidiary ledger is maintained, cost of sales is often automatically
recorded by the accounting system (as part of the sales and accounts
receivable process) when customer sales are posted. If a separate
subsidiary ledger is not maintained, cost of sales is often recorded with a
manual journal entry at month end by applying an estimated cost of sales
percentage to sales for that month. In any event, accounting personnel
should ensure that all recorded sales have a matching recorded cost in
the same period.
Inventory transfers. Adjusting the detailed inventory records (if any) and
the general ledger for transfers of inventory between locations or the
disposal of excess, obsolete, or damaged inventory.
Reconciliation. Keeping the inventory subsidiary ledger in balance with
the ending general ledger balance.
2-8
Account maintenance. Setting up new inventory parts in the system and

changing part numbers of existing inventory items.
210.10 Accounting for inventories and cost of sales is a complex area that varies greatly from
one company to the next. Because most accounting staff personnel have minimal involvement
in this area, this Guide does not provide in-depth discussion of this process. Accounting staff
persons are encouraged to seek the advice and help of the controller or outside CPAs when
dealing with inventory and cost of sales accounting issues.
Fixed Assets and Depreciation
210.11 The fixed assets and depreciation process consists of recording fixed asset additions
and deletions and related depreciation. The accounting departments role in this process
generally includes:
Purchases. Recording fixed asset purchases in the general ledger is

typically done as part of the purchasing and cash disbursement cycle
discussed in Paragraphs 210.04-.05. Purchases are usually posted to
the general ledger by debiting the appropriate fixed asset account and
crediting accounts payable.
Subsidiary fixed assets ledger. If the companys fixed asset system is

integrated with the companys accounting system, the fixed asset
subsidiary ledger is generally updated at the same time fixed asset
purchases are posted to the general ledger. Otherwise, additions and
retirements typically must be reentered into a separate stand-alone fixed
asset/depreciation system.
Depreciation. Calculating and recording depreciation for each asset is

typically done by using an automated fixed assets/depreciation system.
However, companies with relatively few fixed assets sometimes use
manual or automated spreadsheets to track fixed assets and related
depreciation. In addition, those companies make a manual journal entry
to record the depreciation provision. Companies generally must make
separate depreciation calculations for tax purposes.
Retirements. Recording fixed asset retirements (sales, trade-ins, or

disposals) is typically posted to the general ledger via a manual journal
entry.
Although this Guide does not contain a separate chapter on fixed assets, aspects of the fixed
asset process are covered in various chapters throughout the Guide.
210.12 Accounting personnel have two primary challenges in the fixed assets and depreciation
area. They must ensure that the subsidiary fixed assets ledger stays in balance with the general
ledger control account and that depreciation calculations comply with financial statement rules
and ever-changing tax requirements.
2-9
General Ledger and Financial Statements

210.13 The general ledger process consists of posting the periods transactions to the general
ledger and preparing financial statements. The accounting departments role in this process
generally includes the following activities:
Posting summary journal entries. Entries from summary journals
(purchases, sales, cash receipts, cash disbursements, payroll, etc.) are
typically posted by the system throughout the month as batches of
transactions are processed.
Preparing manual Journal entries. Preparing and posting manual
journal entries varies depending on the type of entry. The entries may be
either recurring journal entries that must be made each month or
adjusting journal entries that are made as needed to correct any errors
that are detected.
Generating the trial balance. The trial balance is simply a numerical
listing of all general ledger accounts in account number order. Accounting
personnel generate the general ledger trial balance to ensure total debits
equal total credits.
Reconciling subsidiary ledgers and supporting workpapers. As
discussed previously, comparing general ledger control accounts with
subsidiary ledgers (accounts receivable, inventory, property and
equipment, and accounts payable) and any supporting workpapers (bank
reconciliation, investment schedule, prepaid expense schedule, etc.) is
crucial to ensuring the accuracy of the general ledger. Accounting
persons should investigate out-of-balance situations and prepare
adjusting journal entries when needed.
Closing out. Closing out the general ledger involves making an entry to
zero out all income statement accounts for the period (month or year) and
posting the offsetting entry to the balance sheets retained earnings
account. After making this entry, the balance sheet should be in balance
(in other words, assets should equal liabilities plus equity).
Producing the financial statements. Producing the financial statements
is done after the general ledger has been prepared and is in balance. As
mentioned in Paragraph 205.14, computer-generated financial statements
typically include a balance sheet and an income statement.
Chapter 7, Maintaining the General Ledger, and Chapter 8, Preparing Financial Reports,
provide in-depth discussion of the general ledger and financial statement process.
210.14 Accounting personnels main concern in preparing the general ledger and financial
statements is ensuring that all entries have been accurately posted. A careful review of the trial
balance and preliminary general ledger and a comparison to subsidiary ledgers and supporting
workpapers will often reveal additional adjusting journal entries that are needed to correct
errors.
2-10
215
BASIC INTERNAL ACCOUNTING CONTROLS

215.01 Although accounting staff persons are typically not directly involved with ensuring
appropriate internal accounting controls exist, a basic understanding of small business controls
is helpful in carrying out day-to-day duties. This knowledge will also help accounting staff
persons better understand why they are asked to perform certain procedures.
215.02 This section discusses the following general categories of internal accounting controls:
Segregation of duties.
Restricted access.
Document controls.
Processing controls.
Reconciliation controls.
Segregation of Duties
215.03 Segregation of duties involves allocating bookkeeping tasks among personnel so that
one individual does not have the ability to make an accounting error (either intentionally or
unintentionally) and also cover it up.
215.04 The principle of segregation of duties implies that the person with physical access to
cash or other moveable assets (investments or inventory) should not also be involved with the
related recordkeeping. For example, the person opening the mail and depositing customer
remittances should not also be responsible for maintaining the accounts receivable subsidiary
ledger. In addition, the person responsible for writing checks should not also have responsibility
for maintaining the accounts payable subsidiary ledger. Whenever possible, bank accounts
should be reconciled by someone with no other cash receipt or disbursement functions.
215.05 Unfortunately, the limited number of accounting personnel in most small businesses
often makes it difficult to adequately segregate incompatible duties. In this situation, the
services of other nonaccounting personnel, such as the receptionist or even the business
owner, can sometimes be used in a limited capacity to provide some segregation. Also, a closer
involvement in the day-to-day affairs by the small business owner and controller often partially
compensates for a lack of segregation of duties.
Restricted Access
215.06 Restricted access is a control category closely related to segregation of duties. Not only
should bookkeeping duties be segregated whenever possible, but physical access to valuable
and moveable assets should be restricted to only authorized personnel.
215.07 For example, access to warehouse and other inventory should be restricted to only
those people with responsibility for maintaining inventory. In almost all instances, salespersons
should not have access to inventory locations. Also, inventory should not be shipped from the
warehouse unless accompanied by appropriate shipping documents. In addition, unused
checks and petty cash should be kept in a locked filing cabinet in a secured area.
2-11
Document Controls
215.08 Since source documents initiate the recording of transactions, it is essential that
adequate controls exist to ensure that the accounting system captures all source documents.
Source document controls principally include using prenumbering documents and accounting
for the numerical sequence of those documents.
215.09 Common prenumbered source documents include company checks, receiving reports,
purchase orders, sales invoices, debit and credit memos, shipping documents, and customer
receipts for over the counter sales. For retail businesses, a cash register is another basic tool
for controlling cash receipt source documents and currency.
Processing Controls
215.10 Once documents enter the accounting system, processing controls help ensure that
the documents are processed accurately. Common processing controls include:
Batch controls. Preparing batch control totals of key source document
amounts to ensure the amounts are entered into the accounting system
accurately. For example, accounting persons may run an adding machine
tape of total remittances received from customers for the day. After
entering the remittances into the accounts receivable system, they
compare the adding machine tape total to the total generated by the
system to ensure all remittances were accurately entered.
Source document matching. Comparing information on the various
source documents to ensure they match. For example, this control might
include comparing quantities and part numbers on the receiving
reports/packing slips and purchase orders with the vendor invoice, and
comparing unit prices on the purchase order with the vendor invoice. For
customer shipments, this control might include comparing quantities and
part numbers on sales orders and shipping documents with customer
invoices, and comparing prices on sales orders and price lists with
customer invoices.
Clerical accuracy of documents. Checking the mathematical accuracy
of financial data on key source documents, such as vendor invoices,
customer invoices, and time cards. For example, accounting personnel
may recalculate the extended prices on invoices by multiplying the
quantity by the unit price.
General ledger account code checking. Checking to ensure that
amounts on source documents (such as vendor invoices) were coded
with the appropriate general ledger account numbers before entering
them into the accounting system.
Processing controls are designed to catch errors before they are posted to the general ledger.
2-12
Reconciliation Controls
215.11 Reconciliations consist of reconciling selected general ledger control accounts to
subsidiary ledgers. Thus, in contrast to processing controls, they are designed to detect errors
after transactions have been posted and the general ledger has been run.
215.12 Accounting persons commonly reconcile accounts receivable, property and equipment,
and accounts payable subsidiary ledgers. Inventory is also commonly reconciled if the company
maintains a perpetual inventory subsidiary ledger. Monthly reconciliations of bank accounts are
also essential controls over cash balances.
220 BOOKKEEPING SKILLS EVALUATION

220.01 Knowledge and ability are key factors to assess when hiring accounting personnel. If
the company is primarily looking for a data entry person, that persons bookkeeping knowledge
may be less important. However, if a company is seeking a full-charge bookkeeper, that
individual must grasp all aspects of the bookkeeping function. Properly matching the companys
needs with the applicants skills will greatly improve the success of the hiring process.
220.02 Applicants are identified through various sources, including referrals from employees,
customers, suppliers, and business associates; unsolicited applications; employment agencies;
and advertisements. The sources used depend on how quickly the position must be filled and
the companys past success in attracting applicants.
220.03 Once applicants have been screened and interviewed, their past experience and skills,
as presented on their resumes and disclosed during the interview process, should be verified.
Two common techniques for verifying and evaluating skill levels include:
Reference checking.
Pre-employment testing.
Each technique is briefly discussed below.

Reference Checking
220.04 Applicants will typically provide a list of personal references and former employers that
the company may contact. Although references may appear to be good sources of information
about an applicant, the company should remember that:
Personal references are hand-picked by the applicant. Thus, the

company should expect to hear mainly positive comments about
the applicant.
Many federal and state employment laws have been enacted to

protect the rights of present and former employees. Often,
employers are hesitant to provide candid information about former
employees because of fear of a possible employment lawsuit.
2-13
220.05 Information requested from former employers should concentrate on the applicants
work duties and performance, attendance record, dependability, cooperation, and other jobrelated matters. The information should confirm what has already been provided by the
applicant.
Pre-employment Testing
220.06 To more objectively assess an applicants abilities, some companies require applicants
to take a skills test. If such tests are used, they should be given to all applicants and be relevant
to the specific job. In other words, the skills tests should assess only those abilities that the
applicants will need for the position.
220.07 If the company is primarily looking for someone with strong data entry skills, most
state-sponsored employment commission agencies administer data-entry tests for a reasonable
fee.
225
SUMMARY
225.01 To perform to the best of their abilities and to receive increased responsibility,
accounting staff persons should have a good understanding of the entire bookkeeping process.
Otherwise, expanded duties and advancement within the department often will be delayed.
225.02 Getting a big picture understanding of the bookkeeping process involves
understanding how the various financial records interact within the accounting system. Key
financial records include various source documents, summary journals, subsidiary ledgers,
general ledger and financial statements. The accounting system starts with numerous source
documents and continually processes and groups these transactions to ultimately produce
month-end financial reports.
225.03 Each accounting transaction generally falls into one of a handful of accounting
processes or cycles. Common accounting processes and cycles include purchasing, accounts
payable, and cash disbursements; sales, accounts receivable, and cash receipts; payrolls;
inventory and costs of sales; fixed assets and depreciation; and general ledger and financial
statements. Although the general steps performed in each of these processes may appear
similar on the surface, the specific procedures performed are generally quite different. There are
also certain aspects of each process that are more crucial than others.
225.04 Although accounting staff persons may not have direct responsibility for internal
accounting controls, a basic understanding of controls is helpful for understanding why
accounting procedures are performed in a certain way. This knowledge can also help controllers
improve the companys control environment when circumstances permit. The controls generally
fall into one of the following categories: segregation of duties, restricted access controls,
document controls, processing controls, and reconciliation controls.
225.05 Finally, small businesses should ensure that applicants for bookkeeping positions have
the skills and experience needed for the position. Two common techniques for verifying and
evaluating disclosed skills include reference checking and bookkeeping skills tests.
2-14
Processing Sales and Receipts
3
Table of Contents
Section
Description
Page
300
INTRODUCTION ................................................................................................... 3-1
305
SYSTEM CONSIDERATIONS ................................................................................ 3-2

.03
.07
.08
310
PROCESSING MAIL RECEIPTS............................................................................ 3-4

.03
.04
.05
.11
.24
.27
.29
.34
315
Credit Sales: Open Item vs. Balance Forward Systems ................................ 3-2
Order-entry System........................................................................................ 3-3
Retailers: Point of Sale (POS) System .......................................................... 3-3
Opening the Mail ............................................................................................

Making the Deposit ........................................................................................
Applying Remittances to Customer Accounts.................................................
.06 Batch Daily Remittances before Processing ..........................................
.09 Apply Remittances to Customer Accounts Accurately ...........................
.10 Enter Batches in a Batch Control Log ....................................................
Handling Remittance Exceptions ...................................................................
.12 Cash Discounts Taken ..........................................................................
.14 Unauthorized Deductions Taken ...........................................................
.16 Unmatched Remittances .......................................................................
.17 Unidentified Remittances ......................................................................
.18 Deposits or Advance Payments.............................................................
.19 Overpayments .......................................................................................
.20 Small Dollar Differences ........................................................................
.21 Returned Checks ..................................................................................
Reducing Future Remittance Exceptions .......................................................
Processing Debit or Credit Memos .................................................................
Posting Receipts to General and Subsidiary Ledgers ....................................
.30 Consider Backing up Files before Posting .............................................
.32 Post Each Batch Promptly .....................................................................
.33 Compare Cash Receipts Summary Journal to Batch
Control Log ...........................................................................................
Filing Remittance Documents ........................................................................
3-4
3-5
3-5
3-5
3-6
3-6
3-7
3-7
3-7
3-7
3-8
3-8
3-8
3-8
3-8
3-9
3-9
3-9
3-9
3-10
3-10
3-10
PROCESSING OVER-THE-COUNTER RECEIPTS ............................................... 3-10

.03
.06
.10
.13
Making the Store Deposit ...............................................................................

Auditing the Daily Cash-register Report (DCR) ............................................
.07 Sample DCR .........................................................................................
.09 DCR Audit Procedures ..........................................................................
Recording Store Receipts in the General Ledger ...........................................
Handling Credit Card Sales............................................................................
.15 Reconciling Deposited Credit Card Sales ...........................................
3-11
3-11
3-11
3-13
3-13
3-15
3-15
3-1
3
Table of Contents (Continued)
Section
Description
315
.20
320
.09
.12
Entering Sales Orders ....................................................................................

.05 Batch Processing ..................................................................................
.08 Online, Order-entry Processing .............................................................
Posting Sales Invoices ...................................................................................
.10 Batch Processing ..................................................................................
.11 Online, Order-entry Processing .............................................................
Filing the Sales Documents ...........................................................................
3-17
3-17
3-18
3-18
3-18
3-18
3-18
COMPLETING PERIOD-END ACTIVITIES ............................................................ 3-19

.02
.08
.10
.11
330
.16 Reconciling Electronically-transmitted Credit Card Sales ..................... 3-15

.19 Recording Chargebacks and Fees ........................................................ 3-16
Filing the Retail Cash Receipt Documents ..................................................... 3-16
PROCESSING SALES INVOICES ......................................................................... 3-17

.04
325
Page
Reconciling the Bank Accounts ......................................................................

.03 Who Should Perform the Bank Reconciliation and When? ....................
.05 How to Reconcile the Bank Statement ..................................................
Reconciling the Subsidiary Ledger to the General Ledger..............................
Reviewing the Accounts Receivable Aged Trial Balance................................
Making a Proper Period-end Cutoff ................................................................
3-19
3-19
3-19
3-22
3-22
3-22
SUMMARY
Appendix
3A
Cash Receipts Batch Cover Sheet ......................................................................... 3-27
3B
Cash Receipts Batch Control Log ........................................................................... 3-29
3C
Cash Remittance Exception Log............................................................................. 3-31
3D
Daily Cash-register Report (DCR) Form ................................................................. 3-33
3E
DCR Audit Checklist ............................................................................................... 3-37
3F
Sales Invoices Batch Cover Sheet .......................................................................... 3-39
3G
Sales Invoices Batch Control Log ........................................................................... 3-41
3H
Bank Reconciliation Form ....................................................................................... 3-43
3I
Period-end Sales Cutoff and Reconciliation Form................................................... 3-45
TOC 3-2

o
SYSTEM CONSIDERATIONS
PROCESSING MAIL RECEIPTS
PROCESSING OVER-THE-COUNTER RECEIPTS
PROCESSING SALES INVOICES
COMPLETING PERIOD-END ACTIVITIES
300 INTRODUCTION
300.01 Processing cash receipts, and to a lesser extent sales invoices, are major activities of
most small business accounting departments. Not only must accounting personnel handle and
deposit incoming cash promptly, but they must also process it accurately to effectively manage
the companys cash flows and maintain good customer relations.
300.02 This chapter provides accounting personnel step-by-step guidance for processing cash
receipt and sales transactions, both in a traditional small business that extends trade credit and
in a small retail business that receives cash over the counter. The chapter assumes the small
businesss accounting function is computerized.
300.03 The guidance in this chapter is useful to full-charge bookkeepers as well as accounting
personnel involved in selected accounting and bookkeeping areas. The chapter helps existing
cash receipts personnel fine-tune their processing activities and provides newly-hired or crosstrained employees with a solid foundation for processing cash receipts.
300.04 The chapter includes the following major sections:
System Considerations. Section 305 briefly discusses three aspects of

accounting systemsthe type of accounts receivable subsidiary ledger,
an order-entry system, and a retailers point of sale systemthat impact
how cash receipts are processed.
Processing Mail Receipts. Section 310 covers the processing of

customer remittances received through the mail. The section includes
opening the mail, making the deposit, applying remittances to customer
accounts, handling remittance exceptions and credit memos, posting the
transactions, and filing the documents.
Processing Over-the-counter Receipts. Section 315 covers the

processing of a retail businesss over-the-counter receipts. It includes
making the deposit, auditing the daily cash-register report (DCR),
handling credit card sales, and filing the documents.
3-1
Processing Sales Invoices. Section 320 provides a brief overview of

sales invoice processing for those small business accounting
departments that have responsibilities in this area. However, this
function is now frequently handled by order entry personnel outside the
accounting department.
Completing Period-end Activities. Section 325 discusses activities that

are performed after each month end in preparation for closing the
general ledger and preparing financial statements. Activities include
reconciling the bank account and accounts receivable subsidiary ledger,
reviewing the aged trial balance, and properly cutting off or ending
month-end transactions.
305
SYSTEM CONSIDERATIONS
305.01 As mentioned previously, the chapter assumes that accounting personnel using this
Guide are working with a basic computerized accounting system. However, even though a
company is computerized, the nature of a businesss activities will sometimes dictate system
variations unique to that type of business. Those system variations often impact how cash
receipt transactions are processed.
305.02 Three system variations that are covered in this section include:
Credit sales: open item vs. balance forward systems.
Order-entry system.
Retailers: point of sale system.
The first two generally apply to traditional businesses that extend trade credit, and the last type
applies to retailers.
Credit Sales: Open Item vs. Balance Forward Systems
305.03 Most accounting systems offer businesses two options for tracking unpaid customer
invoices: the open item method (which is generally more costly to maintain) or the balance
forward method.
a. Open item method. The open item method tracks all open items for
each customer. Invoices are the primary method used to notify and bill
customers for purchases.
b. Balance forward method. The balance forward method keeps details of
only the current periods activity and groups all other open items into a
single beginning balance amount. Statements are the primary method
used to notify customers of purchases.
305.04 Small businesses that recurrently sell goods (rather than services) to commercial
customers typically use the open item method since commercial customers generally record
and pay for purchases using invoices (as opposed to statements). Retailers and other
3-2
companies that sell to individual consumers or provide a regular service to individuals or

commercial accounts often use the balance forward method.
305.05 The open item method requires accounting personnel to apply remittances to specific
unpaid invoices, whereas the balance forward method allows accounting personnel to apply
remittances to the aggregate unpaid balance. If the balance forward system is used in the
wrong type of company, however, accounting personnel must constantly invest extensive
clerical time researching the composition of the beginning balance-forward amounts.
305.06 The discussion in this chapter focuses principally on the open item method since it is
the most common in small businesses, and its cash application process is more complex.
Order-entry System
305.07 Many small businesses today use an order-entry system for entering sales invoices.
An order-entry system works similarly to a retailers point of sale system discussed below. As
an order is received from a customer (typically over the phone), it is entered into the online
system by the order person and posted to the invoice register before taking the next order. In
contrast to a batch-processing mode, an order-entry process allows order personnel to access
current inventory quantities and other information at any time.
Retailers: Point of Sale (POS) System
305.08 Small retailers have traditionally used a stand-alone electronic cash register to capture
over-the-counter sales. Today, many retailers are converting to point of sale (POS) terminals to
improve processing efficiency. Since cash receipts processing and related transactions can be
affected by the type of system used, the following paragraphs briefly discuss and contrast the
two types of systems.
Stand-alone electronic cash register. The traditional electronic cash

registers primary purpose is to classify cash receipts by type and
provide a total of each days sales transactions. The register requires
accounting personnel to prepare manual journal entries to record each
days sales transactions.
Point-of-sale (POS) terminal. A POS terminal is essentially a computer

terminal disguised as a cash register. A key difference between the
traditional cash register and a POS is that a POS is typically linked to the
companys accounting system (inventory, accounts receivable, and
general ledger). Thus, when individual sales are entered, the POS
system updates the inventory records for each item sold. The POS also
generates daily journal entries that may be posted manually or
automatically to the companys general ledger.
305.09 The primary advantages of a POS system over a traditional cash register are that the
POS eliminates duplicate processing tasks and automates certain tasks (such as the cash
register closeout/reconciliation process) that were previously performed manually.
3-3
310
PROCESSING MAIL RECEIPTS

310.01 Mail receipts processing is often the single most time-consuming task performed by
small business accounting personnel. The process typically includes applying a high volume of
remittances against the related customer invoices and dealing with customers to resolve
various remittance exceptions. If remittances are not applied accurately and promptly,
complaints will come quickly from both external customers and internal credit and collection
personnel.
310.02 This section covers small business processing of mail receipts. It includes a complete
step-by-step process that begins with the task of opening the mail and ends with posting the
cash receipt transactions to the general ledger and filing the related documents. More
specifically, it covers each of the following tasks:
Opening the mail.
Making the deposit.
Applying remittances to customer accounts.
Handling remittance exceptions.
Reducing future remittance exceptions.
Processing debit or credit memos.
Posting receipts to general and subsidiary ledgers.
Filing remittance documents.
This section applies to small businesses that extend traditional trade credit to their customers.
Retail businesses that receive over-the-counter receipts are covered in Section 315.
Opening the Mail
310.03 The first step in processing mail receipts naturally begins with opening the mail,
controlling and safeguarding the receipts are the companys most important concerns at this
stage. When performing this function, small businesses should consider the following
recommendations:
3-4
Use secretary/receptionist. Whenever possible, the company should

assign someone with no other cash receipt or processing duties to
receive, open, and sort the mail. This practice improves the companys
internal controls by segregating the asset custody function from the
recordkeeping function. In most small businesses, the secretary or
receptionist can fill this role.
Restrictively endorse checks. The secretary or receptionist should

separate customer remittances from other mail (junk mail, vendor
invoices, etc.) and immediately restrictively endorse all checks. In other
words, the back of each check should be stamped with appropriate
wording to preclude a lost or stolen deposit from being cashed. Typically,

the stamp indicates that the check is For Deposit Only and includes the
companys name and bank account number.
Forward remittance advices. The secretary/receptionist should forward

the customer remittance advices (not the actual checks) to accounting
personnel. If remittance advices are missing or incomplete, copies of the
related checks should also be made and forwarded to accounting
personnel.
Prepare duplicate deposit slips. The secretary or receptionist should

prepare the original deposit slip along with a duplicate copy. The deposit
slip should typically list the amount and customer names for each check
included in the deposit. At a minimum, an adding machine tape of the
customer
checks
should
accompany
the
deposit.
(The
secretary/receptionist should retain the duplicate deposit slip and a copy
of the adding machine tape for later comparison to the validated deposit
slip. They should then be forwarded to the accounting department.)
Making the Deposit

310.04 The next step in processing mail receipts consists of making the deposit. The following
are two aspects of making the deposit that small businesses should follow:
Make the deposit daily. Typically, an office manager or some other

trustworthy nonaccounting employee will take the deposit to the bank.
Deposits should be made daily whenever possible. In addition, deposits
should be made before the banks daily cutoff time (say, 2:00 p.m.) in
order to receive credit from the bank for the deposit on that day.
Obtain and verify the validated deposit slip. The person making the
deposit should have the bank validate the deposit slip and return it to the
secretary/receptionist. The secretary/receptionist should compare the
validated deposit slip amount with the duplicate deposit slip amount to
ensure all monies were actually deposited. The deposit slips should then
be forwarded to the accounting personnel.
Applying Remittances to Customer Accounts

310.05 Accounting personnel use the remittance advices and other supporting documentation
received from the receptionist/secretary to apply the receipts to each customers outstanding
balance. The process can become tedious and time consuming, particularly when remittance
exceptions are common. The following paragraphs discuss the general cash application
process, followed by Paragraphs 310.11-.26 that show how to deal with various remittance
exceptions.
310.06 Batch Daily Remittances before Processing. Batch processing is the most common
approach used by small businesses for applying remittances to customer accounts. After
receiving the daily remittance advices from the secretary/receptionist, accounting personnel
simply assemble the remittances in a manageable bundle and prepare an adding machine tape
of the total remittances (batch control total). Limiting each batch to between 25 and 50
3-5

receipts will help reduce the time spent researching input errors.
310.07 The batch control totals purpose is to help ensure that all remittances were entered
accurately. After entering each batch of remittances into the computer, the system will typically
calculate a batch control total. If the manual and computer-generated totals agree, the data
entry person gains some assurance that remittances were accurately entered. In some
systems, the data entry person must enter the manually-calculated batch control total into the
computer and may not finish the data entry until the total agrees with the system-generated
total. Accounting personnel should then agree the batch-total to the cash receipts journal and
the related validated deposit slip.
310.08 Cash application persons often use a batch cover sheet to document batch processing
steps. The cover sheet contains a unique batch identifying number and has space to document
steps taken in processing the batch and recording the batch total. The batch cover sheet is
physically attached to the bundle of remittance advices. Appendix 3A presents a Cash Receipts
Batch Cover Sheet that may be used by cash application persons.
310.09 Apply Remittances to Customer Accounts Accurately. Accurately entering
remittances is crucial to maintaining the integrity of the accounts receivable subsidiary records.
Batch control totals help ensure that all remittances were accurately entered into the system.
However, batch control totals generally do not provide assurance that receipts were applied to
the proper invoices or even that payments were applied to the proper customers account. The
cash application process varies depending on whether the small business uses a balance
forward or an open item subsidiary ledger. (The two systems are also briefly discussed at
Paragraphs 305.03-.06).
Balance forward system. The cash application process is much simpler

for companies using balance forward systems. The data entry person
simply calls up each customers account and applies the payment in total
to the outstanding account balance (not to specific invoices).
Open item system. The cash application process is more difficult for
companies using an open item aged trial balance. In this case, the data
entry person must call up the specific customers account and match up
payment amounts to specific outstanding invoices. In most small
businesses, the matching process is performed manually, but some
computer programs now include an automatic application feature that
allows the system to apply a large percentage of remittances
automatically. For example, by simply entering the customer number and
cash receipt amount, the system can search the customers file and apply
the payment to the appropriate outstanding item.
Unfortunately, the cash application process is often not nearly as straightforward as the above
discussion may imply. Paragraphs 310.11-.23 discuss in more detail the various exceptions and
difficulties that tend to crop up when applying cash receipts.
310.10 Enter Batches in a Batch Control Log. Once data entry is complete, the data entry
person should record the batch control total (see Paragraphs 310.06-.08) and selected other
processing information into a batch control log. Typically, the data entry person records the
3-6
data-entry date, the person who entered the batch, and the batch control total. Accounting
personnel subsequently compare the control log to the cash receipts journal to ensure all
entered receipts were posted1 (see Paragraph 310.33). Appendix 3B contains a Cash Receipts
Batch Control Log that cash application persons may use.
Handling Remittance Exceptions
310.11 If payments from customers always matched up with specific outstanding invoices,
remittance processing would be simple. Unfortunately, remittance exceptions are common.
Cash application persons must clearly identify remittance exceptions for prompt follow-up and
resolution. Otherwise, unresolved exceptions will quickly grow, reducing the usefulness of the
accounts receivable aged trial balance for collection purposes. The following paragraphs
describe how cash application persons should handle common remittance exceptions.
310.12 Cash Discounts Taken. Invoices are typically recorded at their gross amounts, even
if the company offers customers an early payment discount. Thus, when customers claim a
discount when remitting payment, the difference between the gross invoice amount and the
payment must be adjusted off.
310.13 Accounts receivable systems typically allow cash application persons to write off cash
discounts taken (often even unearned discounts) as part of cash application processing. The
discount amount is simply designated as a discount, and the system credits the invoice amount
and debits the applicable expense account. When customers take unearned discounts,
however, cash application persons should be given clear guidance by the company on how to
handle the discounts. For example, the company should instruct cash application employees
about whether it will allow unearned discounts to be granted and whether or not customers
should be contacted when discounts are taken improperly.
310.14 Unauthorized Deductions Taken. Besides taking unearned discounts, customers will
frequently initiate other claims by deducting the amounts from the check. Common claims
include freight disputes, quantity shortages, and price adjustments.
310.15 Some accounts receivable systems will allow cash receipts personnel to adjust the
customers account during the cash application process and make the corresponding general
ledger adjustment. To maintain control over unauthorized deductions, however, adjustments
generally should not be made until a properly approved debit or credit memo has been
prepared (see Paragraphs 310.27-.28). Thus, cash application personnel should post only the
net payment amount against the related invoice. The remaining portion of the invoice should
remain open until the claim can be properly resolved.
310.16 Unmatched Remittances. Customers will frequently send payments without indicating
how the payment should be applied. Remittances that cannot be readily matched to
outstanding invoices generally should be temporarily posted to the customers account as an
unapplied credit (payment on account). In other words, personnel should not apply the payment
to specific invoices until the customer is contacted and indicates how the payment should be
applied. At that time, accounting personnel should then match the unapplied credit to the
appropriate outstanding invoices.
1
The term posting, as used in this chapter, means instructing the computer to update the
accounting records (summary journals, subsidiary ledgers, or general ledger) for transactions
entered during batch processing. Prior to posting, transactions entered during batch
processing remain in a temporary suspense file.
3-7
310.17 Unidentified Remittances. Occasionally, payments will be received from companies

that do not appear to be customers. For example, if a customer is a subsidiary of another
corporation, a cash application person might have difficulty identifying payments made by the
parent company on behalf of the subsidiary. These remittances should generally be posted
temporarily to a dummy customer account in the aged trial balance until cash application
persons identify the customer. Once identified, the posting to the dummy account should be
promptly reversed and posted to the proper customers account.
310.18 Deposits or Advance Payments. Customers sometimes will make advance payments
or deposits. These payments should be handled similarly to unmatched remittances. Cash
application persons should temporarily post them to the customers account as an unapplied
credit (payment on account) until the related invoice amount is entered.
310.19 Overpayments. Customers will occasionally overpay an invoice. When this occurs,
cash application persons should apply the payment against the invoice and designate the
remaining overpayment as an unapplied credit (payment on account) until the customer can be
contacted.
310.20 Small Dollar Differences. Customers will often pay amounts that differ slightly from
the companys recorded invoice amount. In those situations, cash application persons should
be authorized by the company to write off any insignificant differences while processing the
remittances. In other words, the cash application person should be able to directly post the
write-off adjustment while in the remittance processing mode without having to prepare a
journal entry or obtain further approvals. The company should set a preapproved dollar limit
(say, differences of less than $1) for direct write-offs.
310.21 Returned Checks. Checks that are returned from the bank because of insufficient
funds represent negative receipts and generally require special treatment by cash application
persons. Cash application persons should typically process returned checks separately. In
other words, they should not be included with the normal cash receipts batch processing.
310.22 Banks typically notify companies of returned checks either by phone or through the
mail. When the company is notified of a returned check, it can request the bank to resubmit the
check a second time for collection. (This request can be automatic. In other words, the
company can instruct the bank to return the checks only after they have been sent through the
bank collection system twice.) If the bank is unable to collect the check, the company then
processes and records the returned check.
310.23 The exact method the company uses to process a returned check will vary depending
on the system. Some systems only permit the company to enter a returned check as a negative
cash receipt (similar to entering a debit memo). Alternatively, systems that maintain a
transaction history file of paid invoices and cash receipts will often allow cash application
persons to call up the original check posting and effectively reverse it. In other words, the
original invoice is reinstated (debit to accounts receivable) and cash is credited. In all cases,
however, cash applications persons must enter the returned checks through the accounts
receivable subsidiary ledger to ensure the general ledger and subsidiary ledger remain in
balance.
3-8
Reducing Future Remittance Exceptions

310.24 Not only should small businesses establish procedures to ensure that remittance
exceptions are resolved timely, but they should also strive to minimize the number of future
exceptions. To correct a problem, however, management must first know the problems cause.
When cash application exceptions arise that require further follow-up and action, the cash
application person should immediately document them on a log. The log will help ensure the
exceptions are promptly resolved and will provide information to help reduce future exceptions.
310.25 Cash application persons may use the Cash Remittance Exception Log at Appendix
3C for this purpose. The log will quickly show exceptions that have not been resolved by
internal action or follow-up with the customer. In addition, the log reveals both the type and
frequency of exceptions.
310.26 Once the exceptions have been identified in the log, determining the cause is generally
straightforward. Problems can be caused internally, such as by pricing or other clerical errors,
or externally, such as when customers do not follow sales terms and policies or fail to include
remittance information with payments. In either case, educating the appropriate company
employees and customers will frequently correct the problems and reduce future exceptions.
Processing Debit or Credit Memos
310.27 The cash application process is clearly a common source for identifying remittance
exceptions that require adjustments to customer accounts. Credit, collection, and sales
personnel are another common source in small businesses. Regardless of the source,
however, the company should require that all proposed adjustments be subject to an
appropriate review and approval process.
310.28 Thus, cash application and other data entry persons normally should not adjust
customer accounts during processing without first obtaining a properly approved debit or credit
memo. In addition, appropriate supporting documentation, such as receiving reports indicating
returned goods, should accompany all debit or credit memos before processing them. The
specific policies and procedures will generally be set by the owner or controller.
Posting Receipts to General and Subsidiary Ledgers
310.29 After entering remittances and other adjustments into the system, the cash application
person must instruct the computer to post the individual transactions to the accounts receivable
ledger and cash receipts summary journal. Depending on the system, the summary journal
totals will subsequently be posted to the appropriate general ledger accounts automatically or
through a manual journal entry.
310.30 Consider Backing Up Files before Posting. Depending on the accounting software
features and the number of data entry persons, accounting personnel may wish to back up
affected data files before posting transactions. This backup procedure is a safety measure in
case the computer was to fail during the posting process. If the system fails during posting, it
sometimes becomes difficult determining where the system left off when it failed.
310.31 However, this backup procedure may not be necessary depending on the
circumstances. Backing up is generally not needed because of recovery procedures in many
newer software packages. These recovery procedures allow the system to restart processing at
the precise point it left off when the system failed.
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310.32 Post Each Batch Promptly. Cash application persons generally should instruct the
computer to post batches after each batch is processed or at least at the end of each day.
Frequent posting will ensure the subsidiary ledger and general ledger reflect the most recent
activity. Also, if the computer system is subject to power outages or other system failures that
may damage existing files, frequent posting will help ensure previously entered data is not lost.
310.33 Compare Cash Receipts Summary Journal to Batch Control Log. After posting the
cash receipts, the cash remittance person should record in the cash receipts batch control log
(see Paragraph 310.10) the number of the cash receipts journal to which the batch was posted.
That person should also agree the totals of posted batches (per the cash receipts batch control
log) to the cash receipts journal. If they agree, the cash application person knows that all cash
receipts entered were posted to the cash receipts journal. In that case, that person should
document the agreement in the last column of the cash receipts batch control log. If the totals
do not agree, the difference must be located and corrected.
Filing Remittance Documents
310.34 After remittance batches have been entered and posted, they should typically be filed
chronologically in a filing cabinet or storage box by week or month, depending on the volume.
Each drawer or box should clearly show which days are included to allow easy retrieval when
later questions arise. If the batches are initially filed in filing cabinets, they should be transferred
to storage boxes annually. Each box should be clearly labeled with a destruction date.
315
PROCESSING OVER-THE-COUNTER RECEIPTS

315.01 The small business accounting departments role in processing retail over-the-counter
receipts is often very different from its role in processing mail receipts. The differences stem
primarily from how the customers pay for their purchases. Retail customers typically make
purchases by using cash, checks, or credit cards, compared to commercial customers who
typically use trade credit to purchase goods. Also, the retailers accounting department is often
in a location physically separate from the retail store(s), which usually requires store personnel
to perform some of the traditional bookkeeping activities.
315.02 This section discusses the small business accounting departments role in processing
over-the-counter receipts. It covers the following key areas:
3-10
Making the store deposit.
Auditing the daily cash-register report (DCR).
Recording store receipts in the general ledger.
Handling credit card sales.
Filing the retail cash receipt documents.
Making the Store Deposit

315.03 In contrast to commercial businesses that receive mail remittances from customers at
a central location, retailers typically receive payment from customers at a retail store that is
physically located away from the companys accounting department (corporate office). Thus,
the receiving and depositing of cash is often handled by store personnel. in addition, most retail
businesses require the store cashier to reconcile cash per the cash register at least daily
before making the deposit.
315.04 Anytime a cash register is closed out, either because of a shift change or store closing,
the cashier typically reconciles the actual cash with the expected cash. In other words, the
cashier counts the cash in the register and reconciles it to the registers recorded sales and
other transactions. The cashier usually documents this reconciliation process on a form
commonly referred to as a daily cash-register report (DCR).
315.05 After completing the DCR the store manager (or other designated employee) typically
completes a deposit slip, takes the deposit to the bank, and receives a validated deposit slip.
The store manager then forwards the DCR, validated deposit slip, cash register tape, and any
other related documents (such as sales receipts, cash withdrawal vouchers or invoices, etc.) to
the accounting department for processing.
Auditing the Daily Cash-register Report (DCR)
315.06 The DCR often serves as the primary document used by accounting personnel to
control store cash and record daily sales transactions. Because of its importance in a retail
environment, accounting personnel typically verify its accuracy by auditing it. The following
presents a sample DCR and typical audit procedures.
315.07 Sample DCR. As mentioned previously, a DCR simply reconciles actual cash in the
register with expected cash. Any unresolved differences are shown as a cash over or short,
as reflected in Part A of the sample DCR form at Exhibit 3-1.
315.08 The DCR consists of three basic parts. The first part is the actual sales to cash
reconciliation and the other two parts provide supporting detail for items in the first part. Each
part is briefly described below.
Part AReconciliation of Register Sales to Actual Cash. This

section of the DCR begins with sales per the register and reconciles that
amount to the actual cash to be deposited. It adjusts sales and sales
taxes for overrings/underrings to arrive at a net sales amount. Sales
(including sales tax) are then adjusted for customer refunds, credit sales
and collections, any miscellaneous receipts, and other cash amounts
paid out. To facilitate general ledger account coding, Part A also includes
account numbers for the transactions.
Part BDetail of Actual Cash in Register. This section provides the

details of cash in the register, including any credit card slips. It deducts
the fixed cash fund amount to arrive at the net deposit. The amounts
should agree to the bank deposit slip except for credit card sales
transmitted electronically for deposit. The net deposit amount is
transferred to Part A.
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Exhibit 3-1
Sample Daily Cash-register Report (DCR)
Store: ABC Retail Outfit

Register No.: 1
Prepared by: D. Thomas
Date: 6/20/X4
Managers Signature:
Ending Register Reading: 123,790
PART ARECONCILIATION OF REGISTER SALES TO ACTUAL CASH
Description
Sales
Tax
1 Gross sales per register
658.00
51.00
+
2 Net voids: underrings (+) overrings (-)
-26.00
-2.00
+/3 Net sales
632.00
49.00
=
CR # 400
CR # 205
G/L Accounts
4 Customer refunds:
5
Sales amount refunded
DR # 490
6
Sales tax amount refunded
DR # 205
Total customer refunds (per Part C)
=
7 Sales on account
DR # 121
8
Total cash sales
=
9 Receipts on account (ROAs) (per Part C)
CR # 121
+
10 Miscellaneous income (per Part C)
CR # 623
+
11 Paid outs (per Part C)
DR # (see below)
=
12
Total expected cash
=
13
Cash over (+) short (-) (line 14line 12)
14
Actual cash to deposit (from line 26)
Total
709.00
-28.00
681.00
-19.00
-2.00
-21.00
225.00
435.00
100.00
15.00
14.00
536.00
CR or DR # 627
+/-
-6.00
DR # 105
530.00
+
+
+
=
=
25.00
280.00
95.00
400.00
-100.00
300.00
+
+
+
=
=
150.00
80.00
0.00
230.00
530.00
PART BDETAIL OF ACTUAL CASH IN REGISTER

15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
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Coins
Bills
Checks
Subtotal
Fixed cash fund amount
Cash deposit amount
Credit card slips:
MasterCard/Visa
Discover
American Express
Total credit card deposit
Total deposit (To line 14)
PART COTHER TRANSACTIONS (Refunds, Paid Outs, Misc. Income, or ROAs)

Description (Customer or Vendor Name,
Transaction Type/
Receipt No., etc.)
General Ledger A/C #
Amount
David Oconner (Rec. No. 144515)
Refund
21.00
John Smith (Rec. No. 144523)
ROA
100.00
XYZ Vending (Rec. No. 144575)
Misc. Income
15.00
ABC Supplies (Office pads)
Paid Outs (DR # 728)
14.00
Part COther Transactions Listing. This section lists the details of

certain less common transactions, such as receipts on account,
miscellaneous income, and paid outs. The total for each type of
transaction is taken to Part A.
The DCR should be signed by the preparer and the store manager. In addition, the closing
register reading (used to derive the number of closeouts since the previous days DCR) should
be documented at the top of the form. Appendix 3D includes a blank copy of the DCR form that
accounting personnel may use.
315.09 DCR Audit Procedures. In general, the accounting departments DCR audit consists
of:
Reviewing the DCR for each register so that errors and improperly
processed transactions by individual sales personnel can be identified
and addressed.
Reviewing documentation supporting transactions (such as voids,

refunds, paid outs, etc.) to determine their accuracy and to ensure that
they have been properly approved by the store manager.
Compiling daily gross and net sales totals and other statistics, such as
departmental sales and returns.
Verifying sales commissions, sales tax collections, and cash over and
short amounts.
Checking general ledger account codings.
Appendix 3E includes a DCR Audit Checklist that accounting personnel may use to audit daily
store transactions.
Recording Store Receipts in the General Ledger
315.10 The DCR is the primary source document used by accounting personnel to record
retail store receipts and other daily transactions in the general ledger. As shown in the sample
DCR at Exhibit 3-1, the DCR includes general ledger account numbers for common
transactions. Where necessary, accounting personnel may write down account numbers for
less common transactions (such as paid-outs) in Part C.
315.11 Accounting for specific retail store transactions is discussed in the following
paragraphs. References are to specific lines in the DCR in Exhibit 3-1.
Sales (line 3). The general ledger sales account should be credited for
the total sales amount shown in Part A, line 3. (As discussed below, the
sales amount may also include sales taxes depending on whether or not
the cash register rings taxes up separately.) Also, some companies may
wish to break down sales by product line or cost center. The totals for
these amounts may be obtained directly from the cash register tape
(assuming the register provides this option) or by adding up sales
receipts.
3-13

Sales taxes (line 3). The process for recording sales taxes varies. If the
register rings up sales taxes separately, the net sales tax amount per the
register tape will appear on line 3 of the DCR. Accounting personnel
should simply record that amount to the sales tax payable account in the
general ledger when the DCR is processed. Alternatively, if sales taxes
are not rung up separately at the register, the sales amount (line 3)
probably also includes sales taxes. In that case, accounting personnel
will manually calculate the sales tax amount and then debit the sales
account when the sales tax liability is recorded or paid.
Customer refunds (lines 5 and 6). When store personnel make refunds
to customers, a sales returns account is debited for the net sale amount
on line 5 and the sales tax payable account is debited for the related
sales tax amount shown on line 6. (If merchandise is returned, store
personnel will typically send a receiving report to the accounting
department explaining the returns details. If the merchandise is
saleable, accounting personnel will typically debit inventory and credit
cost of sales. If the merchandise will be returned to the vendor for credit,
accounting personnel will usually debit a receivable account or the trade
payable account and credit cost of sales.)
Accounts receivable (lines 7 and 9). If the store offers in-house credit
to customers (or employees), accounts receivable should be debited for
any sales on account listed on line 7. In addition, accounts receivable
should be credited for any collections on account listed on line 9. If an
accounts receivable subsidiary ledger is maintained, accounting
personnel may use the sales invoices (signed by the customer) and
information in Part C for updating the individual customer accounts.
Miscellaneous receipts (line 10). Stores will occasionally receive other
minor cash receipts. Those amounts are typically shown on line 10 and
recorded to miscellaneous income. If a miscellaneous receipt amount is
significant, accounting personnel should review the nature of the receipt
and record it to a different general ledger account if necessary.
Paid outs (line 11). Stores occasionally take cash from the register to
make payments to vendors and others. The total of the paid outs is
included on line 11, and the individual paid out amounts and appropriate
general ledger accounts are listed in Part C. Obviously, the appropriate
general ledgers accounts to debit will depend on the nature of each paid
out. Depending on the situation, the account numbers may be entered
either by the store manager or by the accounting personnel.
Cash over or short (line 13). The cash over or cash short amount on
line 13 is recorded as either a credit (cash over) or debit (cash short) to
the cash over/short general ledger expense account.
3-14
Cash (line 14). Accounting personnel will debit the cash account for the
net cash deposit shown on line 14. Alternatively, if there are numerous
credit card sales, some retail shops prefer to record credit card deposits
to a separate general ledger cash account to allow easier tracking. In
that case, the separate cash general ledger accounts may be shown in
Part B, lines 20 and 25.
315.12 In addition to recording store transactions as described above, if the company has
multiple stores, each store should be coded to a separate profit center in the general ledger.
This approach allows tracking of individual store profitability and comparisons among stores.
Most general ledger systems allow a two-digit store code to be added to general ledger
accounts (such as 400.01, 400.02, etc.) for cost or profit center reporting.
Handling Credit Card Sales
315.13 For many small business retailers, a significant percentage of the DCRs receipts
come from third-party credit cards (MasterCard, Visa, Discover, American Express). Retailers
typically send credit card sales to the credit card company either by depositing the credit card
receipts in the companys normal daily deposit or by transmitting the charges electronically
through a credit card terminal located at the store.
315.14 In either case, accounting for the receipts is generally identical to any other cash sale.
Accounting personnel simply debit cash and credit sales, although they may wish to record
credit cash receipts to a separate general ledger cash account for tracking purposes (see Paragraph 315.11). The retailers main concerns are ensuring that charges are submitted to the
credit card processor accurately and that the retailers bank account is properly credited for the
daily deposit. The procedures performed by accounting department personnel will typically vary
depending on which method is used to submit the charges to the credit card company. Both
methods are described in the following paragraphs.
315.15 Reconciling Deposited Credit Card Sales. Retailers that deposit credit card
transactions manually complete a charge slip for each transaction and deposit the charge slips
in the daily store deposit. Accounting personnel typically rely on the month-end bank
reconciliation to ensure the company obtains the appropriate funds from the credit card
processor. In other words, accounting personnel simply agree the deposit per the monthly bank
statement with the corresponding amount in the cash receipts journal. If the amounts agree,
accounting personnel are assured that the company received the appropriate credit from the
credit card company.
315.16 Reconciling Electronically-transmitted Credit Card Sales. Retailers that transmit
credit card charges electronically to the credit card processor also rely on the monthly bank
reconciliation process to ensure the companys bank account is properly credited for each
days charges. However, an interim reconciliation procedure is often needed to ensure that
amounts were entered into the terminal accurately and charges were properly transmitted to
the credit card processor. For example, common credit card processing mistakes made by
store personnel include:
Obtaining electronic credit authorization for a customers charge from the
credit card company but forgetting to actually transmit the charge.
Completing a manual charge slip to be signed by the customer but
entering the wrong amount into the terminal.
3-15

315.17 Retailers that choose to detect and correct those types of errors before the monthly
bank reconciliation process often perform daily or weekly reconciliations of the retailers
records to the processors records. The process merely consists of comparing the companys
total credit card transmitted amount to the processors total for each day. If the totals do not
agree, the retailer must compare its individual charges (based on duplicate credit card slips
attached to the DCR) with those of the processors to identify the differences.
315.18 The retailer may obtain the processors list of charges for each day through the mail or
directly from the terminal if it has a printing capability. If the list is obtained by mail, accounting
personnel typically perform the reconciliation. If the processors list is printed from the terminal,
the store personnel should be required to perform the reconciliation, make any corrections, and
attach the printed list to the DCR submitted to the accounting department.
315.19 Recording Chargebacks and Fees. In addition to ensuring that the retailer receives
proper credit for charge transactions, the accounting department must record other credit card
transactions, such as chargebacks and processing fees as discussed below.
Chargebacks. Federal law gives credit card customers the right to
dispute charges within a certain time period by requesting a chargeback. When a customer requests a chargeback, the credit card
processor notifies the retailer by mail and charges the disputed amount
against the retailers bank account until the dispute is resolved. The
accounting department should make a general ledger adjustment to
credit the cash account and debit a chargebacks receivable account. If
the dispute is subsequently resolved in the retailers favor, the entry will
be reversed. If the dispute is resolved in the customers favor, the
chargeback receivable should be written off to sales or the appropriate
expense account. (If chargebacks are numerous, accounting personnel
should maintain a workpaper that lists each chargeback and its final
disposition. The workpaper total should agree to the chargeback general
ledger balance.)
Processing fees. Credit card processors typically provide retailers with
weekly or monthly statements that summarize daily charges for the
period, as well as any chargebacks and processing fees. Accounting
personnel should use this statement to record the processing fee
expense by debiting the expense account and crediting cash. If the
statements are not received on a timely basis, the expense amount will
show as a reconciling item during the monthly bank reconciliation.
Occasionally, the company may be forced to estimate the processing fee
amount (based on the volume of charges for the month) and record an
accrued liability at month end.
Filing the Retail Cash Receipt Documents
315.20 After DCRs have been processed and audited, they should typically be chronologically
filed in a box or filing cabinet in the accounting department. Each drawer or box should clearly
show which days are included to allow easy retrieval when later questions arise. If the DCRs
are initially filed in filing cabinets, they should usually be transferred to storage boxes every
quarter or so.
3-16
315.21 Each box should be clearly labeled with a destruction date. In most cases, the DCRs
should be retained for three years from the companys federal tax return filing date. However,
the companys controller, in consultation with the companys attorney, usually determines how
long DCRs should be retained.
320
PROCESSING SALES INVOICES

320.01 Accounting personnel in most small businesses have little direct involvement with
processing sales invoices. Typically, key data (such as unit prices, sales tax exemptions and
rates, and credit status) are stored in the computer and automatically accessed when preparing
sales orders or customer invoices. Data entry is often handled by sales order personnel outside
the accounting department.
320.02 In less sophisticated accounting systems, however, accounting department personnel
may still perform certain basic functions relating to invoice preparation and processing. For
example, functions might include entering quantities shipped, checking sales prices and any
discounts, and computing sales taxes. The extent of accounting personnel involvement and the
processing procedures generally decline if the company uses an online, order-entry system
(see Paragraph 305.07) for taking and entering sales transactions.
320.03 Because some accounting departments still have involvement in this area, the following
paragraphs briefly discuss each major aspect of invoice processing. This section does not
address companies that manually prepare invoices, although the batch processing procedures
would generally apply.
Entering Sales Orders
320.04 The process of entering sales orders and generating customer invoices varies
depending on whether the company uses a batch processing mode or an online, order-entry
system (see Paragraph 305.07). In either case, designated personnel must ensure that sales
tax exemption certificates for new customers, if applicable, are on file. Also, if the company
sells to out-of-state customers, personnel generally must identify customers by state/locale for
state income tax and sales tax purposes.
320.05 Batch Processing. In a batch processing mode, customer orders or shipping
documents are accumulated in batches (say, 25-50 orders per batch) and entered at one time.
Batch control totals are typically prepared to ensure all orders are entered and entered
accurately.
320.06 The batch totals are typically calculated by running an adding machine tape of key
items, such as shipped quantities, number of line items, or extended sales order dollars (if
known). After the entire batch has been entered, the computer typically generates a batch total,
which the order-entry person compares to the manually-calculated batch total. (If the computer
does not generate a batch total, accounting personnel should retotal the figures on the edit
listing to ensure they agree with the original batch total.) Appendix 3F contains a Sales
Invoices Batch Cover Sheet that data entry personnel may use to control each batch.
320.07 To further control each months sales orders batch processing, data entry persons
should enter certain information from each batch in a batch control log. Typically, information in
the log should include the date and person who entered the batch, the batch total, and the
corresponding sales journal number. If the batch total was based on the extended sales prices,
accounting personnel should subsequently compare the batch total (total debit to accounts
3-17

receivable) to the sales journal to ensure all sales were posted. Since the sales journal total
may be net of sales taxes, it may be necessary to add back sales taxes to tie to the debit to
accounts receivable. Appendix 3G includes a Sales Invoices Batch Control Log that invoice
processing persons may use for this purpose.
320.08 Online, Order-entry Processing. If the company uses an online, order-entry system,
batch-control sheets and logs are typically not used. Instead of accumulating and processing
invoices in batches, an online, order-entry system usually processes each order as it is
received. Thus, in an online, order-entry system, order taking personnel must be extremely
careful to ensure each orders information is entered accurately. For orders entered over the
phone, order entry persons typically repeat the order information back to the customer to
ensure it was entered accurately.
Posting Sales Invoices
320.09 After orders have been entered into the system, sales invoices must be generated and
amounts must be posted to the sales journal, the accounts receivable subsidiary ledger, and
the general ledger. Again, the process typically varies depending on whether the company
uses batch or order-entry processing.
320.10 Batch Processing. If the company uses batch processing, accounting personnel
should instruct the computer to post the batch totals to the sales journal and the individual
invoices to the accounts receivable subsidiary ledger and sales history files. Depending on the
system, the general ledger subsequently may be updated automatically or through a manual
journal entry.
320.11 Online, Order-entry Processing. If the company uses online, order-entry processing,
the individual invoices are posted to the accounts receivable subsidiary ledger and sales
history files as each invoice is entered and accepted into the computer. Depending on the
system, the general ledger may be updated automatically or through a manual journal entry.
Filing the Sales Documents
320.12 Sales documents typically include the customers purchase order, a prenumbered
sales order form, a packing list, a prenumbered packing slip, a bill of lading, and a
prenumbered sales invoice. Typically, an original invoice and one copy are generated. The
following two types of files generally should be maintained:
Numerical file. The first type of file consists of separate numerical files
of any prenumbered documents, such as the sales order form, packing
slip, and sales invoice.
Customer file. The second type of file consists of separate files for each
customer. That file contains each customers sales invoices with all
attached supporting documentation (customer purchase order, sales
order form, packing list, packing slip, and bill of lading).
The company should typically retain the documents for at least three years after filing the
companys year-end federal income tax return.
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325

325.01
After processing and posting sales and cash receipts for the period, accounting
personnel should then perform certain period-end procedures in preparation for closing out the
general ledger. These procedures will provide added assurance that all transactions for the
period have been recorded. The procedures generally include the following:
Reconciling the bank accounts.
Reconciling the subsidiary ledger to the general ledger.
Reviewing the accounts receivable aged trial balance.
Making a proper period-end cutoff.
This section provides step-by-step guidance that accounting personnel may use to perform
these procedures.
Reconciling the Bank Accounts
325.02 The bank statement reconciliation process is a very effective after-the-fact internal
control tool. Moreover, the process is crucial to many small businesses since their accounting
systems are often cash-driven. Not only will the reconciliation help detect errors (both the
companys and the banks) that may have occurred during the period, but it also reveals any
bank debits and credits that have not yet been recorded in the companys general ledger. Also,
banking regulations generally require companies to notify their banks of any banking errors
affecting their accounts within a certain time period or the bank cannot be held liable. Thus,
small business accounting personnel should take steps to ensure the bank reconciliation is
performed timely and accurately each month.
325.03 Who Should Perform the Bank Reconciliation and When? Bank reconciliations
ideally should be performed by someone with no other cash functions. If such a person is not
available, the company should select someone with the least amount of access to receiving or
disbursing cash.
325.04 Bank reconciliations should be performed as soon as possible after the bank
statements are received from the bank. The bank statements should be received by the person
responsible for receiving mail and should be forwarded unopened to the assigned bank
reconciliation person.
325.05
How to Reconcile the Bank Statement. The bank reconciliation is a relatively
straightforward process that involves reconciling the balance per the bank statement with the
balance per the companys cash account balance per the general ledger. Differences are
typically caused by:
Items recorded by company but not by bank. Deposits in transit and

outstanding checks typically cause this difference. The deposits and
checks have been recorded by the company but have not yet been
received and recorded by the bank. Since these differences are simply
caused by a timing situation, adjustments to the companys general
ledger are not needed. These differences account for the vast majority of
reconciling items on monthly bank reconciliations.
3-19
Items recorded by bank but not by company. These differences

typically consist of transactions created by the bank that have not yet
been recorded by the company. Common examples include bank service
charges, interest earnings on time deposits, returned checks, and direct
deposits and withdrawals. Occasionally, these items will also include
checks or deposits that the company failed to record. These differences
typically require accounting personnel to make a manual general ledger
entry to increase or decrease the cash account with an offsetting entry to
the appropriate general ledger account.
325.06 Some small business accounting software include a bank reconciliation feature that
accounting personnel may use to automate much of the reconciliation process. For software
that do not offer this feature, accounting departments may use the reconciliation form shown at
Exhibit 3-2 to reconcile their bank accounts. Appendix 3H includes a blank copy of the form.
325.07 The reconciliation form is divided into two sections. The section on the left-hand side
reconciles the ending bank statement balance to the adjusted general ledger balance. The
right-hand side reconciles the unadjusted ending general ledger balance to the adjusted bank
balance. When completed, the ending balance on each side should be the same. Each section
is briefly discussed below:
Left-hand section. This section begins with the ending bank statement
balance. It then adjusts the bank balance for items recorded on the
companys general ledger but not by the bank. In other words, deposits
in transit are added and outstanding checks are deducted from the bank
statement balance to arrive at an adjusted general ledger (and adjusted
bank) balance. Deposits in transit and outstanding checks consist of
deposits in the cash receipts journal and checks in the cash
disbursements journal that have not yet appeared on the bank
statement.
Right-hand section. This section begins with the companys unadjusted

general ledger cash balance at the end of the period. It then adjusts that
balance for items on the bank statement (such as bank service charges
or interest earnings credited to the account) but not recorded in the
general ledger. After adding or deducting these items, the resulting
balance is the adjusted bank (and adjusted general ledger) balance. The
last column may be used to indicate general ledger account numbers for
preparing the required journal entry for each of the right-hand sections
reconciling items.
As mentioned above, the adjusted balances at the bottom of the left- and right-hand sections
should be equal if the reconciliation was properly completed. Accounting personnel should
prepare journal entries to adjust the general ledger (and subsidiary ledgers if applicable) for the
reconciling items on the right-hand section of the form. Occasionally, accounting personnel
may also discover that deposits or checks appearing in the left-hand section were recorded to
the wrong general ledger cash account. If that occurs, they should be added or deducted (as
appropriate) from each sections adjusted balances at the bottom of the form and an adjusting
journal entry should be made.
3-20
Exhibit 3-2
Bank Reconciliation Form
RECONCILIATION OF BANK STATEMENT TO G/L

$ 25,300.00
Ending Bank Statement Balance as of 1/28/x4
RECONCILIATION OF G/L TO BANK STATEMENT

Unadjusted General Ledger Balance at End of Period $
15,790.00
Items in G/L, Not on Bank Statement
Items on Bank Statement, Not in G/L
Add deposits in transit (attach list if needed):

1/28/x4
$ 1,250.00
$ 2,265.00
+
+
+
+
+
+
+
+
$ 4,785.00
$
$
$
$
$
$
$
$
$ 11,485.00
Total deposits in transit

Deduct outstanding checks (attach list if
needed):
Total outstanding checks
Adjusted G/L (and bank) balance
$
$
$
$
$
$
$
$
$
$
$
$ 22,115.00
Add unrecorded deposits and other bank credits:

Interest earnings on C.D. #587
Total unrecorded deposits and other bank credits

Deduct unrecorded checks and other bank debits:
Bank service charge
LOC interest
Total unrecorded checks and other bank debits

Adjusted bank (and G/L) balance
G/L A/C #.
to Adjust
CR. A/C
#:
+ $
1,700.00
+ $
5,486.00
+ $
+ $
+ $
+ $
+ $
+ $
+ $
+ $
$7,186.00
$ 128.00
$ 733.00
$
$
$
$
$
$
$
$
$ 861.00
= $
22,115.00
# 805.xx
# 125.xx
DR. A/C
#:
# 733.xx
# 865.xx
3-21

Reconciling the Subsidiary Ledger to the General Ledger
325.08 Reconciling the accounts receivable subsidiary ledger (or aged trial balance) to the
accounts receivable account in the general ledger is crucial to most small businesses. If
differences between the aged trial balance and subsidiary ledger are not resolved, either the
companys financial statements or billing statements mailed to customers (or both) are
misstated. If differences go back beyond the current month, locating and resolving the
individual differences becomes increasingly difficult and time-consuming.
325.09 As part of the reconciliation process, accounting persons should make the following
two comparisons (reconciliations):
Recalculate the general ledger balance. Small businesses can gain
some assurance that cash receipts journals and sales journals were
posted to the general ledger by recalculating the accounts receivable
general ledger balance. Accounting persons recalculate the ending
general ledger balance by starting with the beginning general ledger
balance, adding totals per the sales journals, deducting totals per the
cash receipts journals, and adjusting for any other transactions posted to
the general ledger.
Compare the subsidiary ledger to the general ledger. Accounting

persons should compare (reconcile) the subsidiary ledger or the aged
trial balance to the general ledger. If the two balances do not agree,
accounting persons must identify and resolve the differences.
Frequently, differences are caused by entries posted to the general
ledger accounts receivable from manual journal entries or sources other
than the cash receipts or sales journals.
Appendix 3l includes a period-end receivables reconciliation and cutoff form that accounting
persons may use to perform this reconciliation and other period-end cutoff procedures
discussed in Paragraph 325.11. In addition, Chapter 7, Appendix 7C-1, includes a Subsidiary
Ledger Reconciliation Workpaper if reconciliation differences are noted.
Reviewing the Accounts Receivable Aged Trial Balance
325.10 Accounting personnel should review the aged trial balance at the end of each period
as a regular part of the monthly closeout process. The reviewer should quickly scan each page
looking for obvious errors or anything else unusual. Common examples might include
significant individual credits or accounts with overall credit balances, unusually large debits in
the current period, or large balances slipping into the older aging categories. Accounting
personnel should investigate any unusual items and make any necessary corrections to the
aged trial balance and general ledger.
Making a Proper Period-end Cutoff
325.11 To accurately present net income and other line items in the financial statements,
accounting personnel should perform certain procedures to ensure all sales (and only those
sales) for the current period are recorded. Steps that accounting personnel should take to
ensure a proper period-end cutoff include the following:
3-22
Obtain the last invoice and shipping document number for the
month. At the end of the last business day of each period, accounting
personnel should document the last sales documents (invoices and
shipping forms) used. They should examine both the last document used
and the next unused document to verify that they were used/unused.
This procedure helps ensure that only sales for the current period are
recorded. Accounting personnel may use the Period-end Cutoff and
Reconciliation Form at Appendix 3l to log this information.
Obtain copy of shipping log at month end. If the company keeps a log
of all merchandise shipped, accounting personnel should obtain a copy
of the log for the last business day of the period and the first business
day of the next period. Accounting personnel should subsequently check
the last five or so shipments at the end of the period and the first five or
so shipments at the beginning of the next period to ensure invoices were
prepared and sales were recorded in the proper period.
Process all debit and credit memos due. Accounting personnel

should ensure that all customer debit or credit memos (returned goods,
price adjustments, etc.) have been recorded. Locating unprocessed debit
or credit memos will vary depending on the companys internal
procedures. For example, if the company maintains a log of cash
application exceptions (see Paragraphs 310.24-.26), accounting
personnel may review this log to identify any unresolved exceptions.
Accounting personnel can also review the file of unmatched receiving
reports at period end to identify goods returned by customers for which
credit has not yet been issued.
Account for numeric sequence of documents. Accounting personnel

should review the numeric sequence of sales-related documents
(invoices, shipping documents, and sales orders) issued during the
month to identify any out-of-sequence or missing numbers. This
procedure may help identify unrecorded sales or sales recorded in the
wrong period. Accounting personnel should refer to the last document
number list discussed above when performing this procedure.
Review open sales order file. Accounting personnel should also

consider reviewing the open sales order file to identify any old or
significant sales orders that have not yet been filled or that may have
been filled but not yet invoiced.
325.12 The above steps help ensure that sales are recorded in the appropriate period. It is
equally important that accounting personnel ensure that the related costs belonging to each
sale are recorded in the same period as the sale. Without a proper matching of costs to sales
in each period, net income can be significantly overstated. For example, if a $10,000 sale is
recorded at the end of the period, but the related $8,000 cost of sale is delayed until the
following period, the companys income statement will overstate gross profit by $8,000.
325.13 Most accounting systems are designed to automatically record the related cost of
sales for all sales recorded through the sales journal. In other words, as items sold to a
3-23

customer are entered into the accounts receivable system for invoicing, the items are also
flagged in the inventory system. When the items sold are posted to accounts receivable and
sales, inventory and costs of sales are also posted. Since the entry for recording inventory and
cost of sales is often system-generated, accounting personnel are primarily concerned with
recording cost of sales for any sales recorded outside the normal process. Thus, accounting
personnel should review any sales recorded to the general ledger through manual journal
entries or other nonstandard methods to ensure the related costs of sales have been recorded.
330
SUMMARY
330.01 Cash receipts and sales are the lifeblood of any small business. Thus, a crucial role for
accounting personnel is promptly and accurately processing and recording cash receipts and
sales.
330.02 The type of system small businesses use can impact how accounting personnel
process invoices. For nonretail businesses, cash receipts processing is affected by whether the
company uses an open item or a balance forward accounts receivable system. Sales
processing is affected by whether or not the company uses an order-entry system for entering
customer orders. For retail businesses, sales/cash receipts processing is governed by whether
the company uses a point of sale system or a traditional cash register.
330.03 For nonretail businesses, mail receipts processing is often the most time-consuming
task. Whenever possible, the persons opening the mail and making the deposit should not
have other accounting or cash responsibilities. Accounting personnel typically should use batch
processing when applying customer remittances against their account balances. Remittance
exceptions are common and should be promptly resolved and processed. A remittance
exception log often helps to ensure prompt follow-up of remittance exceptions. After processing
each remittance batch, accounting personnel should post each batch promptly to the general
ledger. Accounting personnel typically should use a batch control log to ensure all batches are
accurately posted.
330.04 For retail business, processing over-the-counter receipts is often less time-consuming.
Accounting personnel typically have two primary functions: (a) auditing the daily cash-register
report (DCR) received from the stores, and (b) coding and recording receipts to the general
ledger. A DCR audit checklist and a DCR that includes general ledger account numbers
provides more consistency and reduces the amount of time spent by accounting personnel.
Also, accounting personnel in a retail environment typically must handle credit card
transactions, which vary depending on whether or not the company uses an electronic credit
card terminal.
330.05 Accounting personnel often have minimal involvement with processing sales
transactions. If the company uses some form of order-entry system, order-entry personnel
(often outside the accounting department) enter the customer order information that produces
the sales invoices. If the company does not use an order-entry system, accounting personnel
may be responsible for entering sales information from customer orders or picking lists and
generating sales invoices.
330.06 After processing sales and cash receipts throughout the period, accounting personnel
should perform certain period-end procedures before completing the general ledger closing.
Those procedures typically include reconciling the bank accounts, reconciling the aged trial
balance and the general ledger, reviewing the aged trial balance for unusual items, and
performing certain procedures to ensure a proper sales cutoff was achieved.
3-24
Appendixes
3
Table of Contents
Appendix
Description
Page
Processing Mail Receipts

3A
Cash Receipts Batch Cover Sheet .................................................................
3-27
3B
Cash Receipts Batch Control Log ..................................................................
3-29
3C
Cash Remittance Exception Log ....................................................................
3-31
Processing Over-the-counter Receipts

3D
Daily Cash-register Report (DCR) Form .........................................................
3-33
3E
DCR Audit Checklist ........................................................................................
3-37
3F
Sales Invoices Batch Cover Sheet .................................................................
3-39
3G
Sales Invoices Batch Control Log ..................................................................
3-41
Completing Period-end Activities

3H
Bank Reconciliation Form...............................................................................
3-43
3I
Period-end Sales Cutoff and Reconciliation Form ........................................
3-45
3-25
Appendix 3A
Cash Receipts Batch Cover Sheet

Instructions
Data entry personnel may use this form to document the processing stage of a batch of cash
remittances. The form should be temporarily attached (by rubber band) to the remittance in the batch.
After the batch has been entered into and accepted by the accounting programs (and logged into the
Cash Receipts Batch Control Log at Appendix 3B) the batch cover sheet may be disposed of according
to the controllers preference.
Additional Guidance: See Paragraphs 310.06-.08.
Cash Receipts Batch Cover Sheet

Batch #
Number of Remittances
Batch Total (Total Batch Credits to A/R)

Date Entered
Entered by
Cash Receipt Journal #

Batch Listed in Cash Receipt Batch Control Log by
3-27
Appendix 3B
Cash Receipts Batch Control Log

Instructions
Data entry persons may use this form to create a cash receipts batch control log.
Record in the log the deposit amount, batch total (total credit to accounts receivables), and the other
listed information for each individual batch. As cash receipt documents are entered, they should be
canceled or marked entered to prevent reentering.
When a cash receipts journal is posted, calculate the journals expected total credit to trade receivables
based on information in the log. Then compare the calculated total to the cash receipt journals actual
total and the validated deposit slip amount. Enter a checkmark in the last column, if the amounts
agree. By agreeing the amounts, you have assurance that all deposited amounts were entered into the
system and that all cash receipts entered in the batches were actually posted to the cash receipts
journal.
The log should be permanently retained in the accounts receivable files.
Additional Guidance: See Paragraph 310.10.
3-29

Batch
No.
Batch Entered
By
3-30
edit manager to
Appendix 3C
Cash Remittance Exception Log
Appendix 3B
Date
Receipts Marked
Entered
By
Date
Deposit
Amount
Page:
Batch Total
(Total Batch
Credit to A/R)
Cash
Receipts
Journal
No.
A Unearned discount
B Freight deduction
C Price deduction
Name
Customer Account
Check
Number
Amount
Invoice
Number
Reason
Code*
Exception Data
* Reason Codes
D Damaged goods
G Sales tax
E Quantity discrepancy
H Unknown
F Duplicate deduction
I
Number
Check
Amount
Remittance Data
J
K
L
Comments
Date
Resolved
(Optional)
3-31
Appendix 3D
Daily Cash-register Report (DCR) Form

Instructions
Store personnel may use this form to document the daily cash register closeout. Store personnel
should complete the form, attach all supporting documentation (register tape, cash receipts, credit card
slips, approved overrings and underrings, vendor invoices, validated deposit slip, etc.), and forward the
package to the accounting department.
PART A
Part A represents the reconciliation of sales per the register to actual cash in the register. The store
manager should simply enter the following amounts:
Line 1Enter gross sales per the register. If sales taxes are entered separately as sales
are rung up, enter total sales taxes in the appropriate column.
Line 2Add any underrings or deduct any overrings, including the related sales tax, if
applicable.
Lines 5 and 6Deduct the total sales and sales tax amounts of any cash refunds given to
customers per Part C.
Lines 8 and 10If the company offers in-house credit, deduct the total of any sales on
account (line 8) and add the total of any receipts on account (line 10) per Part C (line 47).
Line 11Add the total of any other cash received per Part C.
Line 12Deduct the total of any miscellaneous amounts paid out from the register per
Part C.
Line 14Enter the amount that the register is over or short. This amount is the difference
between lines 13 and 15.
Line 15This is the actual amount to be deposited. It is taken from Part B, line 28.
PART B
Part B represents the amount of cash (coins, bills, and checks) and credit card slips that will be
deposited. The amounts should agree to the deposit slip except for any credit card sales transmitted to
the processor electronically. The total deposit amount equals the total less the fixed cash register fund
amount per line 20. The total deposit amount per line 28 is taken to Part A, line 15.
PART C
Part C represents a detailed listing of any miscellaneous transactions, such as refunds, paid outs,
miscellaneous income, or ROAs. Store personnel should write down the customer or vendors name,
cash receipt number (if applicable), general ledger account, and amount. Totals should be taken to the
applicable lines in Part A.
3-33
Appendix 3D
Store:
Register No.:
Prepared by:
Date:
Managers Signature:
Ending Register Reading:
1
2
3
4
5
6
7
8
9
10
11
12
13
PART ARECONCILIATION OF REGISTER SALES TO ACTUAL CASH

Description
Sales
Tax
Gross sales per register
+
Net voids: underrings (+) overrings (-)
+/Net sales
=
CR#
DR#
G/L Accounts
Customer refunds:
N/A
Sales amount refunded
DR #
Sales tax amount refunded
DR#
Total customer refunds (per Part C)
=
Sales on account
DR#
Total cash sales
N/A
=
Receipts on account (ROAs) (per Part C)
CR#
+
Miscellaneous income (per Part C)
CR#
+
Paid outs (per Part C)
DR# (see below)
Total expected cash
N/A
=
14 Cash over (+) short (-) (line 15-line 13)
CR or DR #
15 Actual cash to deposit (from line 28)
DR#
Total
+/=
PART BDETAIL OF ACTUAL CASH IN REGISTER

16
17
18
19
20
21
22
23
24
25
26
27
28
Coins
Bills
Checks
Subtotal
Fixed cash fund amount
Cash deposit amount
Credit card slips:
MasterCard/Visa
Discover
American Express
Other:
Total credit card deposit
Total deposit (To line 15)
+
+
+
=
=
+
+
+
+
=
=
3-35
Appendix 3D

(Continued)
PART COTHER TRANSACTIONS (Refunds, ROAs, Misc., Income, or Paid Outs)

Description (Customer or Vendor Name, Receipt No., etc)
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
3-36
Customer Refunds:
Total customer refunds (To Line 7)

Receipts on Account (ROAs):
Total receipts on account (To Line 10)

Miscellaneous Income:
Total miscellaneous income (To Line 11)

Paid Outs:
Total paid outs (To Line 12)
General Ledger
Account Number
Amount
Appendix 3E
DCR Audit Checklist

Instructions
Accounting personnel may use this checklist to document their audit of the daily cash-register reports
(DCRs) received from retail stores.
Steps
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
Completed
By or N/A
General
Check mathematical accuracy of DCR.
Determine whether the preparer and manager signed the DCR.
Compare the ending register reading at the top of the DCR to the previous days
reading for reasonableness.
Post the DCRs transactions to the appropriate general ledger accounts after
completing the DCR.
Part A
Agree gross sales and sales taxes (line 1) to the cash register tape.
Agree any voids, overrings, or underrings (line 2) to the register receipt or form
approved by the store manager.
If store personnel prepare customer invoices or receipts, total them, and agree the
amount to gross sales on line 1.
Check the numerical sequence of any customer invoices or receipts, and determine
whether the first number of the day is in sequence with the last number of the
previous day.
Agree any customer refunds (line 7), receipts on account (line 10), miscellaneous
income (line 11), and paid outs (line 12) to the corresponding totals in Part C.
If significant, compare the cash over or short amount (line 14) to the amounts for the
last 5 days to detect a pattern.
Agree the total deposit amount (line 15) to Part B (line 28).
Part B
Agree deposit totals (lines 21, 27, and 28) to the validated deposit slip, except for
credit card sales deposited electronically.
Separate credit card slips into stacks by type and prepare an adding machine tape
of each stack. Agree the total per each tape to the deposit amounts (lines 23-26) or
to the control totals (and related supporting documentation) taken from the
electronic terminal.
Check to ensure the proper fixed fund amount is shown on line 20.
Part C
Agree each transaction in Part C to supporting documentation attached to the DCR,
and enter or check the general ledger account number shown on the DCR.
Agree customer refunds and related sales tax amounts to the refund forms
approved by the store manager.
Review the nature and propriety of any paid outs and whether they were approved
by the store manager.
3-37
Appendix 3F
Sales Invoices Batch Cover Sheet

Instructions
If the company processes sales invoices in a batch processing mode (as opposed to an on-line, orderentry mode), data entry persons may use this form to document the processing stage of a batch of
sales invoices. The form should be temporarily attached (by rubber band) to the input documents
(customer order forms, shipping documents, etc.) in the batch. As shown below, the batch total is
generally based on quantities shipped or extended sales prices. After the batch has been entered into
and accepted by the accounting programs (and logged into the Sales Invoices Batch Control Log at
Appendix 3G), the batch cover sheet may be disposed of according to the controllers preference.
Sales Invoices Batch Cover Sheet

Batch #
Number of Invoices
Batch Total: Quantities

Date Entered
Dollars
Entered by
Sales Journal #
Batch Listed in Sales Invoices Batch Control Log by
3-39
Appendix 3G
Sales Invoices Batch Control Log

Instructions
If the company processes sales invoices in a batch-processing mode (as opposed to an on-line, orderentry mode), data entry persons may use this form to create a sales invoices batch control log.
Record the manually-computed batch total and the other listed information for each individual batch.
The batch total may represent the quantities shipped, or if known, the extended sales prices. In either
case, the manually-calculated batch total should be agreed to the corresponding system-generated
total.
If the batch total is based on extended sales prices, calculate the journals expected total debit to trade
receivables based on information in the log. Then enter the corresponding sales journal number and
compare the batch total to the sales journals actual total, and enter a checkmark in the last column if
they agree. When the totals agree, you have assurance that all invoices entered in the batches were
actually posted to the cash receipts journal.
If the batch total is based on quantities shipped, simply enter the corresponding sales journal number.
The log should be permanently retained in the accounts receivable files.
Additional Guidance: See Paragraphs 320.05.07.
3-41
Appendix 3G

Page:
Batch
No.
3-42
Batch Entered
By
Date
Order Forms or
Shipping Forms
Marked Entered
By
Date
Sales Journal
Batch Total
No.
Appendix 3H

Instructions
Accounting personnel may use this form to document monthly reconciliations of the companys bank
accounts. The format is slightly different from that found on the back of most bank statements. The
revised format allows accounting personnel to document general ledger account numbers for any items
recorded on the bank statement that have not yet been recorded in the general ledger.
The reconciliation form is divided into two sections. The section on the left-hand side reconciles the
ending bank statement balance to the adjusted general ledger balance. The right-hand side reconciles
the unadjusted ending general ledger balance to the adjusted bank balance. When accounting
personnel complete the reconciliation, the ending balance on each side should be the same. The
following provides instructions for completing each section.
Left-hand Section
Enter the ending bank statement balance on the first line. Next, enter all items recorded on the
companys general ledger but not by the bank. In other words, add deposits in transit and subtract
outstanding checks to arrive at an adjusted general ledger (and adjusted bank) balance. Deposits in
transit are generally obtained from the cash receipts journals, and outstanding checks are obtained
from the cash disbursements journals.
Right-hand Section
Enter the companys unadjusted general ledger cash balance at the end of the period on the first line.
Next, enter any items appearing on the bank statement (such as bank service charges or interest
earnings credited to the account) but not recorded in the general ledger. After adding or deducting
these items, the resulting balance is the adjusted bank (and adjusted general ledger) balance. Use the
last column to indicate general ledger account numbers for preparing the required journal entry for each
of the right-hand sections reconciling items.
As mentioned above, the adjusted balances at the bottom of each section should be equal if the
reconciliation was properly completed. Accounting personnel should then prepare journal entries to
adjust the general ledger (and subsidiary ledgers if applicable) for the reconciling items on the righthand section of the form. Occasionally, accounting personnel may also discover that deposits or checks
appearing in the left-hand section were recorded to the wrong general ledger cash account. If that
occurs, they should be added or deducted (as appropriate) from each sections adjusted balances at
the bottom of the form and an adjusting journal entry should be made.
3-43
Appendix 3H
Bank Account Name:
Bank Account Number:
Completed by:
Date Completed:
RECONCILIATION OF BANK STATEMENT TO G/L

$
Ending Bank Statement Balance as of
RECONCILIATION OF G/L TO BANK STATEMENT

$
G/L A/C #.
Unadjusted General Ledger Balance at End of
to Adjust
Period
Items in G/L, Not on Bank Statement

Add deposits in transit (attach list if needed):
Items on Bank Statement, Not in G/L

Add unrecorded deposits and other bank
credits:
+
+
+
+
+
+
+
+
+
+
Total unrecorded deposits and other bank
credits
Deduct unrecorded checks and other bank
debits:
Total unrecorded checks and other bank debits
Adjusted bank (and G/L) balance
=
+
+
+
+
+
+
+
+
+
+
Total deposits in transit
$
$
$
$
$
$
$
$
$
$
$
Deduct outstanding checks (attach list if needed):

-
Total outstanding checks

Adjusted G/L (and bank) balance
3-44
$
$
$
$
$
$
$
$
$
$
$
= $
CR. A/C #:
$
$
$
$
$
$
$
$
$
$
$
DR. A/C #:
$
$
$
$
$
$
$
$
$
$
$
$
Appendix 3I
Period-end Sales Cutoff and Reconciliation Form

Instructions
Accounting personnel may use this form at period end to help ensure that sales were properly recorded
during the period. The form is divided into the following two parts:
Part ASales CutoffPart A documents certain key information to help accounting

personnel ensure that sales were recorded in the proper period.
Part BReconciliationPart B helps accounting personnel reconcile the general

ledger and subsidiary ledger (aged trial balance) at period end.
Each part is explained below.

Part A. Sales CutoffAccounting personnel should simply list the last sales invoice and shipping
document numbers used at period end in the second column. The next four columns should be used to
list the four documents used before and after the last document number and the period in which they
were recorded. Obviously, the four preceding documents should have been recorded in the current
period and the next four documents should have been recorded in the succeeding period.
Part B. ReconciliationsThis part includes two reconciliations. The first part reconciles activity in the
general ledger accounts receivable (A/R) account and the second part reconciles the aged trial balance
to the A/R general ledger account.
When completing the first reconciliation, accounting personnel should:
Enter the beginning of the period general ledger balance on the first line.
Separately add the totals per the sales journals and cash receipt journals for the period
and enter them on the second and third lines.
Enter the totals of any other debits and credits posted to the accounts receivable
general ledger account on the fourth and fifth lines.
Calculate the ending general ledger balance by adding or subtracting the above
amounts from the beginning balance.
Enter the actual general ledger balance and compare it to the calculated balance. The
balances should be equal.
When completing the second reconciliation, accounting personnel should simply enter the ending AIR
aged trial balance amount and the ending general ledger balance. If there is a difference, enter that
amount. Accounting personnel should investigate and resolve any difference. Often, a difference results
from one of the other debits or credits listed in the first reconciliation above.
3-45
Appendix 3I
Period-end Sales Cutoff and Reconciliation Form
Company Name:
Period:
Prepared by:
Reviewed by:
PART A: SALES CUTOFF
Document
Name
Sales
Invoice
Last Document
Number at
Period End
Preceding Four Documents

Number
Next Four Documents
Period
Recorded
1.
2.
3.
4.
Period
Recorded
Number
1.
2.
3.
4.
1.
1.
2.
2.
Shipping
Form
3.
3.
4.
4.
PART B: RECONCILIATIONS
1. Reconciliation of Activity in General Ledger Trade Receivables Account
Beginning general ledger (G/L) A/R balance
+ Total A/R debits per the periods sales journals
- Total A/R credits per the periods cash receipts journals
+ Other debits in the G/L
- Other credits in the G/L
= Calculated ending general ledger balance
- Actual general ledger balance
= Difference (should be zero)
$
+
+
=
=
2. Reconciliation of A/R Aged Trial Balance to General Ledger

Ending balance per A/R aged trial balance
- Ending general ledger A/R balance
= Difference (should be zero)
$
=
3-46
Processing Purchases and Payments
4
Table of Contents
Section
Description
Page
400
INTRODUCTION .................................................................................................... 4-1
405
PROCESSING INVOICES ...................................................................................... 4-1

.02
.06
.16
410
Recalculating the Invoice ................................................................................ 4-6

Assigning Accounting Codes .......................................................................... 4-7
Documenting Procedures Performed on Each Invoice .................................... 4-7
Entering Invoices into the System................................................................... 4-8
.13 Batching Invoices ................................................................................... 4-9
.15 Purchase Journal Posting ...................................................................... 4-10
DISBURSING CASH ............................................................................................... 4-10

.02
.10
420
4-2
4-2
4-2
4-3
4-3
4-3
4-4
4-4
4-5
4-6
RECORDING INVOICES IN THE ACCOUNTING SYSTEM ................................... 4-6

.02
.05
.07
.09
415
Receiving the Invoice .....................................................................................

.04 Gathering Invoices Not in the Accounting Department ...........................
.05 Date Stamping Invoices Received .........................................................
Obtaining Direct Payment Authorization .........................................................
.10 Check Signer Approval ..........................................................................
.12 Direct Approval ......................................................................................
Obtaining Indirect Payment Authorization .......................................................
.18 Comparison to Purchase Orders ............................................................
.21 Comparison to Receiving Reports..........................................................
.24 Control over POs and RRs.....................................................................
Selecting Invoices to Pay................................................................................ 4-11

.06 Partial or Held Payments ....................................................................... 4-11
.08 Offsetting Payables and Receivables ..................................................... 4-11
Issuing Checks ............................................................................................... 4-12
.11 Preparing Checks .................................................................................. 4-12
.16 Signing Checks ...................................................................................... 4-13
.19 Distributing the Checks .......................................................................... 4-13
.23 Filing Paid Invoices and Check Copies .................................................. 4-14
COMPLETING PERIOD-END ACTIVITIES ............................................................. 4-14

.02
.03
.06
.10
Reconciling Internal Records .......................................................................... 4-15

Reconciling to Outside Vendor Records ......................................................... 4-15
Reviewing the Accounts Payable Subsidiary Ledger ...................................... 4-15
Cutting Off Accounts Payable....................................................................... 4-16
TOC 4-1

Section
425
Description
SPECIAL ISSUES IN PROCESSING PURCHASES ............................................... 4-17

.04
.08
.11
.17
.20
430
Page
Independent Contractor Information ............................................................... 4-17

Form 1099 MISC Information ......................................................................... 4-19
Backup Withholding ........................................................................................ 4-21
Vendor Insurance ........................................................................................... 4-22
Filing Vendor Information................................................................................ 4-22
SUMMARY.............................................................................................................. 4-23
Appendix
4A
Invoice Transmittal Log ........................................................................................... 4-27
4B
Check Request Form .............................................................................................. 4-29
4C
Purchase Order Form.............................................................................................. 4-31
4D
Receiving Report Form ........................................................................................... 4-33
4E
Vendor Invoice Processing Slip ............................................................................... 4-35
4F
Vendor Invoice Batch Cover Sheet.......................................................................... 4-37
4G
Vendor Invoice Batch Control Log ........................................................................... 4-39
4H
Check Stock Log ..................................................................................................... 4-41
4I
Check Authorization Letter ...................................................................................... 4-45
4J
Period-end Payables Cutoff and Reconciliations ..................................................... 4-47
4K
Vendor Statement Reconciliation ............................................................................ 4-49
4L
Independent Contractor Questionnaire.................................................................... 4-51
4M
Vendor Insurance Schedule .................................................................................... 4-55
TOC 4-2
400
PROCESSING INVOICES
RECORDING INVOICES IN THE ACCOUNTING SYSTEM
DISBURSING CASH
SPECIAL ISSUES IN PROCESSING PURCHASES
INTRODUCTION
400.01 One of the accounting staffs most important jobs is processing and recording
purchases. The bookkeeper should follow practices that protect the businesss cash from misuse
while preserving good relations with its suppliers. The purchase activity often produces the
greatest number of general ledger entries, so a strong knowledge of the computerized accounting
system as well as financial and tax accounting is needed to properly record transactions. The
accounting staff must clearly document how the business classified a purchase for taxes because
purchase transactions are often the focus of state and federal tax audits.
400.02 This chapter discusses purchasing activities. These activities include the following:
Processing Invoices. Section 405 explains the accounting personnels

activities when receiving the invoices and obtaining authorization for
payment.
Recording Invoices In the Accounting System. Section 410 describes

the accounting staffs recalculating the invoice, assigning accounting
codes, documenting the invoice processing, and entering invoices into
the computerized accounting system.
Disbursing Cash. Section 415 presents guidance when selecting

invoices to pay and issuing checks.
Completing Period-end Activities. Section 420 details four types of

activities the accounting staff should perform at the end of the
accounting period: reconciling internal records, reconciling to outside
vendor records, reviewing the accounts payable listing, and cutting off
accounts payable.
Special Issues In Processing Purchases. Section 425 explains the

businesss obligation to gather and process information about vendors.
400.03 This chapter assumes that the accounting staff is using a computerized accounting
system and that the majority of purchases are on credit and supported by invoices. In general, an
invoice is the bill for one purchase transaction. A statement is a listing of all the invoices created
4-1

and remaining unpaid as of a certain date. Usually, businesses choose to record purchases and
schedule disbursements based on invoices rather than statements to check the accuracy of the
vendors statement and records, schedule payments to take advantage of each invoices credit
terms, and accurately record the purchase in the period it occurred.
405
PROCESSING INVOICES
405.01 The accounting staffs activities when processing invoices are more complicated and
important than they may at first appear. The activities include:
Receiving the invoice.
Obtaining payment authorization.
Updating vendor information.
The following paragraphs discuss these activities in detail.

Receiving the Invoice
405.02 A business generally should distribute mail containing invoices directly to the accounting
staff, who then take control over the processing of the invoice. To help implement this practice,
persons authorized to make purchases should be instructed to ask vendors to send the bill to
Accounts Payable, Bookkeeping, or Accounting Department. The accounting staff also
should instruct the person who sorts the mail to recognize the invoice envelopes of the
companys recurring vendors. In a business with a large volume of vendors, the accounting staff
should prepare a list of the companys vendors for the mail sorters reference.
405.03 As an alternative, the business may have the mail person initially distribute the invoice to
the department supervisor or manager responsible for the purchase. For example, a trucking
firms fuel invoices could be routed directly to the supervisor of fleet operations. The
disadvantage of this procedure is that, because no one else knows that the invoice was received,
invoices may easily become lost or delayed in payment. As bookkeepers know, most operating
department personnel arent eager to process paperwork. For this reason, controllers often
decide to send ordinary invoices directly to the bookkeeper and to send only those invoices from
a few vendors who represent exceptional situations directly to an operating department.
405.04 Gathering Invoices Not in the Accounting Department. In spite of the companys
efforts to distribute invoices directly to the accounting staff, invoices may come directly to the
supervisor or manager who initiated the purchase. For example, when the controller buys a tax
book, the invoice may be attached to the book shipped directly to the controller. Usually these
invoices are incidental and do not create a great problem. However, to ensure the business
records all purchases and liabilities in the proper accounting period, the bookkeeper should take
special procedures to obtain and record such invoices at the fiscal year end.
405.05 Date Stamping Invoices Received. In a business with a low volume of purchase
transactions, accounting personnel usually do not stamp the invoice with the date received.
However, in a business with a high volume of purchase transactions, a controller sometimes
requires the bookkeeper or payables clerk to stamp the invoice with the date received
4-2
by accounting. Controllers may use this date stamp to help monitor the accounting departments
processing volume or speed, help file unpaid invoices, schedule invoices for payment, or
calculate discounts. Rather than have a separate stamp, the date received can be incorporated
into the invoice processing slip or stamp, as discussed at Paragraphs 410.07-410.08.
Obtaining Direct Payment Authorization
405.06 The bookkeepers first step in processing the invoice is to obtain approval to pay the
invoice. The approval procedure should confirm that the business actually received its purchase
in accordance with the agreed upon cost, quantity, quality, and other purchase terms. When the
business tracks purchases by specific cost centers or project codes (such as contracts or
construction projects), the bookkeeper may also use the approval procedures to determine the
purchases complete account coding (discussed at Paragraphs 410.05410.06).
405.07 Businesses generally choose from among three different procedures to approve the
purchase:
Check signer approval.
Direct approval by person who initiates the purchase.
Indirect approval by the person who initiates the purchase.
405.08 Except in the smallest companies, approval by the check signer does not give the
business the assurance it is seeking. Generally, small and medium-sized service businesses find
the second method, direct approval by the person who initiates the purchase, to be most
appropriate. These two methods are discussed in the following paragraphs. Large or inventory
intensive businesses rely heavily upon the indirect approval by the purchase initiator; however,
even the business that uses the indirect approval method for inventory purchases may still use
the direct approval method for many small purchases of goods and services. The indirect
approval method is described at Paragraphs 405.16-405.26.
405.09 Before obtaining the check signers or purchase initiators approval, many businesses
require the accounting staff to verify the legitimacy of large invoices from new vendors. The
accounting staff usually has the credit department use their resources (such as Dun and
Bradstreet books) to verify that the vendor is bona fide.
405.10 Check Signer Approval. Some small companies rely on the check signer (usually the
owner) to approve all disbursements. This control often is not effective for two reasons. First, the
check signer is often too busy (and the checks are prepared too close to the mail pickup times) to
carefully examine each disbursement and its support. Second, in many businesses, one check
signer does not have sufficient information to be the primary control over every payment.
405.11 Instead, the check signers review should serve as only a secondary form of approval for
the transaction, and it should be accompanied by either the direct or indirect approval of the
purchase initiator. If such approval is not possible, then another officer, such as the controller,
should carefully review the supporting documents and account coding for all significant
disbursements.
405.12 Direct Approval. In businesses where managers directly approve the payment of
invoices for their purchases, the accounting staff forwards the invoices to the managers for
4-3

approval. If an invoice comes to the manager directly from the vendor, the manager should
approve the invoice before sending it on to accounting.
405.13 In either case, the bookkeeper should instruct the managers that their approval should
include a review of the item description, cost, quantity, quality, and payment terms. Managers
may simply initial the invoice to indicate their approval. Highlighting or circling the initials helps
the bookkeeper locate the approval. Some businesses standardize the location of the approval
initials by including a space for the approval on the processing slip or block stamp (described at
Paragraph 410.07).
405.14 Direct approvals biggest challenge is that the managers may delay or lose the invoices.
In some businesses, managers are very responsible in approving and returning invoices. In other
situations, however, the bookkeeper may find it necessary to implement a procedure to ensure
that invoices sent for approval are returned promptly. One procedure is for the accounting staff to
send a copy of the invoice to the manager for approval, noting on the original invoice when and to
whom the copy was sent. Another procedure is for the bookkeeper to keep a log of original
invoices sent to managers for approval. The information in the log should be sufficient to allow
the accounting staff to request a replacement invoice from the vendor, if necessary. Appendix 4A,
Invoice Transmittal Log, is a sample page from such a log.
405.15 Not all purchases arise from invoices. For example, travel advances are not initiated by
an invoice, Instead, the business may use a check request form to initiate a purchase
transaction. The check request form is prepared by the purchase initiator, approved by an
authorized manager, and forwarded to the bookkeeper. Upon receipt, the bookkeeper basically
processes the check request in the same way as an authorized invoice. Appendix 4B, Check
Request Form, presents a sample check request form.
Obtaining Indirect Payment Authorization
405.16 In a large or inventory intensive business, the purchase volume is such that having a
manager directly approve invoices is not an effective and efficient use of time. Instead, the
business obtains approval for payment indirectly in what is usually a two step process:
The bookkeeper compares the invoice to a purchase order form (PO)

created by the person initiating the purchase.
The bookkeeper compares the invoice to a receiving report form (RR)

prepared by an employee or to a packing list verified by an employee.
405.17 These comparisons may be performed manually by the accounting staff or in part by the
computer system. Because the indirect approval method involves several comparisons and
multiple documents, it requires much greater administrative effort by the bookkeeper than does
the direct method. However, more time is saved by the operating departments. These
comparisons are discussed further in the following paragraphs.
405.18 Comparison to Purchase Orders. For the accounting staff, a purchase order
represents documentation of the managers pre-approval of the purchase terms (such as the
item, price, and quantity). By comparing the invoice (what the vendor says it did and the terms)
and the purchase order (what the manager expected to be done and the terms), the bookkeeper
can determine if the manager pre-approved what the vendor billed. Appendix 4C, Purchase
Order Form, is a sample form that can be used as a purchase order. Because purchase orders
4-4
given to external vendors legally commit the business to complete the purchase, any PO form
should be reviewed by an attorney before being adopted by the business.
405.19 When comparing the invoice to the PO, the accounting staff should review the following
items (if applicable):
Item number.
Item description.
Cost.
Quantity.
Discount.
Payment due date.
Freight charges.
Other purchase terms.
405.20 When the purchase information on the invoice and the purchase order agree, the
accounting staff can proceed to the next stage of the approval process (discussed at Paragraph
405.21). When there are differences, the bookkeeper usually must notify the creator of the
purchase order and await further instructions. Generally, the bookkeeper should send only copies
of purchase orders, not originals, to persons outside the accounting department as part of the
resolution process. The bookkeeper may document when and to whom the PO copy was sent on
the PO retained in the accounting department.
405.21 Comparison to Receiving Reports. For the accounting staff, a receiving report
prepared by an employee who has physically counted and inspected the goods received can help
provide authorization for the invoice payment. By comparing the receiving report (what was
received) with the purchase order (what the manager expected to receive), the bookkeeper can
determine if the manager pre-approved what the company actually received. When comparing
the invoice and the receiving report, the bookkeeper should compare the product descriptions
and quantities of goods.
405.22 Often a business uses a copy of the purchase order with the prices and quantities
masked out as the receiving report form. Many office supply stores sell pre-printed multi-part
purchase order/receiving report forms. Some businesses use the packing list enclosed with the
received goods, instead of a receiving report form, to document its counts and inspections.
Appendix 4D, Receiving Report Form, presents a sample form that can be used as a receiving
report.
405.23 When the purchase information on the invoice, purchase order, and receiving report
agree, the bookkeeper can consider the invoice as approved for payment and then proceed to
the next stage of the payment process (discussed at Paragraph 410.01). When the receiving
report contains differences, the bookkeeper usually must notify the creator of the purchase order
and await further instructions. Generally, the bookkeeper should send only copies, not originals,
of receiving reports to persons outside the accounting department as part of the resolution
process. The bookkeeper may document when and to whom the receiving report copy was sent
on the receiving report retained in the accounting department. Some businesses find it
4-5

advantageous to adopt an accounting policy for the approval of purchases that are divided into
several shipments.
405.24 Control over POs and RRs. Businesses find it useful to sequentially number POs and
RRs. Assigning each PO a unique number helps those purchasing goods to track their commitments. Similarly, sequential numbering of receiving reports helps the business track receipts of
purchases.
405.25 For the accounting staff, the PO and receiving report numbers can form an important link
between the invoice and the support that authorizes its payment. The bookkeeper usually records
the PO and RR numbers on the invoice itself, attaching the supporting POs and RRs to the
invoice.
405.26 When administering a system using POs and RRs, the bookkeeper often keeps files of
open or unmatched invoices, POs, and RRs as well as files of invoices, POs, and RRs with
differences awaiting resolution by the preparer of the purchase order. Periodically, the
bookkeeper should review these open items and investigate items that have not been resolved
within a reasonable time. Management may also want such information (for example, to identify
vendors who are slow to ship).
410
RECORDING INVOICES IN THE ACCOUNTING SYSTEM

410.01 After the accounting staff has completed the initial invoice processing (received the
invoice, obtained approval for its payment, and updated the vendor information), the staff
performs clerical processes to record the purchases in the accounting records, including:
Recalculating the invoice.
Assigning accounting codes.
Documenting procedures performed on each invoice.
Entering invoices into the system.
The following paragraphs discuss these activities.

Recalculating the Invoice
410.02 Traditionally, the bookkeeper performed calculations to determine the clerical accuracy
of the invoice. In performing these tests, the bookkeeper multiplied the units purchased by the
unit cost, totaled all the unit costs, determined the applicable sales tax rate and calculated the
taxes, calculated and subtracted any discounts, and calculated the total invoice charges.
410.03 With the advent of computer prepared invoices, some businesses have chosen to not
recalculate invoices or to recalculate them only if they exceed a certain amount. Other
businesses have the accounting staff total the invoice but calculate the extended price of
selected items only. Still other businesses have the staff continue the traditional practice.
4-6
410.04 To avoid misunderstandings, the accounting staff should determine that the businesss
expectations for calculations are clearly expressed and documented. When only selected items
on the invoice are recalculated, the staff should also carefully document on the invoice which
items are recalculated, usually by placing a symbol (such as ) next to those items.
Assigning Accounting Codes
410.05 The accounting staff must assign accounting codes to each invoice to record the
transaction in the form a computer will understand. Because detecting and correcting a miscoded
transaction is often difficult and time-consuming, the staff should take extra care to ensure the
initial transaction coding is correct. For example, while an out-of-state vendor may not charge the
business sales tax on a purchase, the business may owe its home state a use tax that should be
recorded. The accounting staff should be able to recognize that the use tax is due and to code
the invoice accordingly.
410.06 When coding invoices, accounting staff may encounter transactions that require the
establishment of new account codes in the general ledger. The bookkeeper has two basic
options. The first option is to suspend processing until the code is set up, which may delay the
recording of the entire invoice batch. The second option is to record the transaction in a
suspense account. The advantage of the second option is that the liability is recorded and the
batch processed without further delay; its disadvantage is that the bookkeeper must remember to
follow-up on and properly record the transaction in the general ledger and other supporting
journals. The bookkeeper will have to rely on the controller and personal preference in choosing
which option to use.
Documenting Procedures Performed on Each Invoice
410.07 A bookkeeper may find that by documenting the invoice processing steps as they are
performed, the bookkeeper can better keep track of what steps remain for each invoice. This
documentation usually is accomplished in one of two ways:
A processing slip. A processing slip is usually from one-half to one

page in length and is attached to the invoice and its supporting PO and
receiving report. The slip contains spaces where the bookkeeper
documents each processing step completed. (In some businesses the
processing slip is called a voucher, and while a voucher often contains
the same information as a processing slip, a true voucher contains a
unique document number.) The processing slips primary advantage is
that the slip often is more readable than the stamped processing block;
its disadvantage is that it may become separated from the invoice.
A stamped processing block. The bookkeeper may use a rubber stamp

to impress a form onto the face of the invoice itself. The form, sometimes
called a processing block, contains spaces where the staff documents
each processing step completed. The stamped processing blocks
primary advantage is that the processing documentation cannot become
separated from the invoice and lost. Its disadvantage is that it may be
hard to read.
4-7

410.08 The processing slip or stamped processing block should be affixed to the invoice before
invoices are sent out of the accounting department for approval (see Paragraphs 405.14-405.15).
Exhibit 4-1 displays a form that could be used as a processing slip. A stamped processing block
would use abbreviations and smaller spaces to fit on the invoice. Note that the block should be
modified for the business; for example, some businesses would not use the lines for Agreed to
PO #, Agreed to RR #, or Discount Missed. The block also contains lines such as Entered in
Batch # by and Paid by Check #, that are for later processing use. (See Paragraphs 410.09410.14 and Section 425). A copy of this form is reproduced at Appendix 4E, Vendor Invoice
Processing Slip, for the accounting staffs use.
Exhibit 4-1
Vendor Invoice Processing Slip or Stamped Block
Done by
Date Received by Accounting
Initiators Approval
Agreed to P0 # _____________
Agreed to RR # _____________
W-9 on file
_Y _N _NA
Backup Withholding _Y _N _NA
Insurance Certificate _Y _N _NA
________
________
________
________
________
Done by
Price x Quantity Tested
________
Invoice Totaled
________
Computed Sales Tax
________
Recorded Use Tax
________
Computed Freight
________
Discount Taken $____________ ________
Discount Missed $____________ ________
Vendor # _________ Invoice # ________________ Invoice Due Date ____________

Amounts and Accounting/Project Codes:
Processing Reviewed by ____ Entered in Batch #____ by
Paid by Check #_______________
Other businesses may use software programs that place vendor information (W-9, backup
withholding, and insurance certificate) on the computer screen; the accounting staff could then
remove those items from the processing block.
Entering Invoices into the System
410.09 After the accounting staff has assigned the account coding to the invoice, the bookkeeper
is ready to enter the purchase transaction into the businesss computerized accounting system.
(If the business uses a manual accounting system, the bookkeeper typically delays recording the
purchase until the preparing of the disbursement check.) Many bookkeepers think this is the
most efficient time to review the adequacy of the invoice processing. However, others prefer to
review the invoice and its support after the check has been prepared. The bookkeepers
preference should be determinative.
410.10 When entering the information into the computer system, the accounting staffs goals are
to ensure that:
4-8
All the required information on the invoice is entered.
The information entered is accurate.
Invoices are entered only once.
All the invoices to be processed are entered.
410.11 The first three goals may be met in part through calculations and comparisons built into
the computer program. If this is not the case, the bookkeeper and the controller or outside CPA
should design procedures to give assurance that these goals are met. For example, the
bookkeeper may compute totals of certain information on each invoice and then compare the
calculated total to a corresponding total calculated from a computer report.
410.12 The third and fourth goalsassurances that all the invoices to be processed are entered
once and only onceare generally accomplished by using batches to control unentered invoices.
A batch consists of a bundle of invoices that are entered into the computerized accounting
system during the same session.
410.13 Batching Invoices. An effective batch system contains four features:
Cover sheet. The cover sheet allows the bookkeeper to quickly

determine the status of a batchs processing. The cover sheet contains a
unique batch identifying number and has space for the bookkeeper to
document the steps taken in processing the batch and to record the
batch total. The batch cover sheet is temporarily attached to the bundle
of supporting invoices. Appendix 4F, Vendor Invoice Batch Cover Sheet,
presents a sample sheet.
Batch total. The bookkeeper computes the batch total by computing the
total credit to trade accounts payable from the invoices to be entered.
The computer program calculates the total credit to trade accounts
payable for the invoices entered. When the two totals agree, the
bookkeeper has gained some assurance that all the invoices have been
entered accurately and only once.
Cancellation. The bookkeeper should note on the invoice that it has

been entered into the computer. This procedure helps ensure that an
invoice is entered only once. Some bookkeepers place a special mark on
the invoice, others stamp the invoice Entered, while others initial a line
on the stamped processing block or processing slip. To help research
data entry problems, the authors recommend recording on the invoice
both the batch number and the initials of the person who entered the
invoice. The sample processing slip at Appendix 4E, Vendor Invoice
Processing Slip, contains spaces for this information.
Vendor invoice batch control log. The bookkeeper records the batch
total and the processing stage of the batches in a vendor invoice batch
control log. Typically, the bookkeeper records the date and the person
who entered the batch, the date and person who cancelled the
supporting invoices (marked as entered), and the batch total (total
credit to trade accounts payable). Appendix 4G, Vendor Invoice Batch
Control Log, presents a sample log page.
410.14 Once the batch has been entered into and accepted by the system, the bookkeeper
removes the batch control sheet and temporarily files the entered but unpaid invoices by vendor
in an entered and awaiting payment file. Usually, the batch control sheets are kept only for a
4-9

month (if they are kept at all) to allow tracking of problems located during the monthly accounting
cycle.
410.15 Purchase Journal Posting. After one or more invoice batches have been entered into
the computer, the bookkeeper must instruct the computer program to post the entered invoices to
a purchase journal that automatically updates the computerized vendor history records and
subsidiary accounts payable journal. (Some computer programs go a step further and
automatically post the purchase journal to the general ledger; others do not.)
410.16 Because of interruptions, the bookkeeper may forget to instruct the computer to post the
entered invoice batches to a purchase journal. While some computer programs have controls to
prevent accounting staff from forgetting to post a batch, many others do not. Thus, accounting
staff should follow a procedure to ensure that all the invoice batches entered are posted to a
purchase journal.
410.17 The bookkeepers primary tool for this task is a comparison of the vendor invoice batch
control log to the purchase journal. The bookkeeper should record in the invoice batch control log
the sequence number of the purchase journal to which the batch was posted. After posting a
purchase journal to the general ledger, the bookkeeper should agree the totals of the batches
posted to the purchase journal (per the invoice batch control log) to the purchase journals total. If
the two totals agree, the bookkeeper has assurance that all the invoices entered into the system
were posted to the purchase journal. The bookkeeper should document the agreement on the
purchase journal and the vendor invoice batch control log. If the two totals do not agree, the
bookkeeper must locate and correct the difference.
410.18 In some accounting systems, after posting to the purchase journal the bookkeeper must
take additional steps to update supporting fixed asset, project cost, or inventory records. For
example, the fixed asset subsidiary journal may not be integrated with the purchasing software
module, and the bookkeeper would have to re-enter information into the fixed asset program to
record assets purchased.
415
DISBURSING CASH
415.01 After recording the invoices in the accounting system, the bookkeeper is ready to pay the
invoices. When disbursing cash, the bookkeeper has two major activities:
Selecting the invoices to pay.
Issuing checks.
During these activities, the bookkeepers concerns include taking full advantage of the vendors
credit terms and protecting the businesss cash from misuse. The following paragraphs give
suggestions for conducting these activities.
4-10
Selecting Invoices to Pay

415.02 Many businesses take advantage of the vendors credit terms by delaying the payment
of invoices until near the end of the credit term. This practice requires that each invoice be
assigned a payment date. Many computerized accounting systems automatically assign the date
of payment based upon (a) the invoice date entered into the accounting system, and (b) a time to
pay (such as 25 days) recorded in the computerized vendor master file. Some more
sophisticated systems also take discount terms into the calculations. In manual systems, the
bookkeeper typically uses knowledge of the vendors credit terms to file the invoices awaiting
payment by the scheduled payment date.
415.03 While credit terms are a key factor in deciding when to pay an invoice, other important
factors include the businesss cash on hand, expected cash flow, relations with the vendor, and
credit rating considerations. The computer program, or even the bookkeeper, may not have
access to all this information.
415.04 Accordingly, prior to preparing the disbursement checks, the bookkeeper often prepares
a proposed scheduled to pay listing of the invoices. (Many computerized systems can prepare a
scheduled to pay listing as a standard report.) The businesss controller or owner modifies and
approves the scheduled to pay listing to better respond to the businesss cash and purchasing
situation. The bookkeeper then reassigns any invoice payment dates as directed and runs the
disbursement checks. It is a good practice for the controller to initial the scheduled to pay listing
when approving it. The controller may then later compare the checks actually written with the
approved schedule of checks.
415.05 The scheduled to pay listing usually groups invoices by date within vendor, includes the
vendor total, and calculates the grand total of the check run. Some versions of the report also
include the amount and due dates of proposed payment discounts. The authors recommend that
the report also print each vendors standard time to pay used by the computer. Upon seeing the
time to pay information, the controller or owner may wish to change the period or renegotiate
the vendors terms.
415.06 Partial or Held Payments. Sometimes the controller may decide to pay only part of an
invoice. As a general rule, the bookkeeper should associate the partial payment with a specific
vendor invoice and should not list the payment as a payment on account. This procedure will
help reduce confusing differences between the businesss and the vendors records. However,
the controller may want the subsidiary accounts payable ledger to show both the original amount
of the payable and the current amount owed; in this situation, the bookkeeper may have to
manually write the requested information on the subsidiary ledger.
415.07 At other times the controller may decide to put a payment on hold, that is, to delay the
payment indefinitely (usually until a dispute is resolved). In both manual and computerized systems, the bookkeeper needs a means to ensure that the held payment is not forgotten. A regular
review of the accounts payable listing (see Paragraph 420.06-420.08) is one procedure that helps
identity held payments. The bookkeeper also may keep the held payment from being forgotten by
physically placing the invoice into a special folder kept in the front of the open invoice files.
415.08 Offsetting Payables and Receivables. Generally, it is not wise to offset a payable with
a receivable from the same company, if the receivable and payable arose from separate types of
transactions (such as the businesss purchase of services from the ABC Company and the
businesss sale of merchandise to the ABC Company). Such offsetting usually creates problems
in retracing the transaction. More importantly, however, without additional accounting entries the
offsetting may misstate underlying subsidiary ledgers and computer files used to calculate various
4-11

taxes.
415.09 Debit balances in accounts payable, however, may be offset against credit balances in
accounts payable since the debits usually do arise from purchase transactions (returns, price
adjustments for damaged merchandise, overpayments, or discounts).
Issuing Checks
415.10 When issuing checks the bookkeeper usually performs the following steps:
Preparing the checks.
Getting the checks signed.
Distributing the checks.
Filing the paid invoices and check copies.
The following paragraphs discuss these activities in detail.

415.11 Preparing Checks. When preparing checks using a computer and special check stock,
the bookkeepers goals include ensuring that only authorized and recorded disbursements are
made. The bookkeeper can meet these goals by:
Securing check stock. The bookkeeper should keep all check stock, including
stock not currently used, under lock and key. (Some businesses go so far as to use
two locks requiring two persons be present to unlock the stock.) The unopened
boxes of checks should be listed in a check stock log, remain taped or otherwise
sealed, and be regularly monitored for unauthorized opening and use. Blank stock
taken to prepare checks should not be let out of the bookkeepers sight.
Recording all checks used. The bookkeeper should log all checks taken from the
open box of check stock, including those that were damaged and voided (see
Paragraph 415.13).
Appendix 4H, Check Stock Log, displays two pages from a check stock log.
415.12 The bookkeeper should keep written but unissued checks under lock and key. if the
computer prepares a listing of the checks printed, the listing should be retained for review by the
check signer. Some controllers may choose to retain the listing longer for control purposes.
415.13 Typically, when preprinted stock is used, several checks at the beginning of a check run
are ruined in the process of aligning the printer. The bookkeepers should record the checks in the
log, physically cut the signature lines out of the check, and place both the original and duplicate
checks in the check history file (see Paragraph 415.23).
415.14 Sometimes checks are written and recorded in the accounting system, only later to
require cancellation (voiding) and reissuing. Usually, the computerized accounting system has a
special program to void checks. The bookkeeper should physically cut the signature lines out of
the check and place both the original and duplicate checks in the check history file.
4-12
415.15 Even when the business is using a computerized accounting system, the business will
often prepare by hand checks that cannot wait to be printed in the next check run. These checks
are often called manual checks to distinguish them from computer prepared checks. Because
the computerized accounting program did not write the checks, the bookkeeper must update the
computer records to reflect the checks issuance. Most computerized accounting programs
contain options to record the issuance of manual checks.
415.16 Signing Checks. When the business opens a checking account with a bank the
business completes documents authorizing certain employees or combinations of employees to
sign checks up to specified limits. The bookkeeper should be familiar with the authorized check
signers and their limits. In companies with many checking accounts or signers, the bookkeeper
may have to prepare a schedule showing the authorized signers and their limits for each checking
account.
415.17 In smaller companies, an unauthorized person may sometimes have to sign a check, as
when all the authorized signers are out of town and a tax payment is due. The bank will usually
pay the check if the business gives the bank an authorization letter signed by a check signer
before the check is presented at the bank for payment (which may take up to one week when out
of town mail is involved). Appendix 4I, Check Authorization Letter, presents an authorization letter
that may be adapted for the businesss use.
415.18 Usually, the check signer desires to see support for the payments. The bookkeeper
typically gives the check signer the following:
Approved and initialed scheduled to pay listing. Some systems

produce a listing of checks when checks are written, and the signer often
wants to view this listing as well.
Checks. The bookkeeper should arrange the checks in the same order
as listed on the scheduled to pay listing. (To accelerate the disbursing
of the checks, the bookkeeper may attach the mailing envelope and
remittance advice, if any, to the check.)
Support. The bookkeeper should furnish the invoices and attached

support for each check, arranged in the same order as listed on the
scheduled to pay listing. When several invoices support a check, the
bookkeeper may group them together using a rubber band or a file
folder.
415.19 Distributing the Checks. The bookkeeper should distribute the checks as quickly as
possible after they have been signed. This general rule minimizes risks that a check will be lost or
stolen.
415.20 One way the bookkeeper can quicken the disbursing of checks is to prepare the mailing
envelopes before the checks are signed, rather than after. The bookkeeper could use window
envelopes or address the envelope and insert the remittance advices. The bookkeeper could then
clip the envelopes to the back of the checks to be signed.
415.21 The bookkeeper should avoid holding checks for one or more days after they are
prepared because the checks may be lost or stolen. Checks held at the end of an accounting
period may require adjustments in the accounting records. See Paragraph 420.10 for additional
discussion. Held checks also complicate the controllers job of managing the companys cash.
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415.22 If the bookkeeper does have to hold a check, it is generally preferable that the check not
be signed as part of the regular check run. Instead, the check should be signed when it is
released. If, however, the check must be signed and held, the bookkeeper should ensure that the
check is securely locked up.
415.23 Filing Paid Invoices and Check Copies. Businesses vary in how many check copies
they prepare. The simplest system is for the business to prepare one copy along with the original.
The copy is placed in a check history file, which consists simply of all checks in numerical order.
The bookkeeper writes the check number on the invoice to provide an audit trail as well as to
prevent the double payment of the invoice.
415.24 Some businesses prepare one original check and two copies. The bookkeeper files one
copy in a check history file and attaches the remaining copy to the invoice. The attached check
provides the needed audit trail and helps to prevent double paying invoices. When several
invoices are paid by one check, the controller may want the bookkeeper to make additional
photocopies of the check to attach to each invoice paid.
415.25 The bookkeeper files the invoices and attached support in accordance with the
businesss practice, with a goal of easily producing the documentary support for a disbursement.
Usually the invoice or check numbers are the keys to locating a document, but some systems rely
upon the purchase order number or a voucher number. Most small and medium-sized businesses
file invoices and support by vendor name and invoice number (or date).
415.26 Many small businesses keep both the current and the prior years files accessible.
Others keep accessible only the current years (although they may not remove the previous
years files until after the first one or two months of the new year). Because invoice and check
records may be used in lawsuits, some legal experts advise keeping them for seven years. The
controller, in consultation with the businesss attorney, usually determines how long paid invoices
and check copies should be retained.
420
420.01 To help ensure that all authorized purchase transactions, and only such transactions,
are recorded in the accounting records, the bookkeeper should perform certain activities at
period end, including:
Reconciling internal records.
Reconciling to outside vendor records.
Reviewing the accounts payable listing.
Cutting off accounts payable.
The following paragraphs discuss these period-end activities.
4-14
Reconciling Internal Records

420.02 As part of the monthly close of the general ledger, the bookkeeper should make two
comparisons (reconciliations). The bookkeeper should:
Compare the beginning and ending general ledger balances. The

bookkeeper may calculate the expected general ledger ending balance
using the beginning general ledger balance, the purchases journals, the
cash disbursement journals, and other reviewed general ledger entries. If
the calculated and actual ending balance amounts agree, the
bookkeeper has assurance that all the amounts entered in the summary
journals were posted to the general ledger.
Compare the accounts payable subsidiary ledger to the general

ledger. If the total of the accounts payable subsidiary ledger (sometimes called the accounts payable listing) agrees to the ending balance
of the general ledger accounts payable account, the bookkeeper has
assurance that all the invoices and payments posted to the general
ledger were also posted to the detailed vendor records.
Appendix 4J, Period-end Payables Cutoff and Reconciliations, presents a sample form with which
the bookkeeper can document these regular monthly reconciliations. The bookkeeper should
investigate any differences the comparisons identity.
Reconciling to Outside Vendor Records
420.03 While the bookkeeper should carefully exclude the vendors statement from the invoices
to be processed (see Paragraph 400.03), the bookkeeper should not totally ignore the vendors
statement. Periodically, the bookkeeper should compare (reconcile) the businesss records and
the vendors statement of unpaid invoices. This reconciliation gives the bookkeeper assurance
that the companys purchase liabilities are properly recorded in the businesss records.
420.04 When reconciling the statement to the businesss records, the bookkeeper usually
agrees the statements listing of invoices to the businesss accounts payable subsidiary ledger
(list of accounts payable). Differences are usually explained by recently paid invoices, unentered
invoices, or unmatched invoices/purchase orders/receiving reports. To help the bookkeeper,
many vendors arrange the statements invoice listing in date order. Appendix 4K, Vendor
Statement Reconciliation, is a form the bookkeeper may use when performing the reconciliation.
420.05 How often the bookkeeper makes the comparison will depend upon the credit relations
with the vendor, the purchase volume, and the frequency, amount, and persistence of the
differences. At a minimum, the bookkeeper usually reconciles the largest vendor statements in
preparation for an annual financial audit.
Reviewing the Accounts Payable Subsidiary Ledger
420.06 The bookkeeper (or possibly the controller) should review the accounts payable
subsidiary ledger monthly for debits and old invoices. In some companies, special computer
programs read the accounts payable file and locate debits or old unpaid invoices.
4-15

420.07 Debits represent amounts vendors owe the business. Sometimes vendors will pay the
business cash for the debit. In most instances, debits are offset against the amounts owed by
inclusion on a disbursement check as a negative invoice. However, debits that vendors will not
honor should be removed from the accounts payable subsidiary ledger and from the general
ledger (by a general journal entry).
420.08 Old unpaid invoices should be investigated and compared with the vendors statements.
In some cases the invoices represent true liabilities requiring payment. In other cases the
invoices were already paid and the listing should be corrected. The bookkeeper should review the
corrective actions to be taken with the initiator of the purchase and the controller (or outside CPA)
before making correcting entries. Some companies have the bookkeeper regularly prepare an
aged account payables report to identify such old invoices.
Cutting Off Accounts Payable
420.10 When period-end reports are prepared for outsiders (such as quarterly or annual reports
to the bank or shareholders), the bookkeeper should take special precautions to ensure that all
purchases and purchase obligations are recorded (cutoff) in the proper period. Precautions that
bookkeepers can take to get a proper period-end cutoff include:
Gathering invoices. The bookkeeper can circulate a memo to

managers who may have received invoices directly from vendors. The
memo should encourage the managers to forward the invoices to the
bookkeeper for recording and processing.
Recording the last documents used. At the end of business on the last
day of the accounting period, the bookkeeper can determine the
document numbers of the last used check and receiving report. The
bookkeeper can then investigate to determine that these and surrounding transactions are properly recorded or reported in the
accounting records for the current period. Generally, the bookkeeper
should reflect the items received but not yet invoiced as an accrued
liability in the financial statements. Appendix 4J, Period-end Payables
Cutoff and Reconciliations, presents a workpaper that may be used to
log this information.
Reviewing invoices. For one or two weeks after the end of the period,
the bookkeeper should carefully examine vendor invoices received.
Many of these invoices frequently are for goods or services received in
the preceding accounting period. For example, the bookkeeper may
carefully examine invoices received in April for goods or services
received in March. In addition to the normal processing of the invoices
the bookkeeper should make a list of all such invoices, their account
codings, and amounts, and attach copies of the invoices (if the business
will be audited by a CPA). The bookkeeper will usually make a general
ledger entry to properly state the periods financial records. The
bookkeeper may use Appendix 4J, Period-end Payables Cutoff and
Reconciliations, to gather this information.
Listing held checks. If a check was held at a period end, the
accounting records incorrectly report the liability to be paid. If the amount
is significant, the controller or CPA may need to prepare a
reclassification entry to debit cash and credit accounts payable at the
4-16
date of the financial statements. The bookkeeper may use Appendix 4J,
Period-end Payables Cutoff and Reconciliations, to gather this
information.
425
SPECIAL ISSUES IN PROCESSING PURCHASES

425.01 Businesses obtain certain information about vendors in order to avoid the risk of
substantial IRS penalties, to lower their insurance costs, or to lower their exposure to legal
damages. Ideally, this information is obtained on or before the time an order has been placed with
a vendor. In practice, however, the business often obtains or updates the information when the
bookkeeper begins to process the invoice.
425.02 The business should obtain or update information:
On the vendors status as an independent contractor to protect the business from

IRS claims for employment taxes and worker claims for unemployment benefits.
On the vendors status as a noncorporate nonemployee to fulfill its IRS obligations

to prepare Form 1099-MISC.
On the vendors tax status to fulfill its IRS obligations to withhold amounts to pay
income taxes (backup withholding).
On the vendors insurance status to save on the businesss insurance costs and
protect the business from lawsuits.
425.03 The following paragraphs discuss in detail the bookkeepers updating and filing of the
vendor information.
Independent Contractor Information
425.04 Under the federal income tax rules, most vendors that small businesses use are
considered to be independent contractors in business for themselves, rather than employees of
the business. However, small businesses that rely on individuals to routinely provide services
(such as welding, office cleaning, painting, computer consulting, or peak load work) may be at
risk for misclassifying as independent contractors persons the IRS views as employees. The IRS
is actively auditing the status of workers and is often aggressive in claiming that workers are
employees. The penalties for misclassification can be very severe and have been responsible for
the liquidation of many smaller businesses.
425.05 With knowledge of the classification principles the IRS uses and proper documentation,
the bookkeeper can do much to defend the business against IRS claims of misclassification.
Under federal income tax laws, there are three rules for classifying workers:
Direct sellers (such as door-to-door salespersons) and licensed real

estate agents are independent contractors.
Corporate officers are employees.
All other workers are classified by using twenty common law factors. In
general, the common law rule is that an independent contractor is free to
determine how the work for the business is to be performed. Appendix
4-17

4L, Independent Contractor Questionnaire, is a questionnaire based on
the twenty common law factors (as expanded by IRS and court
interpretations). The bookkeeper can use the questionnaire to help
classify those noncorporate vendors whose status appears uncertain.
The bookkeeper does not need to complete the questionnaire on every
vendor. The completed questionnaire should be filed in the vendor
documentation file (see Paragraph 425.20).
425.06
If the business conducts a significant amount of business with a vendor whose
independent contractor status may be uncertain, the bookkeeper should discuss the matter with
the controller or outside CPA. In many unclear cases, the bookkeeper can help defend the
business by obtaining certain documentation supporting the businesss treatment of the worker.
Exhibit 4-2 presents examples of helpful documentation. The documentation should be placed in
the vendors documentation file (see Paragraph 425.20).
Exhibit 4-2
4-18
Documentation Supporting Independent Contractor Status
Contracts
Bids
Vendors advertisements in newspapers, fliers, magazines, and telephone directories
The vendors business card and stationery
Documents evidencing the vendors reimbursement to eth business of any fees,

equipment rentals, supplies, insurance, bonding, or other expenses paid on the vendors
behalf
Vendor payments for damages to equipment or the work site
The vendors licenses, sales tax certificate, governmental permits, or incorporation

documents
The vendors insurance certificates or policies
Evidence of the vendors separate business location
425.07 Most businesses classifying vendors use the IRS rules and find them sufficient.
However, the bookkeeper should be aware that several lawssuch as federal social security,
federal unemployment, and state workers compensation lawsuse somewhat different
definitions of an independent contractor. These laws therefore infrequently classify workers
differently than the federal income tax law.
Form 1099-MISC Information
425.08 As part of its program to collect income taxes, the IRS requires businesses to report
payments made to many nonemployees (basically, independent contractors). IRS Form 1099MISC is most commonly used to report these payments. To comply with the reporting
requirements, the business must determine whether the requirements apply to both the vendor
and the payment, as discussed below:
The vendor. In general, a vendor must be reported on Form 1099-MISC
if it is a noncorporate nonemployee. A noncorporate entity is typically a
sole proprietorship or a partnership that has not chosen to legally
incorporate. The IRS instructions indicate that a noncorporate business
include one whose name ends with Company or Co. or no indication
of status; corporate entities have names that end with P.C.,
Incorporated, Inc., Corporation, or Corp. Law and accounting firms
are usually noncorporate businesses. In general, a nonemployee
(independent contractor) is a person who is free to determine how the
work for the business is to be performed (see Paragraphs 425.04425.07).
Thus, when the bookkeeper sets up a new vendor account, the
bookkeeper should determine if the vendor is a noncorporate
nonemployee; if so, the bookkeeper should indicate in both the vendors
documentation file and the computerized vendor master file that the
vendor is subject to Form 1099-MISC reporting.
The payment. The law requires the business or nonprofit organization

report on Form 1099-MISC payments (including exchanges of property
or services) for services rendered to the trade, business, or nonprofit
organization. Payments statutorily exempt from reporting on a Form
1099-MISC include payments for rent made to real estate agents, for
merchandise and inventory, and for utilities and telecommunications
services. Exhibit 4-3 lists the types of payments to noncorporate
nonemployees that must be reported. [Other payments may be
reportable on a form other than the Form 1099-MISC. This discussion on
the bookkeepers determination of the vendors Form 1099-MISC
reporting status is equally applicable to the obligation to report on the
other information returns.]
4-19

425.09 Businesses must give Form 1099-MISC to recipients by January 31st of each year and to
the IRS (along with a summary Form 1096) by February 28th. Bookkeepers can gain more
information from the Form 1099 instructions.
Exhibit 4-3
Payments Reported on Form 1099-MISC

Repo
1
Payment Type
Payments for services performed for a trade or business by people not treated as
its employees, including auto reimbursements, awards, bonuses, car expense,
Christmas bonuses, commissions, compensation, damages, directors fees,
education expense reimbursement, fees, golden parachute payments, health
services, medical services, mileage, prizes, subcontractors fees, use of an
entertainment faculty, and vacation allowances.
Reporting
Threshold
$ 600
Rent payments (except payments to real estate agents).

$ 600
Royalty payments.
$
Direct sales (to door-to-door salespersons and others) of consumer products for
resale.
Payments to crew members by owners or operators of fishing boats. Report

payments of proceeds from sale of catch.
Payments to a physician, physicians corporation, or other supplier of health and

medical services. (Issued mainly by medical assistance programs or health and
accident insurance plans.)
10
$5,000
All
$ 600
Assumes payments are made only to noncorporate nonemployees (basically,

independent contractors).
425.10 Some newer computerized application systems allow the bookkeeper to indicate
reporting on a Form 1099-MISC at both the vendor and invoice levels. However, in most
computerized accounting systems, the bookkeeper usually indicates if a vendor requires reporting
on Form 1099-MISC but does not indicate if a payment requires reporting. For example, if the
bookkeeper indicates that the ABC Construction Company is subject to Form 1099-MISC
reporting, the computer typically will aggregate all the payments made to ABC throughout the
year for inclusion on the Form 1099-MISC. If the business gives ABC some payments that are
reportable and some that are not, the bookkeeper typically creates two separate ABC
Construction Companies as vendorsone for the reportable and one for the nonreportable
payments. The bookkeeper should seek to make accurate distinctions among reportable and
nonreportable payments; if the reported amounts are higher than they are required to be, the
business may pay unnecessarily high workers compensation premiums (see Paragraphs 425.17425.19).
4-20
Backup Withholding
425.11 The IRS requires businesses not only to report payments made to independent
contractors, but also in certain cases to withhold 30% of the payment as income tax and remit the
withholding to the IRS. This withholding is called backup withholding.
425.12 Most businesses must make backup withholding if either of the following occur:
The independent contractor did not give the business a taxpayer

identification number (TIN) to show that the independent contractor had
been registered in the federal tax system. For individuals and sole
proprietorships, the TIN is the Social Security number; for corporations
and partnerships, the TIN is an assigned federal employer identification
number (FEIN).
The IRS informs the business that the furnished TIN is invalid.
425.13 To administer this law, the bookkeeper should use IRS Form W-9 to obtain a certified TIN
from independent contractors subject to backup withholding. The Form W-9 is reproduced at
Appendix 4M, IRS Form W-9. The bookkeeper should file the completed forms in the vendor
documentation file (see Paragraph 425.20).
425.14 The Form W-9 instructions list both the vendors and the payments exempt from backup
withholding. For most businesses the exempt vendors are corporations and governments and
the exempt payments are those not subject to reporting on Form 1099-MISC or the other
information reports (see Paragraphs 425.08-425.10).
425.15 If the business is required to make backup withholding from a vendors payments, the
bookkeeper must keep track of scheduled payments to the vendor. Automatic backup
withholding is not a standard feature among most commercial computerized accounting systems,
so the bookkeeper normally must use manual reminders to identify the vendor from whom
amounts must be withheld. In addition, the bookkeeper should place in the vendors
documentation file:
A memo describing the vendors backup withholding status and documenting that
the vendor was informed.
A schedule showing the gross, backup withholding, and the net amounts for each
affected payment.
Copies of correspondence and reports to the IRS and the vendor.
The amounts withheld should also be clearly marked on each payment check and on the check
support.
425.16 Because the remittance is not part of the businesss routine tax procedures, it is generally
best if the remittance is made as soon as possible so it will not be overlooked later. The business
reports the amounts withheld to the vendor annually on Form 1099-MISC.
4-21

Vendor Insurance
425.17 Many workers compensation insurance policies automatically will charge additional
premiums to cover independent contractors who receive Form 1099-MISC, unless the business
can show that the independent contractor has separate workers compensation coverage. In
addition, if the independent contractor is not adequately insured, the business may have to pay
legal damages for the independent contractors accidents and other harmful acts.
425.18 Many businesses therefore require that some independent contractors furnish the
business with proof of insurance certificates stating that the vendor has a specified minimum
amount of commercial automobile, general liability, and workers compensation insurance
coverages. Such certificates can and should be obtained directly from the vendors insurance
broker. The businesss determination of which independent contractors should furnish the proof
and how much coverage is necessary is best made by the owner or controller in consultation with
the businesss insurance agent. Their determinations should be documented in a written company
policy.
425.19 As a standard procedure when processing invoices, the bookkeeper should determine if
the business has an acceptable current proof of insurance certificate for an independent
contractor subject to the businesss policy on insurance; if not, the bookkeeper usually informs the
owner or controller. The bookkeeper should file the certificates in each vendors documentation
file (see Paragraph 425.20) and retain the certificates until the statute of limitations for claims
against the business has passed (at least two years). Because the certificates often cover short
periods (six month periods or less), the bookkeeper usually records the expiration dates of all the
certificates on a vendor insurance schedule, a form for which is presented at Appendix 4N,
Vendor Insurance Schedule. Each month the bookkeeper should review the schedule, make
revisions for new certificates received, and request new certificates from those active vendors
whose certificates will soon expire. Prior to any workers compensation audit, the bookkeeper
should review the vendor insurance schedule and vendor documentation files for all vendors who
received a Form 1099-MISC; the bookkeeper can then seek to obtain any missing certificates
proving insurance coverage.
Filing Vendor Information
425.20 Bookkeepers may keep the information gathered about vendors in two files. These files
are:
4-22
Vendor documentation files. The vendor documentation files (as they

are called in this Guide) are paper-based files that contain information on
the vendor. While not every vendor may have a file, the bookkeeper
should always keep vendor documentation files on some vendors (such
as those the IRS is likely to assert are employees). Often the vendor
documentation file can be non-invoice documents clipped together and
placed in the vendors paid invoice files. (However, the bookkeeper may
need to carry some of these documents forward from year to year, rather
than filing them with the years paid invoices.) A vendors documentation
file would contain Appendix 4L, Independent Contractor Questionnaire (if
used); any of the documents listed in Exhibit 4-2 used to document the
vendors independent contractor status; Form 1099-MISC duplicate
copies; IRS Form W-9; documents regarding backup withholding
described at Paragraph 425.15; and proof of insurance certificates.
Vendor master files. These are computerized files that a computerized

accounting system uses in processing invoices and preparing checks.
They usually contain address information, the systems internal vendor
identification number, payment terms, and the vendors status for Form
1099-MISC reporting.
SUMMARY
430.01 One of the bookkeepers most important jobs is the processing and recording of
purchases. The bookkeepers accuracy and efficiency during these duties affects the accounting
records, relationships with vendors, and the course of tax audits. The bookkeeper has four major
activities when recording and paying purchases: processing invoices, recording invoices in the
accounting system, disbursing cash, and completing period-end activities.
430.02 When processing invoices, the bookkeeper should first determine that the businesss
procedures will route the invoices to the bookkeeper in a timely manner. Next, the bookkeeper
should obtain approval to pay the invoice. Most small business bookkeepers send invoices (or
invoice copies) to the person initiating the purchase for direct approval. Large and inventory
intensive businesses rely heavily on indirect approval by the purchase initiator; indirect approval
typicaIly involves the use of purchase orders and receiving reports and requires the bookkeeper)
to perform several matching and logging activities. Businesses generally should not rely solely on
the check signer to approve purchases.
430.03 After the initial invoice processing is completed, the bookkeeper should prepare to record
the invoices in the accounting system by first recalculating the invoice and assigning accounting
codes. The bookkeeper may document the procedures performed on each invoice by using a
processing slip or a stamped processing block. When entering the invoices into the accounting
system, the bookkeeper should use invoice batches involving cover sheets, batch totals,
cancellation of invoices, and a vendor invoice batch control log; these procedures help the
bookkeeper determine that all invoices are accurately entered and posted to the purchase journal.
430.04 After the invoices have been entered into the accounting system, the bookkeeper is
ready to pay the invoices by disbursing cash. The bookkeeper should first prepare a scheduled
to pay listing for the owner or controller to review. After the invoices to be paid are selected, the
bookkeeper should prepare the checks, making sure to secure the check stock and record all the
checks used. The bookkeeper typically gives the check signer the approved scheduled to pay
listing, checks, and supporting documentation. The filing of the invoices depends upon the
businesss accounting system.
430.05 At the accounting periods end, the bookkeeper should reconcile internal summary and
subsidiary records to the general ledger, reconcile vendors accounts with vendor statements,
review the subsidiary ledger for old or debit balances, and perform procedures to ensure
purchases and payables are properly cut off.
430.06 While processing invoices, the bookkeeper should obtain or update information on
certain vendors. The information should include information regarding the vendors status as an
independent contractor, the applicability of the Form 1099-MISC reporting requirements, the
applicability of the backup withholding regulations, and the vendors insurance coverage.
4-23
4-24
Appendixes
4
Table of Contents
Appendix
Description
Page
Processing Invoices
4A
Invoice Transmittal Log ...............................................................................
4-27
4B
Check Request Form ...................................................................................
4-29
4C
Purchase Order Form ..................................................................................
4-31
4D
Receiving Report Form ..............................................................................
4-33
Recording Invoices in the Accounting System

4E
Vendor Invoice Processing Slip..................................................................
4-35
4F
Vendor Invoice Batch Cover Sheet ............................................................
4-37
4G
Vendor Invoice Batch Control Log ...........................................................
4-39
Disbursing Cash
4H
Check Stock Log .........................................................................................
4-41
41
Check Authorization Letter ........................................................................
4-45
Completing Period-end Activities

4J
Period-end Payables Cutoff and Reconciliations ....................................
4-47
4K
Vendor Statement Reconciliation ............................................................
4-49
Special Issues in Processing Purchases

4L
Independent Contractor Questionnaire ....................................................
4-50
4M
Vendor Insurance Schedule ......................................................................
4-55
4-25
Appendix 4A
Invoice Transmittal Log

Instructions
When sending vendor invoices to the managers of other departments for approval, the accountant may
use the form on the following page to record the invoices sent and returned. The accountant should
investigate delays in the returning of invoices; if an invoice is lost, the accountant may use the log
information to request a duplicate invoice.
4-27
Appendix 4A

Invoice Information
Invoice
Vendor Name
Number
Date
4-28
Page:
Date
Amount
Person Issued To
Out
Returned
Appendix 4B
Check Request Form
Instructions: The accountant may use this form as support for purchase for which there is no invoice.
The requestor should complete the information above the double line and have the purchase approved
by a manager with authority for the purchase amount. The accountant should then complete the form
and process the payment in accordance with the regular procedures used for invoices.
Check Request
Check Request Number:
(Assigned by accounting)
Date Requested:
Date Needed:
Payee:
Amount: $
Address:
Telephone #:
Taxpayer Identification Number (TIN) of Payee, if not a corporation or payment is not for inventory
(The TIN is the Social Security Number of a sole proprietorship or partnership or the federal Employer Identification Number (EIN) of a
corporation)
Check Distribution (Please check one):

Return to
Hold for Pickup by
U.S. First Class Mail
Express Delivery before
Certified Mail, Return Receipt Requested
Other
Description:
Requested by:
Payment Approved by:

(Date)
(Date)
For Accounting Use Only

Account Name
Project
Account Number
___________________________
_____________________________
_____________________
___________________________
_____________________________
_____________________
___________________________
_____________________________
_____________________
___________________________
_____________________________
_____________________
Recorded for
Insurance Certificate
Use Tax
W-9 on file
Backup Withholding
Processing Approved by:
Y N NA
Y N NA
Y N NA
Y N NA
Entered in Batch #
by
Paid by Check #
4-29
4-30
Appendix 4C
Purchase Order Form

Instructions
The business may use the form on the following page as a purchase order. The purchase initiator
should complete the form in triplicate; obtain its approval; and forward one copy to the vendor, one to
the accountant (for future matching with the invoice), and retain one copy in the purchasing department
files.
When using purchase orders (POs), the business should sequentially prenumber each purchase order
(by using a numbering stamp, for example). The business can then use the numerical sequence to
identify missing, delayed, or unauthorized purchase transactions. Office supply stores often sell blank
prenumbered triplicate purchase order forms. Because the business becomes legally committed upon
giving a purchase order to a vendor, the purchase order form used by the business should be first
approved by an experienced commercial law attorney.
4-31
Appendix 4C
Purchase Order Form

Purchase Order
PO Number: ________
(include on all shipments, invoices, and letters.)
Vendor Name: ____________________________
Ship to: _________________________________
Vendor Address: __________________________
_______________________________________
________________________________________
_______________________________________
________________________________________
_______________________________________
________________________________________
_______________________________________
Vendor Contact: ___________________________
Bill to: __________________________________
Vendor Phone: ____________________________
_______________________________________
_______________________________________
_______________________________________
Attention: if you cannot fulfill the terms of this purchase order, pleae notify
Date Required
Ship Via
Freight Terms
at telephone number (
Payment Terms
Requested for
Line
Quantity
Ordered
Received
Item
Number
Description
Unit
Cost
1
2
3
4
5
6
7
8
9
10
11
12
Purchase Authorized by
4-32
Date:
Extended
Cost
Appendix 4D
Receiving Report Form

Instructions
The business may use the form on the following page as a receiving report. The person receiving the
merchandise should prepare the form in duplicate, forward the original and any supporting packing slips
to the accountant (for matching with the invoice), and retain a copy in the receiving department files.
The person receiving the merchandise may note in the Comments column the presence of any open
or damaged boxes or other unusual occurrences. In some businesses, the accountant rather than the
person receiving the merchandise will complete the Vendor Number and P0 Number information.
When using receiving reports (RRs), the business should sequentially prenumber each receiving report
(by using a numbering stamp, for example). The business can then use the numerical sequence to
identify unrecorded receipts. Office supply stores often sell blank prenumbered duplicate receiving
report forms.
4-33
Appendix 4D
Receiving Report Form
Receiving Report
Receiving Report Number:
Date:
Vendor Name:
Vendor Number:
Vendor Address:
Bill of Lading Number:
Freight Company:
Item Number
Receiving Person:
4-34
PO Numnber:
Quantity
Description
Comments
Date:
Appendix 4E
Vendor Invoice Processing Slip
Instructions: The accountant can attach this slip to the invoice to document the processing steps
performed. Alternatively, the accountant can have a rubber stamp made to imprint each invoice. The
accountant should tailor the slip for the businesss processing procedures and system.
Vendor Invoice Processing Slip

Done by
Date Received by Accounting
Initiators Approval
Agreed to PO #
Agreed to RR #
W-9 on file
Y N NA
Backup Withholding
Y N NA
Insurance Certificate
Y N NA
Vendor #
Done by
Price x Quantity Tested
Invoice Totaled
Computed Sales Tax
Recorded Use Tax
Computed Freight
Discount Taken $
Discount Missed $
Invoice #
Invoice Due Date
Amounts and Accounting/Project Codes:
Processing Reviewed by
Entered in Batch #
by
Paid by Check #
4-35
Appendix 4F
Vendor Invoice Batch Cover Sheet
Instructions: The accountant can use this form to document the processing status of a batch of
invoices. The form should be temporarily attached (by rubber band) to the invoices in the batch. After
the batch has been entered into and accepted by the accounting program and logged into the vendor
invoice batch control log (see Appendix 4G, Vendor Invoice Batch Control Log), the accountant can
dispose of the batch cover sheet according to the controllers preference.
Vendor Invoice Batch Cover Sheet

Batch #
Batch Total (Total Credits to Trade AP)
Number of Invoices ______________
Date Entered ______________ Entered by __________________
Purchase Journal # ____
Date Invoices
Invoices
Marked Cancelled ______________ Cancelled by __________________
Batch Listed in
Invoice Batch
Control Log by ______________
4-37
Appendix 4G
Vendor Invoice Batch Control Log

Instructions
The accountant may use the form on the following page to create a vendor invoice batch control log.
The accountant should record the batch total (total credit to trade accounts payable) and the other
listed information for each individual batch. When a purchase journal is posted, the accountant should
calculate the purchase journals expected total credit to trade accounts payable based upon information
in the vendor invoice batch control log. The accountant should then compare the calculated total to the
purchase journals total. When the totals agree, the accountant has assurance that all invoices in the
batches were entered and posted to the purchase journal; the accountant should investigate any
differences. The log should be permanently retained in the accounts payable area.
4-39
Appendix 4G
Page:
Batch
No.
4-40
Batch Entered
By
Date
Invoices Marked
Entered
By
Date
Batch Total
(Total Credits to
AP)
Purchase Journal #
Where Batch Posted
No.
Appendix 4H
Check Stock Log

Instructions
The business may use the forms on the following pages to create a check stock log. The check stock
log should be kept separately from the check stock to diminish the chances that the log will be altered.
The first page is for recording all boxes of check stock received from the printer. When the box is
received, the accountant should record the beginning and ending check numbers, the date received,
and the accountants initials. On a regular basis, the accountant should examine the boxes of stock to
confirm that they remain unopened; the accountant should enter the dates of these reviews in the
column labeled Monitored and initial the log. When the box is opened the accountant should record
the date and initial the log.
The second page is a form for recording the use of individual checks. The accountant should record the
beginning and ending check numbers used, including checks damaged and voided, record the date of
use, and sign the log. Gaps in the number sequence indicate a possible loss of control over the check
stock.
4-41
Appendix 4H
Check Stock Log

Unopened Check Stock
Check Number
Beginning
4-42
Ending
Received
Date
By
Monitored
Date
Used
By
Date
By
Appendix 4H
Check Stock Log

(Continued)
Checks Used
Check Number
Beginning
Ending
Date Used
Signature
4-43
4-44
Appendix 4I
Check Authorization Letter
Instructions: The accountant may complete this letter when conditions require the signing of a business
check by an unauthorized check signer (for example, when the signers are out of town on the day a
check for tax payment must be issued). When an authorized signer becomes available, the accountant
should prepare the letter in duplicate. The original should be sent to the bank, and the accountant
should retain one copy of the letter to file with the cancelled check when it is returned from the bank.
[Company Letterhead]
[Account Officer]
[Checking Account Bank]
Dear Sir [Madam]:
On [date of check], this business issued check number [#1 for [$ amount] to [Payee]. Due to a shortage
of time, this check was signed by [signers name], an employee of this business who is not authorized
to sign checks of that amount on account [account number and name].
However, I am authorized to sign checks of such amount drawn on the above account. Please consider
this letter your written authorization to honor check number [#] when presented to your bank in
accordance with regular commercial banking practices. Please contact me immediately if there is a
problem with honoring this request.
Yours very truly,
[Authorized Signer]
[Title]
4-45
Appendix 4J
Period-end Payables Cutoff and Reconciliations
Instructions: The accountant may use this workpaper to determine that (a) purchase and payment
transactions are recorded in the proper period and (b) the transactions entered into the accounting
system were properly posted to the general ledger and the accounts payable subsidiary ledger.
Detailed instructions are provided on the form. This form should be filed in the month-end closing
workpapers.
Additional Guidance: See Paragraphs 420.02, 420.10.
Period-end Cutoff & Reconciliations
GL Acct #:
Prepared by:
Reviewed by:
Company:
Period:
Part 1: Cutoff
Instructions: By gathering the following information, the accountant can demonstrate that purchase
obligations and payments have been recorded in the proper accounting period. The accountant should
gather the numbers of the last documents issued at the close of business at the end of the accounting
period. Documents with numbers lower than the last issued document normally should be issued and
recorded in the ending accounting period, while the higher document numbers should be recorded in
the new accounting period. Receiving reports are considered recorded when their corresponding
invoice is recorded. The accountant should make entries to adjust the accounting records for held
checks and invoices received after the accounting periods end.
Period-End Documents
Last Issued
Check Number:
Last Issued
Receiving Report
Number:
Previous Four Document #s

Check Number
Next Four Document #s
Period Recorded
Check Number
Period Recorded
_____________
_____________
_____________
_____________
______________
______________
______________
______________
______________
______________
______________
______________
____________
____________
____________
____________
Receiving Rept.
_______________
Period Recorded
________________
Receiving Rept.
_______________
Period Recorded
______________
_____________
_____________
_____________
______________
______________
______________
______________
______________
______________
____________
____________
____________
Identifying Information
Held Checks
Check Number
__________________
__________________
__________________
__________________
Payee
_________________
_________________
_________________
_________________
Amount
_______________
_______________
_______________
_______________
Invoices received in the next period

that reflect obligations of the
ending period.
Vendor
__________________
__________________
__________________
__________________
Invoice Number
_________________
_________________
_________________
_________________
Amount
_______________
_______________
_______________
_______________
4-47
Appendix 4J
Period-end Payables Cutoff and Reconciliations

(Continued)
Part 2: Reconciliations
Instructions: The accountant may complete the two reconciliations below as part of the month-end
accounting procedures. The reconciliations give some assurance that all entered transactions are
recorded in the records. The account should investigate and resolve any differences.
1. Reconciliation of Activity in General Ledger Trade Payables Account
Beginning General Ledger (GL Balance)
$ ___________
Total Credits per the periods Purchase Journals
+___________
Total Debits per the periods Cash Disbursement Journals
- ___________
Other Proper Credits in the GL
+___________
Other Proper Debits in the GL
_ ___________
Calculated Ending General Ledger Balance
=___________
Actual General Ledger Balance
- ___________
Difference (Should be zero)
$ ___________
2. Reconciliation of AP Detail to the General Ledger

Accounts Payable Subsidiary Ledger
$ ___________
Ending General Ledger Trade AP Balance
- ___________
Difference (Should be zero)
$ ___________
4-48
Appendix 4K
Vendor Statement Reconciliation
Instructions: The accountant may use this form to reconcile a statement from an outside vendor with
the businesss accounts payable records. Reconciling items should be categorized as (a) items
recorded by vendor but not by the business and (b) items recorded by the business and not by the
vendor. Each item should include the invoice number, date, amount, and reason it is a reconciling item
(for example, payment in transit, goods in transit, disputed invoice, goods received but not invoiced,
check held, or activity between the vendor statement cutoff date and the businesss cutoff date).
Typically, the accountant would discuss any proposed adjustments to the general ledger or accounts
payable subsidiary ledger with the controller or CPA.
Vendor Statement Reconciliation

Amount
Vendor Name and Number:
_____________________________________
A.Balance per vendor statement dated __________________________________
$ ___________
B.Deduct items recorded by vendor but not by business:
1.
2.
3.
4.
5.
6.
7.
8.
Reference
Number
_________
_________
_________
_________
_________
_________
_________
_________
Total
Date
__________
__________
__________
__________
__________
__________
__________
__________
Comments
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________
_______________
_______________
_______________
_______________
_______________
_______________
_______________
_______________
C. Add items recorded by the business but not by the vendor:

1.
2.
3.
4.
5.
6.
7.
8.
_________
_________
_________
_________
_________
_________
_________
_________
Total
__________
__________
__________
__________
__________
__________
__________
__________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________
_______________
_______________
_______________
_______________
_______________
_______________
_______________
_______________
D. Balance per business at (date) ______________________________________
$ ______________
4-49
Appendix 4L
Independent Contractor Questionnaire
Name:
Job:
Date:
Prepared by:
Instructions: The accountant may use this checklist to determine whether a worker is an employee or
independent contractor under the three IRS categories discussed at paragraph 425.05 of this Guide. To
determine the worker's classification, the accountant should mark the appropriate column (but not both)
for each indicator listed. The indicators listed are based upon the IRS's regulations and rulings and
upon court cases. If the answers do not clearly favor one classification, the accountant should discuss
the worker's situation with an experienced CPA or tax attorney. The completed checklist and any
supporting documents may be filed in the employee's personnel file or the independent contractor's
vendor documentation file.
Indicators that Worker May Be an
Employee (EE)

Present? Independent Contractor (IC)
Category One: Behavioral Control
Instruction:
Worker receives oral or written job
procedures, training, and procedures
manuals.
Payor gives no training and limits information to

the results required: the condition, style,
quantity, or quality necessary.
Worker receives orders to waste less

materials, redo unfit work, or stop for
payor's convenience.
Worker is responsible for materials usage and

product quality.
Payor enforces penalties when worker

fails to follow instructions.
Worker is unskilled.
Payer enforces penalties only for unacceptable

results.
Worker has previously acquired professional
knowledge about how work should be done.
Training:
Worker usually must obtain approval
before taking certain actions.
Worker rarely must obtain approval before

taking certain actions.
Instructions are extremely detailed.
Instructions contain little detail.

Worker acquires own professional training.
Payor provides or pays for job training

programs.
Training is mandatory or time is
compensated.
Training addresses procedures and
methods.
Specifying the Worker:
Payor requires that work be performed
be named individuals.
Worker lacks any right to delegate work
to an assistant.
4-50
Training is voluntary or not compensated.

Training covers orientation or information about
business policies, government regulations, or
new products.
Payor requests specific individuals because of

their skills, expertise, and reputation.
Worker retains the right to select and delegate
to assistants or subcontractors.
Present?
Appendix 4L
Employee (EE)
Available to the Public:
Worker offices with payor.

(Continued)
Present?

Independent Contractor (IC)
Worker maintains a separate location from
payor.
Worker does not advertise.
Worker advertises in yellow pages,

newspapers, mailings, and on stationery,
radio and TV, uniforms, and vehicles.
Worker operates under the payor's

licenses and governmental permits, has
no separate business forms, wears
payor's uniform, drives vehicle with
payor's logo, uses business card with
payor's logo, distributes payor's hats, and
has not created a separate legal entity.
Worker has professional licenses,

governmental permits, sales tax certificates,
custom business forms with logo, stationery,
and incorporation or assumed name
certificates.
Worker is included on the payor's

business insurance and bonding.
Worker provides business insurance

coverage and bonding. Where this is not
feasible, the worker pays the payor the fair
market value of the coverage, worker is not
listed as an employee, and (if prudent)
worker pays by separate check rather than
a deduction from worker's invoice.
The public, vendors, and customers

believe worker is an employee.
Others believe worker is an IC.
Cash receipts go directly to payor. Worker

keeps no separate books, records, and
bank accounts.
Cash receipts go to worker, who maintains

separate books, records, and bank
accounts.
Payor is represented as responsible for

correcting problems in the work.
Payor disclaims responsibility for correcting

worker's problems.
[Not Used]
Worker performs sundry duties in off duty

hours but does not have an established
separate business.
Worker is a former employee performing
substantially the same duties.
Present?
[Not Used]
[Not
Used]
[Not
Used]
Employing Assistants:
Payor exercises (directly or through
approval) hiring, supervision, and
termination authority.
Only the worker has hiring, supervision, and

termination approval and authority.
Worker does not have a separate Federal

Employer Identification Number.
Worker has a separate Federal Employer

Identification Number.
Payor pays worker's assistants directly

and remits payroll taxes.
Worker uses own funds to pay assistants

and remits payroll taxes.
Assistants believe payor is their employer.
Assistants believe worker is their employer.

Worker can have profit or loss on wages or
assistants.
Worker is only a conduit between payor

and assistants and has no chance for
profit or loss.
4-51
Appendix 4L
Employee (EE)
Hours of Work:

(Continued)
Present?

Payor sets and enforces work hours.

Worker sets hours.
Fulltime Effort:
Worker is required to devote fulltime effort to
Worker pursues similar work from other,
servicing the payor.
unrelated businesses.
Worker has no say in accepting work from the
Worker can and has turned down work
payor.
from the payor.
Job Location:
Payor requires work to be performed at
Worker is free to choose where services
business location where payor can exercise
are performed.
supervision.
Sequence of Work:
Payor requires work to be performed in
Worker determines sequence of work
specific sequence.
procedures.
Reporting:
Payor requires regular time sheets, expense
Worker makes no regular reports.
reports, progress reports, and other oral and
written reports.
Payor requires attendance at regular project
Worker attends no regular meetings.
status meetings.
Evaluation focuses on compliance with
Evaluation focuses on end results.
standards concerning how the work is
performed.
Category Two: Financial Control
Fixed Pay:
Payment is based on time: hourly wages,
salary, bonuses, drawing accounts, minimum
amounts, and advances. Often, fixed amounts
are paid at fixed intervals.
Payor regulates lunch times, breaks, and work
hours.
Payment is not contingent upon payor's
review and acceptance of work product.
Worker is paid when employees are paid.
Worker does not invoice payor for services
rendered.
Worker's contract and other documents are
kept with payor's personnel files.
Payor withholds payroll taxes and issues
worker a Form W-2.
Reimbursements:
Payor reimburses out-of-pocket expenses.
Payor has review and approval authority for
reimbursements.
4-52
Payment is based on each job where the

worker assumes the risk that pay is not
guaranteed, such as commission, bid, or
piecework.
Worker sets own lunch times, breaks,
and work hours.
Payor reviews and accepts finished
product before paying.
Worker is paid separately from
employees.
Worker invoices payor for services.
Worker's contract, invoices, and other
documents are kept in payor's vendor
files.
Payor issues worker a Form 1099.
Payor collects backup withholding, if
applicable.
Cost of out-of-pocket expenses is
covered in contracted fee.
Payor cannot review and approve
reimbursements.
Present?
Appendix 4L

(Continued)

Employee (EE)
Present?

Present?
Tools and Supplies:

Worker uses company tools and
vehicles.
Payor bears costs of damage to tools
and equipment.
[Not Used]
Payor transports supplies to the job site,

bears the cost of damage and waste, and
retains unused materials.
Worker provides tools and vehicles.
[Not
Used]
Worker bears risk of damage to tools and

equipment.
If worker leases equipment from payor, lease
is at fair market rate and worker has liability
for damage.
Worker provides supplies, bears the cost of
damage and waste, and keeps material.
Risk of Loss:
Worker does not directly risk loss of
capital.
Worker lacks opportunity for gain by

keeping expenses less than revenues.
Worker has no liability for damage to
work site.
Worker risks loss of capital through liability,

rejection of the work product, or requirement
of additional uncompensated work to meet
contract provisions.
Contract terms generally reflect fixed
revenue with opportunity for gain through
worker's control of variable expenses.
Worker must repair any damages caused to
the work site.
Substantial Investment:
Worker has little or no direct investment
in the facilities or equipment.
Worker's investment includes funding payroll,

supplies, equipment, and overhead.
Outside Work:
Worker can work only for the payor or a
related entity; only give outside work a
lesser priority; or only accept outside
work with the payor's approval.
Worker has few sources of Forms 1099MISC.
Worker has the ability to solicit work from

others, especially competitors.
Worker gives at least equal priority to other
firms' projects.
Worker conducts simultaneous projects with
independent businesses.
Worker signs a noncompete clause.
Worker signs a secrecy clause.
Category Three: Relationship of the Parties

Integration:
Worker performs tasks that are ordinary
and necessary to the business's success.
Worker is required to perform sundry
tasks in unskilled areas.
Payor's employees join with the worker in
preparing the materials, using the
materials, or cleaning up.
Tasks are type that ICs traditionally perform,

such as delivery of a finished product or
professional services.
Worker uses unusual, technical, or
specialized skills not used in payor's general
business.
Worker takes care of job from beginning
preparation through ending cleanup.
No payor employees are used.
4-53
Appendix 4L
Indicators that Worker May Be an Employee
(EE)
Worker performs tasks and receives treatment
similar to employees.

(Continued)
Present?

Worker performs unique tasks and
is consistently treated differently
than employees.
Termination:
Worker may be terminated at will," for and or no
reason.
Worker may sue payor for breach of

contract unless the contract's
cancellation clauses are followed.
Quit:
Worker may quit at any time without notice, for any
or no reason.
Worker may be liable to payor for

breach of contract unless the
contract's cancellation clauses are
followed.
Continuing Relationship:
No written agreement governs the work.
Work is a discrete project of limited

duration.
Worker and payor sign a new
written agreement for each
assignment.
Worker does not compete for the business.
Worker solicits the business.
Worker is economically dependent upon payor.
Worker has economic viability

beyond reliance on payor.
Work is continuous or for an indefinite period.
Employee Benefits:
Worker receives paid vacation or sick days; health,
life, or disability insurance; a pension plan; or a tax
qualified retirement or benefit plan available only to
employees.
Worker does not participate in such

plans.
Intent of Parties:
Worker and payor have no written IC agreement.
Conclusion:
4-54
Worker and payor have signed IC

agreement.
Present?
Appendix 4M
Vendor Insurance Schedule

Instructions
The accountant may use the form on the following page to monitor compliance with the businesss
policy regarding vendors insurance coverage. All vendors subject to the businesss policy should be
listed, and the accountant should update the schedule monthly. Approximately 30 days before their
insurance expires, vendors should be reminded of the businesss requirements. All incidents of
noncompliance should be reported to the controller.
4-55
Appendix 4M

Vendor Name
4-56
Vendor Certificate
Number Received?
Coverage
Adequate?
Date
Expires
Comments
Processing Payrolls
5
Table of Contents
Section
Description
Page
500
INTRODUCTION ................................................................................................... 5-1
505
OBTAINING PAYROLL INFORMATION ................................................................. 5-2

.03
.12
.16
.42
510
COMPUTING WAGES............................................................................................ 5-11

.03
.13
.27
515
Employer Information ..................................................................................... 5-2

.05 Employer Identification Number (EIN).................................................... 5-2
.06 The Workweek ...................................................................................... 5-3
.09 The Pay Period ...................................................................................... 5-3
Job Information .............................................................................................. 5-3
Employee Information .................................................................................... 5-4
.21 Name and Address ................................................................................ 5-5
.22 Social Security Number (SSN)............................................................... 5-5
.24 Job Title ................................................................................................. 5-5
.26 Wage Rate ............................................................................................ 5-7
.29 Employees Withholding Status ............................................................. 5-7
.38 EIC Status ............................................................................................. 5-9
.40 Other Authorized Deductions ................................................................. 5-9
Time Information ............................................................................................ 5-9
.43 How Much Time Was Used ................................................................... 5-9
.49 What Type of Time Was Used ............................................................... 5-10
Computing Gross Pay .................................................................................... 5-11

.04 Exempt Employees................................................................................ 5-11
.06 Nonexempt Employees.......................................................................... 5-12
.07 Overtime ................................................................................................ 5-12
Withholding Employment Taxes ..................................................................... 5-13
.15 Employment Tax Coverage ................................................................... 5-13
.18 Federal Income Tax Withholding ........................................................... 5-14
.21 Federal Income Tax Withholding on Supplemental Wages .................... 5-16
.24 Social Security and Medicare Withholding ............................................. 5-16
Making Other Payroll Deductions ................................................................... 5-18
PERFORMING PAY PERIOD ACTIVITIES ............................................................. 5-18

.02
.05
.09
.11
Entering Time Data ........................................................................................ 5-18

Creating the Payroll Registers ........................................................................ 5-19
.08 Wage and Tax Control Log .................................................................... 5-19
Printing Payroll Checks .................................................................................. 5-21
Recording Payroll Information ........................................................................ 5-21
.12 The General Ledger .............................................................................. 5-21
TOC 5-1
Processing Payrolls
5
Section
Description
515
520
.15
.17
.20
.21
.26
.30
.18
Filing Forms 941 ............................................................................................ 5-29

.05 Preparing the Forms 941 ....................................................................... 5-29
.07 Reconciliations ...................................................................................... 5-29
.10 Correcting Withholding Errors ................................................................ 5-30
.12 Due Dates ............................................................................................. 5-31
.14 Tax Return Signers................................................................................ 5-31
.16 Mailing Procedures ................................................................................ 5-32
.17 Penalties ............................................................................................... 5-32
Calculating and Depositing FUTA Taxes ........................................................ 5-32
.21 Determining the Deposit Amount ........................................................... 5-32
.25 Due Dates ............................................................................................. 5-34
.27 Making the Deposit ................................................................................ 5-34
PERFORMING ANNUAL PAYROLL ACTIVITIES ................................................... 5-34

.02
.06
.22
.29
TOC 5-2
Reconciling the Payroll Bank Account ............................................................ 5-27

Reconciling Employee Payroll Deductions ..................................................... 5-28
PERFORMING QUARTERLYPAYROLL ACTIVITIES ............................................ 5-29

.02
530
The Employee Payroll History................................................................ 5-22

Depositing FICA and FITW Taxes ......................................................... 5-25
Determining the Deposit Amount ........................................................... 5-25
Making the Deposits .............................................................................. 5-25
Due Dates ............................................................................................. 5-26
Penalties ............................................................................................... 5-26
PERFORMING MONTHLY PAYROLL ACTIVITIES ................................................ 5-27

.02
.04
525
Page
Recording Non-payroll Compensation ............................................................ 5-35

Issuing Forms W-2 and W-3 ........................................................................... 5-36
.09 Preparing the Forms W-2 and W-3 ........................................................ 5-36
.12 Due Dates ............................................................................................. 5-37
.16 Replacement Forms .............................................................................. 5-37
.17 Undelivered Forms ................................................................................ 5-37
.18 Filing on Magnetic Media ....................................................................... 5-37
.21 Penalties ............................................................................................... 5-38
Preparing the Fourth Quarter Form 941 ......................................................... 5-38
.23 Reconciliation to Forms W-3 .................................................................. 5-38
.26 Correcting Errors in Forms 941 or W-2 .................................................. 5-39
Filing Form 940 .............................................................................................. 5-40
.33 Form 940-EZ
Processing Payrolls
5
Section
530
535
Description
.34
.37
.39
.40
.41
.42
.43
Page
Preparing the Form 940 ......................................................................... 5-41

Reconciliations between Forms 940 and W-3 ........................................ 5-41
Identifying Excluded Payments .............................................................. 5-42
Calculating Payments in Excess of $7,000 ............................................ 5-42
Making the Final FUTA Tax Deposit ...................................................... 5-42
Signing and Mailing the Form 940 ......................................................... 5-42
Due Date ............................................................................................... 5-42
SUMMARY
Appendix
5A
Employee Payroll Information Sheet ....................................................................... 5-47
5B
Payroll Change Form .............................................................................................. 5-49
5C
Time Sheet Form .................................................................................................... 5-51
5D
Time Entry Control Log ........................................................................................... 5-53
5E
Wage and Tax Control Log ..................................................................................... 5-57
5F
Employee Earnings History Form............................................................................ 5-59
5G
Form 8109 Preparation Checklist ............................................................................ 5-61
5H
Payroll Tax Deposit Receipt .................................................................................... 5-63
5I
Employment Tax Calendar...................................................................................... 5-65
5J
Deduction Account Analysis Form .......................................................................... 5-69
5K
Form 941 Preparation Checklist .............................................................................. 5-71
5L
Form 941 Internal Reconciliation............................................................................. 5-75
5M
Non-payroll Compensation Checklist ...................................................................... 5-77
5N
Employee Wage Adjustments Form ........................................................................ 5-79
5O
Form W-2 Preparation Checklist ............................................................................. 5-81
TOC 5-3
Processing Payrolls
5
Appendix
Description
Page
5P
Form W-3 Internal Reconciliation ............................................................................ 5-87
5Q
Reconciliation of Forms 941 to Form W-3 ............................................................... 5-89
5R
Form 940 Preparation Checklist .............................................................................. 5-91
5S
Form 940 Reconciliations........................................................................................ 5-93
5T
FUTA Tax Worksheet ............................................................................................. 5-95
TOC 5-4
Processing Payrolls
500
OBTAINING PAYROLL INFORMATION
COMPUTING WAGES
PERFORMING PAY PERIOD ACTIVITIES
PERFORMING MONTHLY PAYROLL ACTIVITIES
PERFORMING QUARTERLY PAYROLL ACTIVITIES
PERFORMING ANNUAL PAYROLL ACTIVITIES
INTRODUCTION
500.01 Over the years, government regulations have turned the processing of payrolls into one of
the accounting staffs most complex and demanding tasks. For example, each pay period an
employees year-to-date wages usually must be compared to a separate federal unemployment
tax limit, a state unemployment tax limit, a social security tax limit, a federal income tax withholding
table, and a state income tax withholding table. In addition, the federal government is constantly
making changes to employment tax forms and regulations. Even with the use of a computerized
payroll accounting program, accounting staff must have a firm grasp of payroll preparation and of
tax requirements in order to process a payroll correctly.
500.02 This chapter gives an overview of the key steps in processing payrolls, whether by using
a computer software program or manually, and addresses the following payroll processing
activities.
Obtaining Payroll Information. Section 505 discusses the basic

information about the employer, the job, the employee, and the time
worked that the accounting staff must know in order to prepare a
payroll.
Computing Wages. Section 510 describes the steps in computing

gross pay, withholding employment taxes, and making other payroll
deductions. The text also explains how to calculate overtime, which is
often misunderstood.
Performing Pay Period Activities. Section 515 reviews the activities

accounting staff perform each pay period. These activities include
entering the time worked, creating the payroll register, printing
paychecks, recording pay information in accounting records, and
depositing withheld employment taxes.
Performing Monthly Payroll Activities. Section 520 briefly examines

two reconciliations that accounting staff usually perform monthly:
reconciliation of the payroll bank account and of the employee payroll
deductions.
Performing Quarterly Payroll Activities. Section 525 addresses the

quarterly activities of filing Form 941 to report federal income taxes
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Processing Payrolls
and FICA (Social Security) taxes withheld and paid. The text also
explains how to calculate and deposit federal unemployment taxes.
Performing Annual Payroll Activities. Section 530 guides the

accounting staff through key year-end payroll activities. At year end,
staff should identify non-payroll compensation, issue Forms W-2, file
the fourth quarter Form 941, and file the annual federal unemployment
tax return (Form 940). This section includes instructions on reconciling
the amounts between all the filed employment forms.
500.03 This overviewand the extensive set of forms and checklists in the Appendixesare
designed to benefit both the new and the experienced payroll bookkeeper or bookkeeper.
505
OBTAINING PAYROLL INFORMATION
505.01 To accurately calculate payrolls, the payroll bookkeeper needs information about the
employer, the job, the employee, and the time worked or taken on leave. This information is
usually recorded in company procedural memos, employee information documents, or time
sheets. Information about the employer, the job, and the employee changes infrequently, while
information about the time worked or taken for leave changes during each pay period.
505.02 This section describes how the payroll bookkeeper gathers and processes the required
information.
Employer Information
505.03 To accurately calculate a payroll, the bookkeeper needs the following information about
the employer:
a. Employer identification number (EIN).
b. The workweek.
c. The pay period.
505.04 Information in a.-c. usually is established when the business first becomes an employer
and seldom changes. The following paragraphs briefly discuss the information needed.
505.05 Employer Identification Number (EIN). The federal employment tax system identifies
employers by their federal employer identification number (EIN), a nine digit number in the form
xx-xxxxxxx. Before paying its first employee wages, a business should obtain an EIN by filing
with the IRS a Form SS-4, Application for Employer Identification Number (call 1-800-TAX-FORM
or visit www.irs.gov to request). A sole proprietorship that incorporates is also required to obtain a
new EIN.
An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number,
and is used to identify a business entity. Generally, businesses need an EIN. You may apply for an
EIN in various ways, and now you may apply online at www.irs.gov/businesses/small/article/
0,,id=102767,00.html. This is a free service offered by the Internal Revenue Service. You must
5-2
check with your state to make sure you need a state number or charter. To obtain a collection of
links to state government Web sites with useful information for businesses, go to
www.irs.gov/businesses/small/article/0,,id=99021,00.html.
505.06 The Workweek. The federal law governing employee wages and work hours, the Fair
Labor Standards Act (FLSA), requires the employer to designate and document the day and time
when the workweek begins. The workweek consists of the seven consecutive 24-hour periods
(168 consecutive hours) following the designated time.
505.07 An internal policy memo is sufficient to designate the workweek. Employers can choose
different workweeks for different employees or groups. Any changes in the workweek must be
conducted to give the employee as much overtime pay in the week of change as the employee
would have received under the old workweek definition.
505.08 The FLSA uses the definition of the workweek in the calculation of overtime pay for
certain employees who work in nonexempt positions (discussed at Paragraph 505.12). States
may require that overtime be paid based on the hours worked in the workday (rather than in the
workweek). Some states require that notices be given or posted designating the workweek or
workday. The payroll bookkeeper should be familiar with the applicable state rules.
505.09 The Pay Period. The pay period is a grouping of workweeks and days, and the payroll
bookkeeper must know the pay period in order to accumulate all the wages owed. The pay periods
used most often by companies are as follows:
Weekly (52 pay periods).
Biweekly (26 pay periods).
Semimonthly (24 pay periods).
Monthly (12 pay periods).
505.10 Employers may set different pay periods for different groups of employees within the
bounds set by state laws regulating when wages must be paid. To simplify compliance with the
FLSA, the authors recommend that the business pay nonexempt employees either weekly or biweekly.
505.11 The employer should document in an internal memo the designated pay period for each
employee group, and the payroll bookkeeper should also indicate the employees pay period on
the Employee Payroll Information Sheet (discussed in Paragraph 505.18). This documentation is
required under the FLSA and also serves to protect the payroll bookkeeper should a dispute over
the pay procedures arise.
Job Information
505.12 Job positions can either be exempt or nonexempt from the FLSAs minimum wage and
overtime requirements. A jobs FLSA category (exempt or nonexempt status) has consequences
for the wage rate, pay deductions, and time records used to calculate the employees paycheck.
Exhibit 5-1 summarizes these consequences.
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Processing Payrolls
Exhibit 5-1
Comparison of Exempt and Nonexempt Employees
Attribute
Payment amount
Exempt
The employer pays an exempt employee a
fixed salary for any and all work performed
during a workweek. Pay does not vary with
quality or quantity of work.
Nonexempt
The employer may pay a nonexempt
employee using an hourly, salary,
piece, commission, or any other
method. However, the total compensation must be at least the minimum
wage for all hours worked, plus over
time pay for hours over the maximum.
Pay deductions
Generally, deductions for time not worked

may not be made from the weekly salary;
doing so will likely void the exemption. The
FLSA does specify several exceptions to this
policy.
The employer may pay a nonexempt

employee only for the hours worked.
Therefore, deductions may be made
from wages for lateness, full or partial
day absences, and any time the
employee doesnt work.
Time Records
Employers are not legally required to record

the hours worked.
Employers must maintain accurate

daily and weekly records of all hours
worked.
505.13 While a number of exemptions from overtime and minimum wages exist, most payroll
bookkeepers will face issues involving the white collar exemptions, that is, the exemptions for
executive, administrative, professional, and outside sales positions. These exemptions are based
only upon a combination of job duties and salary amounts, and not upon the employees job title,
receipt of a fixed amount of pay called a salary, or high income.
505.14 The jobs FLSA category is usually determined when a job position is created and listed
on the written job description, If the business does not have written job descriptions, the payroll
bookkeeper should learn the FLSA category from the controller or outside CPA. To increase the
efficiency of payroll processing, the bookkeeper should also record the FLSA category on the
Employee Payroll Information Sheet (discussed in Paragraph 505.18).
505.15 While it is the job position that is technically exempt or nonexempt from the FLSA, in
common speech people refer to the employee as exempt or nonexempt. Accounting staff should
not become confused by this language usage.
Employee Information
505.16 Payroll bookkeepers need the following information about the employee in order to
accurately prepare a payroll:
a. Name and address.
b. Social Security Number (SSN).
c. Job title.
d. Wage rate.
e. Withholding status.
5-4
f.
Advanced earned income credit (EIC) status.
g. Other authorized deductions.

505.17 The information in a.-g. is usually provided when the employee is first hired.
505.18 Because the information generally comes from several sources, for efficient processing
the payroll bookkeeper should summarize this information on one form, such as the Employee
Payroll Information Sheet illustrated in Exhibit 5-2. (Appendix 5A, Employee Payroll Information
Sheet, presents a blank form; most payroll software systems use a master file to gather similar
data.)
505.19 The payroll bookkeeper then modifies the information only when notified of changes. To
ensure that only authorized changes are made and that the business has written documentation of
payroll activity to use in employment audits and lawsuits, the payroll bookkeeper should make
changes in the employee payroll information only when a properly authorized Payroll Change
Form is received (see Appendix 5B, Payroll Change Form). After entering the changed information
into the computer system, the bookkeeper should verify that the change was correctly entered and
posted, and document the verification on the change form itself.
505.20 The following paragraphs discuss in further detail the information to be gathered.
505.21 Name and Address. Because the employees name is used by the SSA and IRS,
bookkeepers should not change an employees name (such as through marriage or divorce) in the
payroll records until the employee can produce a revised Social Security card (see Paragraph
505.22). Address data should be kept current to allow the business to fulfill its legal obligations to
deliver Forms W-2, benefit plan information, and COBRA notices.
505.22 Social Security Number (SSN). Because of the SSNs uses, federal agencies may
impose fines on employers who report wage information with inaccurate or missing Social Security
numbers. Bookkeepers gather the SSN when the employee completes Form W-4, Federal
Withholding Allowance Certificate (see the discussion beginning at Paragraph 505.29 below). In
addition, the authors recommend that the bookkeeper compare the SSN entered into the
accounting system with a photocopy of the Social Security card. However, the employer cannot
legally compel the employee to produce the card.
505.23 Employers can verify individual SSNs by calling (800) 772-1213. The Social Security
Administration
(SSA)
offers
social
security
number
(SSN)
verification
at
http://www.socialsecurity.gov/employer/ssnv.htm and quick access to relevant forms and
publications at http://www.socialsecurity.gov/employer/pub.htm. Employees needing to obtain or
revise a Social Security number should complete Form SS-5, Application for a Social Security
Card [available at local Social Security offices or by calling (800) 772-1213].
505.24 Job Title. The employees job is important in (a) establishing whether overtime must be
paid (see Paragraph 510.07) and (b) determining that wage differences between men and women
working the same job do not reflect sex discrimination. The payroll bookkeeper should obtain from
management the employees job title, and any corresponding job description should be retained as
part of the employment records.
5-5
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Exhibit 5-2
GENERAL INFORMATION
Employee number 227
Name Arthur Collin Smith
(First, middle, last)
Address 987 Main Street
City Smallville
Department Accounting
Date employed January 1, 2013
Employee Payroll Information Sheet
Social Security number 123-456-7890
State Texas
Zip 76188
Title Staff Bookkeeper
Date terminated
PAYMENT INFORMATION
Pay period
Weekly
Biweekly
Semimonthly
Monthly
FLSA category
Exempt
Nonexempt
Wage rate (weekly salary if exempt, or hourly rate if nonexempt) $11 per hour
DEDUCTION INFORMATION
Income taxes
Federal
State/Local
Number of allowances claimed
2
N/A
Additional withholding requested
N/A
Marital status
Married
Single
Married, but withhold a higher single rate
Earned income credit
Has the employee filed W-5 for this year with employer?
Has the employees spouse file W-5 for this year with any employer?
Yes
Yes
No
No
Other deductions (Enter the deduction amount or percentage of gross wages that should be deducted
before and after income taxes in each pay period.)
Before tax
After tax
Insurance
____________
30.75
Retirement plan
____________
____________
Savings plan
____________
30.00
___________________________________________
____________
____________
___________________________________________
____________
____________
___________________________________________
____________
____________
___________________________________________
____________
____________
___________________________________________
____________
____________
Completed by Cheryl Anderson
Date January 1, 2013
505.25 When receiving a Payroll Change Notice involving a job title, the payroll bookkeeper
should prepare a revised Employee Payroll Information Sheet, review whether the employees
FLSA exemption status has changed (see discussion beginning at Paragraph 505.12), and enter
any new wage rate into the system. The payroll change notice form should be retained in the
employees payroll file.
505.26 Wage Rate. Under the FLSA, the employers records must reveal the two components of
the employees wage rate: (a) the wage base (how the employee is paidfor example, by the
hour, commissions, by the number of pieces produced, or by a weekly salary) and (b) the wage
amount (the amount that is paid for each hour or week worked, unit sold, or piece produced).
5-6
505.27 The payroll bookkeeper obtains from management the employees authorized wage rate,
usually on a form such as Appendix 5B, Payroll Change Form. The payroll bookkeeper should be
very careful to ensure that there is a clear written audit trail for each change in an employees
wages. Such payroll change notice forms should be kept in the employees payroll file.
505.28 The payroll bookkeeper should also ensure that the wage rate for nonexempt employees
is expressed in terms other than a salary. In some companies it is common practice to describe
the wages paid an office worker, such as a secretary, as a weekly salary. However, such workers
are usually in nonexempt jobs and must be paid overtime. Technically, a salary is a fixed amount
of pay that does not vary with the time worked or work accomplished. A secretary that receives a
salary of $400 per week and is expected to work 40 hours weekly actually has an hourly wage
rate of $10.
505.29 Employees Withholding Status. To properly withhold federal income taxes and
calculate the employees net wages, the employer must ask each new employee to complete a
Form W-4 before or on employment commencement. Some states require that employees
complete a separate state withholding allowance certificate.
505.30 Because claims for excessive allowances and exemptions may result in civil and criminal
penalties, the payroll bookkeeper should never suggest or recommend to the employee a number
of withholding allowances. Employees can consult the Form W-4 and its instructions; IRS
Publication 919, Is My Withholding Correct?; and Publication 525, Taxable and Nontaxable
Income. These publications can be ordered by calling 1-800-TAX-FORM or at www.irs.gov.
505.31 Some employees may claim a total exemption (exempt status) from federal income tax
withholding. (However, withholding Social Security and Medicare taxes may still be required). To
qualify for exempt status, the employee must meet all of the following conditions:
The employee must expect to have no federal income tax liability for
the current taxable year. If circumstances change and a liability is
expected in the current year, the employee must file a new Form W-4
within 10 days (for liabilities expected in the following year, by the later
of 10 days or December 1).
The employee must not have had a tax liability in the prior year.
If the employees current year income exceeds $600 and includes

unearned income, the employee must not be claimed as a dependent
on another return.
505.32 The IRS requires that employees file an amended Form W-4 within 10 days of an event
that decreases their number of withholding allowances. For example, such decreases may occur:
Upon marriage to an employed spouse.
Upon a divorce or legal separation.
When a spouse claims him- or herself as an exemption, as when the

spouse begins a new job.
When someone else will claim a claimed dependent.
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Processing Payrolls
When a claimed dependents level of income will invalidate the allowed

exemption.
When income is greater or exemption or deductions are less than

previously planned.
505.33 An employee may amend the Form W-4 for an increased number of withholding
allowances at any time.
505.34 Employees often are unaware of their obligation to update the Form W-4. Accordingly, the
business should use the employee handbook to inform employees of their obligations.
505.35 When an employer receives the Form W-4, the employer must comply with its withholding
instructions no later than the start of the first payroll period ending on or after 30 days from the
receipt of the Form W-4. Generally, the withholding instructions continue to apply until the
employee amends the Form W-4. However, an employee claiming fully exempt status annually
must renew the Form W-4 by February 15; otherwise, the employer must resume withholding as
though the employee is single with zero withholding allowances.
505.36 The employer is not under any affirmative obligation to evaluate the number of
exemptions for which the employee is entitled. However, the employer does have three duties
regarding the Form W-4 contents:
Ignore Invalid Forms W-4. A Form W-4 is rendered invalid if the

employee changes or adds language to the form, such as rescinding
the certification that the form is correct. The form is also considered
invalid if the employee indicates verbally that the form is not correct.
When a form is invalid, the employer should request a valid one; until a
valid form is received, the employer should withhold based on an
earlier valid form or as if no form had been returned (that is, at a
single, no allowances level).
Report excessive allowances. The employer must send with its Form
941, Employers Quarterly Payroll Tax Return, copies of all Forms W-4
claiming more than 10 withholding allowances along with any written
employee statements supporting the claimed allowances. The IRS will
then notify both the employee and the employer of the maximum
number of allowances. IRS Publication 15, Circular E, Employers Tax
Guide, contains further instructions.
Report certain full exemptions. The employer must send the IRS all
claims for full exempt status by employees with normal weekly wages
of more than $200. The transmittal instructions are the same as for
claims of more than 10 allowances.
505.37 The payroll clerk should retain the signed original Forms W-4 (no copies) for four years
after the company files the related annual employment tax returns.
505.38 EIC Status. Employees with income less than $42,130 for taxpayers that are married
filing jointly in 2012 and $36,920 for all other taxpayers in 2012 and claiming a dependent child
may qualify for an advance earned income credit (EIC) that will increase the paycheck amount.
5-8
Employees wanting to receive the advance EIC must file IRS Form W-5, Earned Income Credit
Advance Payment Certificate.
505.39 Employers are legally required to personally notify certain employees that they may be
eligible for the earned income tax credit (EIC) and may receive the credit in advance as part of
their wages. The easiest way for the employer to comply is to either have IRS Notice 797, Notice
of a Possible Federal Tax Refund Due to the Earned Income Credit (EIC), printed on the back of
the Form W-2 or sent to all employees with their copy of the Form W-2. Employers should not
change the language of the notice. Employers can learn more about the EIC and their duties in
IRS Publication 15, Employers Tax Guide; Publication 937, Employment Taxes and Information
Returns; and Publication 1325. Employees can learn more about the EIC in IRS Publication 596,
Earned Income Credit. The IRS forms and publications related to the EIC can be obtained by
calling 1-800-TAX-FORM or at www.irs.gov.
505.40 Other Authorized Deductions. To accurately compute the employees net pay, the
payroll bookkeeper must know the nature and amount of other payroll deductions (for example, for
retirement plans, insurance, or loan repayments). The payroll bookkeeper should maintain a file
documenting each deductions authorization and tax status. The Fair Labor Standards Act (FLSA)
requires the payroll records to clearly show the date, amount, and description of deductions from
wages; many computerized payroll accounting systems produce a deductions register that lists
such information.
505.41 Most states require the employer to have written documentation from the employee
authorizing a deduction from pay, especially those involving an element of profit to the employer
(such as repayment of loans with interest). It is important that the business use documentation for
deductions that is accepted by state courts. The payroll bookkeeper can obtain further information
from the outside CPA or legal counsel.
Time Information
505.42 To accurately calculate the payroll, accounting staff must know (a) how much time was
used and (b) what type of time was used.
505.43 How Much Time Was Used. Many business owners time records are not in compliance
with federal timekeeping requirements, and these businesses are often penalized when a wage
and hour audit occurs. Courts have ruled that this timekeeping duty is the employers, not the
employees.
505.44 The FLSAs general rule is that businesses must record for nonexempt employees each
days beginning and ending work time and the total time worked during the workweek. However,
the requirement is less extensive for nonexempt employees who work a fixed schedule in an
establishment operating on a fixed schedule (such as office workers). In this situation, the
employer may maintain a statement showing the regular hours the employees are scheduled to
work. In weeks an employee adheres to the schedule, the employee should indicate (by statement
or checkmark) that the scheduled hours were actually worked. In weeks the employee works more
or less than the scheduled hours, the employee should show the exact number of hours worked
each day and each week.
505.45 The business may use time cards (and time clocks) or time sheets to record the time
worked and leave taken, as well as the supervisors approval. If time sheets are used, the
business should require that they be completed in ink and all corrections initialed; such procedures
5-9
Processing Payrolls
lessen the chances for disputes during wage and hour audits. Time sheet forms usually are
available from commercial business form suppliers. To help the payroll bookkeeper during wage
and hour and workers compensation audits, the authors recommend that the business separate
the overtime hours from regular hours on the time card or time sheet. A sample time sheet that
separates these hours is reproduced at Appendix 5C, Time Sheet Form.
505.46 The payroll bookkeeper should ensure that the timekeeping system records the
information needed to comply with state as well as federal pay rules. To have the strongest
defenses in the legal disputes over wages, the authors recommend that the business have
nonexempt employees track time worked to the nearest five minutes and have all exempt
employees record any workweek hours exceeding 40.
505.47 In some situations (such as on-call time), exactly what constitutes recordable time worked
can be a matter of dispute. The FLSA regulations regarding time worked generally consider time
worked to be:
Time that an employer requires an employee to be on duty, or
Time an employee is suffered or permitted to work.
505.48 Sometimes, businesses mistakenly think that they must pay only for time that supervisors
approve. The business is legally obligated to pay for unauthorized time worked, but it may take
disciplinary action if its policy on unauthorized work was violated. Supervisors approve time
records to (a) verify that the time recorded was accurately described, (b) determine that time
worked was authorized, and (c) gain current information about the departments functioning.
505.49 What Type of Time Was Used. Not all time is compensated at the same rate; some time
is paid at the regular rate, some at an overtime rate, and some leave time is unpaid. To properly
prepare a payroll, the payroll bookkeeper must first determine what type of time has been used.
505.50 Generally, the employee includes a description of how the time was spent (work, vacation,
sick leave, and so forth) on the time card or time sheet. Based on that description, the payroll
bookkeeper (or the employees supervisor) then indicates what type of time was used. While the
business usually categorizes leave into detailed subcategories (such as holiday, vacation, sick
leave, jury leave, and family and medical leave) in order to administer leave benefits, the primary
distinction for wage calculations is whether the time was worked time, paid leave, or unpaid leave.
In categorizing the time used, the bookkeeper should be aware that under the FLSA:
5-10
Paid or unpaid leave does not count towards overtime. For

example, no overtime is incurred when an employee takes a paid
holiday and works 40 hours during the remainder of the workweek.
The paid holiday is considered paid leave, not time worked, and the
employee did not exceed 40 hours worked. Vacations, holidays, sick
leave, and other paid or unpaid leave should not be considered in
determining if more than 40 hours were worked during the workweek.
Only the excess of 40 hours worked during the workweek is

considered overtime hours. Under the FLSA, the payroll bookkeeper
should accumulate the first 40 hours worked during the workweek as
regular hours, and then consider any excess to be overtime. For
example, if a part-time employee works thirty hours in the workweek
instead of the usual twenty, the employer incurs no overtime liability,
because the hours worked did not exceed 40.
Each workweek stands alone. Time worked during one workweek

cannot be averaged with the time worked in a second workweek, even
if the two weeks are in the same pay period. For example, if a
nonexempt employee that is paid biweekly works 45 hours during the
first workweek and 35 hours the second, the employer must pay
overtime for the extra five hours worked during the first week.
Some states, however, may have different wage and hour rules such as requirements that
overtime pay be based on the number of hours worked in a day or the number of days worked in a
week.
510
COMPUTING WAGES
510.01 After all the necessary payroll information has been obtained, the payroll bookkeeper can
calculate the amounts to be paid and withheld. The procedures to follow depend upon whether the
payroll is processed using a computer program or manually.
510.02 Regardless of whether manual or computerized payroll systems are used, it is important
that bookkeepers understand the steps needed to calculate payroll information. The following
paragraphs provide guidance for computing gross pay, tax withholdings, and other pay check
deductions.
Computing Gross Pay
510.03 In most instances, the calculation of gross pay is fairly simple and depends largely on
whether the job position is exempt or nonexempt from the FLSA (see discussion beginning at
Paragraph 505.12), and, if nonexempt, whether overtime was worked. The following paragraphs
discuss the calculation of gross pay under these various situations.
510.04 Exempt Employees. The gross pay of employees in FLSA exempt positions is calculated
by multiplying the employees weekly salary by the number of weeks in the pay period. If the
exempt employees salary is expressed as an annual amount, the payroll bookkeeper can
compute gross pay by dividing the annual salary by the number of pay periods during the year. For
example, if a company pays its employees twice each month (i.e., 24 times each year) the gross
pay for each pay period of an employee earning $36,000 annually would be $1,500 ($36,000 / 24).
(Because of past court decisions involving implied employment contracts, the authors recommend
that salaries always be expressed in weekly amounts.)
510.05 Exempt employees generally receive the same gross pay each pay period regardless of
the number of hours worked. Therefore, for those employees, the payroll bookkeeper can
calculate the first payroll of the year and simply duplicate that payroll amount until employee
salaries or deductions change. In some cases, however, companies may enter into unusual
compensation arrangements with their exempt employees. For example, an employee may be
paid a commission, a bonus based on company or department performance, or a combination of
salary and bonus. In those cases, the calculation of gross pay can become complex. Bookkeepers
should carefully review any such arrangements and compute gross pay in accordance with
compensation agreements.
510.06 Nonexempt Employees. For nonexempt employees, gross pay usually is computed by
5-11
Processing Payrolls
multiplying the hourly pay rate by the number of hours worked and paid leave during the
workweek. For example, the gross pay of an employee receiving $8.50 per hour and working 40
hours during the workweek would be $340 ($8.50 x 40 hours = $340).
510.07 Overtime. If overtime hours are worked, the calculation of gross pay becomes more
complex. Under the FLSA, employers are required to pay overtime at a premium rate to workers in
nonexempt positions who work more than 40 hours during the workweek. (A handful of states
require overtime pay based on the number of hours worked during a day or the number of days
worked during the week). The FLSA requires no overtime pay for employees in exempt positions
regardless of the hours worked.
510.08 The FLSA requires employers to keep records of the total premium pay for overtime
hours. The overtime premium pay excludes the straight-time earnings for overtime hours. The
overtime premium pay represents the additional one-half of regular hourly wages paid applied to
the workweeks hours worked in excess of 40. For example, assume the employee has a regular
wage rate of $8.50. The straight time (non-overtime) pay for the employee working 56 hours during
the workweek would be $476 ($8.50 x 56 hours), overtime premium pay would be $68 [($8.50 x )
x (56 - 40 hours)], and total wages would be $544.
510.09 To calculate the overtime premium pay, the payroll bookkeeper first determines the
amount of regular and overtime hours (discussed beginning at Paragraph 505.50). The payroll
bookkeeper then determines the overtime premium rate and then calculates the overtime premium
pay. The following paragraphs briefly discuss these two activities.
510.10 The businesss overtime premium rate equals one-half of the regular rate. The FLSA
defines the regular rate as the workweeks total includable compensation before any overtime
premium pay divided by the workweeks total hours worked. For example, using the example in
Paragraph 510.08, the regular rate is $8.50 ($476 56) and the overtime premium rate is $4.25
($8.50 x ).
510.11 Includable compensation consists of the employees basic hourly wages for the
workweek plus commissions; incentive, on-call, attendance, quality, production, and hazard
bonuses; suggestion awards; and noncash compensation. In practice, most businesses consider
the employees basic hourly rate to be the regular rate. While this is often true, it is not always true,
and the payroll bookkeeper should at least be aware that differences exit.
510.12 Once the bookkeeper has determined the overtime hours and overtime rate, the
bookkeeper simply multiplies the two to determine the overtime premium pay. Ideally, the payroll
system will record overtime premium pay separately from regular pay. Management often can use
the separate overtime premium pay number to gauge the effectiveness of staffing and scheduling.
In addition, the business usually needs to know non-overtime wages in order to calculate
accurately workers compensation and various benefit plan premiums.
Withholding Employment Taxes
510.13 After calculating the gross wages, the payroll bookkeeper must calculate the portion of the
wages required by federal law to be collected (withheld) from the employees wages for:
5-12
Federal income taxes. Employers must withhold personal income

taxes from employees wages and remit the withholdings directly to the
federal government or its depository bank. These taxes are often
referred to as federal income tax withholdings (FITW).
Social Security and Medicare taxes (collectively called FICA).

Employers must withhold FICA taxes from employee wages.
Employers then must remit the withholdings, along with matching
amounts paid by the employer, directly to the federal government or its
depository bank.
510.14 In addition, employers must withhold and remit employment taxes imposed by state laws.
State employment taxes vary depending on the laws of each state. Accordingly, a detailed
discussion of state employment tax requirements is beyond the scope of this Guide.
510.15 Employment Tax Coverage. Only individuals that are classified as employees are
covered by the employment tax laws. Thus, independent contractors (see Chapter 4, Processing
Purchases and Payments) and volunteers are not subject to employment taxes. The definition of
employee under each of the federal employment tax laws is as follows:
Federal income tax withholding. For FITW purposes, individuals are

generally classified by the common-law concept of employee. That is,
they are employees if the payer has the right to control how the work is
performed. By law, however, FITW regulations classify compensated
corporate officers as employees and licensed real estate agents and
direct sellers (such as many door-to-door sellers) as nonemployees.
Social Security and Medicare taxes. FICA regulations add full-time

life insurance agents, agent or commission drivers (such as route
drivers), full time traveling salespersons, and certain home workers to
FITWs list of employees.
510.16 Employers should use caution when classifying individuals as independent contractors
rather than employees. Employers may be held liable for all employment taxes (and be assessed
a penalty of 100% of the unpaid taxes) if they classify employees as independent contractors and
there is no reasonable basis for doing so.
510.17 Many types of businesses and employees receive special treatment under the
employment tax laws. Bookkeepers should refer to IRS Publication 15 (Circular E), Employers Tax
Guide, to determine whether any of their businesss employees should receive special treatment.
510.18 Federal Income Tax Withholding. Generally, employers should withhold federal income
taxes on all wages, salaries, fees, bonuses, commissions on sales or on insurance premiums,
taxable fringe benefits, pensions and retirement pay (unless taxed as an annuity) paid as
compensation for services. Usually, employers withhold on all wages at the time of payment; the
one exception is that employers may choose the time period(s) to withhold taxes arising from a
taxable noncash fringe benefit (such as personal use of a company auto).
510.19 Because of the complexity of compensation taxation, payroll bookkeepers should refer to
IRS Publication 15 (Circular E), Employers Tax Guide, and consult with the controller or outside
CPA to determine how wages should be treated for federal income tax and FICA withholding. IRS
Publication 15 can be obtained by calling 1-800-TAX-FORM or at www.irs.gov.
510.20 The amount of withholding will vary depending on each employees wage, marital status,
and withholding allowances claimed on Form W-4 (discussed beginning at Paragraph 505.29).
5-13
Processing Payrolls
Federal income tax withholding may be computed using any of the methods listed in Exhibit 5-3.
The most common methods used, however, are the wage bracket method and the percentage
method, as discussed in the following paragraphs.
Wage bracket method. Bookkeepers can avoid the detailed work of

computing withholding amounts by using the wage-bracket tables in
IRS Publication 15 (Circular E), Employers Tax Guide. Different withholding tables are available for each payroll period (for example,
weekly, biweekly, semimonthly, etc.) and for single and married
employees. To determine withholding amounts, bookkeepers should
(a) locate the table applicable to the appropriate marital status and
payroll period, (b) locate the wage bracket (first column of the table) in
which the wage payment falls, (c) locate the withholding amount on
the line for that wage bracket that is listed in the column for the
number of allowances claimed by the employee, and (d) add any
additional amount of voluntary withholding that was requested by the
employee to the amount determined in (c).
To illustrate, the withholding amount for a married employee that is
paid semimonthly is found on the Married PersonsSemimonthly
Payroll Period withholding table. If the employee is paid $2,000 semimonthly in 2012 and claims four allowances, the withholding amount
is $120. If the employee is paid $1,500 semi-monthly and claims two
allowances, the withholding amount is $92.
Percentage method. Federal income tax withholdings are determined using IRS rate tables. Different rate tables are available for
each payroll period and for single and married employees. To
determine the amount of income tax withholdings, bookkeepers
should (a) multiply the amount allowed for one withholding allowance
for the particular pay period by the number of allowances claimed by
the employee, (b) subtract the amount in (a) from the employees
wages, and (c) compute the amount to withhold based on the amount
determined in (b) and the appropriate rate table. IRS rate tables can
be found in IRS Publication 15 (Circular E), Employers Tax Guide.
5-14
Exhibit 5-3
FIT Withholding Methods

Method
Comments
Percentage method
See IRS Publication 15, Employers Tax Guide.
Wage bracket tables
See IRS Publication 15.
Alternative formula for percentage withholding
Useful for computerized payroll systems.

See IRS Publication 493. Alternative Tax With-holding
Methods and Tables.
Wage bracket percentage method withholding table
Useful for computerized payroll systems.

Combined income, employee Social Security, and

employee Medicare tax table
Annualized wage method

Average estimated wage method
Cumulative wage method
Useful for commission salespersons. See IRS
Publication 493. Employee must make a written
request, and employer must consent.
Part-year employment method
Useful for temporary or seasonal employees working
less than 245 days a year. See IRS Publication 493.
Employee must make a written request, and employer
must consent.
Additional voluntary withholding
Employee must indicate additional amounts on Form
W-4, line 6.
Other alternative methods
Nonresident aliens
Withholding is subject to treaty obligations.
See IRS Publication 515, Withholding of Tax on
Nonresident Aliens and Foreign Corporations.
Third-party sick pay
Withholding on pensions and annuities
See IRS Publications 15 and 493.
Note: IRS publications can be ordered by calling 1-800-TAX-FORM or at www.irs.gov.
5-15
Processing Payrolls
To illustrate, assume that an unmarried employee claiming two

allowances is paid $500 weekly in 2012. The income tax withholding of
$38.53 would be computed as follows:
Total wage payment
Adjustment for one allowance for
Weekly pay periods
Allowances claimed
Wages subject to withholding
Base
Excess
Withholding per TableWeekly
Payroll Period, Single Person
($16.80 + $144.84 x 15%)
$ 500.00
$ 73.08
x
2
146.16
353.84
- 209.00
144.84
38.53
510.21 Federal Income Tax Withholding on Supplemental Wages. Supplemental wages are
compensation paid to employees in addition to their regular wages. Examples include bonuses,
commissions, tips, overtime pay, accumulated sick leave, severance pay, vacation pay,
reimbursed business expenses taxable to the employee, and payment of nondeductible moving
expenses.
510.22 The IRS allows employers to withhold at a flat rate on supplemental wages. This option
arose when few employers had computerized payroll software. However, because such software is
now common, and because the flat rate in 2012 is 25% (which is often higher than the employees
regular withholding rate), most payroll bookkeepers just enter supplemental wage amounts into the
payroll software program when processing the regular wages earned during the pay period. The
program then calculates actual withholding on the combined regular and supplemental wages.
510.23 If the business chooses to apply the flat rate on supplemental wages, the business must:
Distinguish supplemental wages from regular wages when paid.

If not, they must be combined with regular wages for withholding.
Pay supplemental wages in a year in which the employee

receives regular wages. If regular wages have not been received
(for example, if an employee received severance pay in January and
no other wages), the employer must compute withholdings the same
as for regular wages.
510.24 Social Security and Medicare Withholding. The Federal Insurance Contributions Act
(FICA) provides for a system of old-age, survivors, disability, and hospital insurance. The
insurance is financed through the assessment of Social Security taxes (for old-age, survivors, and
disability insuranceOASDI) and Medicare taxes (for hospital insuranceHI). The taxes are
levied equally on both employers and employees. Employers collect the employees portions of the
taxes through payroll deductions. Those deductions, along with the employers matching amounts,
are then paid to the federal government and reported on employment tax returns.
510.25 The most significant differences between how FIT withholding and FICA withholding treat
types of compensation occur in the following items:
5-16
401(k) pre-tax contributions. Such amounts are excluded from FIT

withholding but included in FICA withholding.
SEP employee contributions. Such amounts are excluded from FIT

withholding but included in FICA withholding.
Deceased workers wages paid in year of death. Such amounts are

excluded from FIT withholding but included in FICA withholding.
Nonqualified deferred compensation plan payments. Generally,

contributions to such a plan are excluded from FIT withholding but
included in FICA withholding, while payments to an employee from
the plan are included in FIT withholding but excluded from FICA
withholding. Because the payroll tax treatment of such plans can be
complex, the payroll bookkeeper should obtain advice from a CPA.
Payroll bookkeepers should be aware of these differences and take steps to ensure that
withholding is accurately calculated.
510.26 For 2012, the rates of withholding from employee wages are as follows:
Social Security tax4.2% of the first $110,100 of each employees

wages.
Medicare tax1.45% of each employees wages.
To illustrate computing withholdings for Social Security and Medicare taxes, assume that an
employees gross pay for the current pay period is $5,000, and the employees year-to-date gross
pay (prior to the current pay period) is $110,000.
Calculation of Social Security withholding
Current period gross pay
Gross pay in excess of wage limit:
Year-to-date gross pay (including
the current pay period)
($5,000 + $110,000)
Social Security wage limit
Current period gross pay subject to
Social Security withholding
Social Security withholding rate
Current period Social Security withholding
Calculation of Medicare withholding

Current period gross pay
Medicare withholding rate
Current period Medicare withholding
$ 5,000
$115,000
110,100
(4,900)
100
4.20%
4.20
$ 5,000
x 1.45%
$ 72.50
5-17
Processing Payrolls
Making Other Payroll Deductions

510.27 The payroll bookkeeper may be required to compute a number of payroll deductions in
addition to federal, state, and local employment taxes. Many of the deductions benefit the
employees by funding insurance or retirement plans. Other deductions, such as those for creditor
garnishments, tax levies, and mandatory child support, may be unpopular with employees and
quite complicated. Federal tax laws whether deductions may be made before or after the
computation of federal income tax or FICA withholding. In some cases, state and federal
withholding treatments differ. Federal and state minimum wage rules must be followed if the
deductions threaten to lower employee pay below federal or state minimums. Accounting staff
should be familiar with the regulatory requirements, tax treatments, and limitations of all employee
payroll deductions to ensure that the deductions are computed accurately.
510.28 Documentation authorizing all deductions should be retained in the payroll file and
summarized on the Employee Payroll Information Sheet (see discussion at Paragraph 505.18).
When entering a new deduction into the payroll software, the payroll bookkeeper should print or
review the deduction information contained in the computer, agree the amounts to the revised
Employee Payroll Information Sheet, and document on the information sheet that the changes
were correctly entered.
515
PERFORMING PAY PERIOD ACTIVITIES
515.01 Each pay period, the bookkeeper enters time data into the payroll system, creates the
payroll register, prints paychecks, records payroll information, and deposits employment taxes.
This section discusses those procedures.
Entering Time Data
515.02 When computerized payroll systems are used, payroll processing is greatly simplified.
When an employee is hired, the bookkeeper enters information about the employee, wage rates,
and withholding (all discussed in Section 505) into the payroll software and changes the
information infrequently. To process each pay periods payroll, the payroll bookkeeper typically
batches the time cards or time sheets together, calculates batch control totals from each time
categorys hours (such as total regular time, overtime, paid leave, and unpaid leave), and records
the hours in a control log similar to Appendix 5D, Time Entry Control Log. The bookkeeper then
enters the hours worked into the payroll accounting software, which produces a payroll time report
showing the time entered for each employee and for the company as a whole. (Some payroll
programs create an hours and earning register when the payroll register is produced rather than
when the data is entered.) The bookkeeper compares this payroll time report (or hours and
earnings register) to the control log totals to determine that all the time was entered into the
system. The bookkeeper then documents on each time card or time sheet that the information was
processed and files the time records.
515.03 The payroll software then calculates gross pay and all withholdings and prepares the
paychecks. Payroll records are automatically posted and relevant tax return data are stored.
515.04 When payroll information is processed manually, the bookkeeper uses the time records
when making the calculations discussed in Section 510 for wages, withholdings, and deductions.
The calculations are relatively straightforward, but tedious.
5-18
Creating the Payroll Registers

515.05 When the payroll bookkeeper (or the payroll software) has calculated the gross wages
(including the overtime premium), employment tax withholdings, and other deductions, the
bookkeeper usually produces a draft payroll register. The payroll register shows the proposed
paychecks gross wages, withholding, and deductions for each employee and for the business in
total. The specific payroll register format will vary among payroll software systems. Exhibit 5-4
displays a sample payroll register page.
515.06 The bookkeeper uses the draft payroll register to:
Review the proposed payroll checks for reasonableness. The

payroll bookkeeper should review the payroll register to determine if
the total payrolls net pay is what was expected (consistent with other
similar pay periods) and if any individual checks appear unusually
large or low.
Determine that FICA taxes are being withheld properly. For 2012,
The payroll registers total Medicare withholding should always be
1.45% of the total Medicare wages. For employees with year-to-date
earnings less than $110,100, the Social Security withholdings should
be 4.20% of the Social Security wages. During 2012, if the payroll
register lists the employer portions of FICA taxes, the amounts would
not match the employees withholdings because although the
employees Social Security withholdings are 4.20% of the Social
Security wages, the employer pays the normal rate of 6.20%.
515.07 The payroll software may also produce an hours and earnings register (which includes
data from the time sheets), a deductions register (which details all deductions made from an
employees paycheck), a general journal (which indicates the accounts and amounts to be
recorded in the general ledger), a job cost journal (which indicates how the payroll costs will be
allocated to specific job projects), and a check register (which usually shows the information that
will appear on the paycheck stubs). The bookkeeper should determine that these reports all
balance to the payroll register and that the results appear reasonable. Usually, the payroll
bookkeeper can correct input errors and rerun the payroll register.
515.08 Wage and Tax Control Log. Payroll bookkeepers should prepare manually a control log
of wage and tax information, even if the business uses a payroll accounting software program. By
comparing the manually accumulated information to the cumulative information reported on the
payroll register, the bookkeeper gains assurance that the computer program is properly
accumulating and storing the data. Maintenance of this control log is very important, given the
inconvenience, lowered employee morale, and tax penalties that may arise from errors in
withholding taxes or reporting wage information. The bookkeeper can use a form similar to
Appendix 5E, Wage and Tax Control Log.
5-19
Processing Payrolls
Exhibit 5-4
Line
1.
2.
3.
4.
Sample Payroll Register Page
a
Name
b
Regular
Wages
c
OT
Premium
J. Apple
M. Rich
A. Carr
YTD
231
1500
300
2031
5.50
0
0
5.50
d
Gross
Wages
236.50
1500.00
300.00
2036.50
e
FIT
Taxable
Wages
236.50
1500.00
300.00
2036.50
f
FIT
WH
14.00
42.00
4
0
56.00
g
Soc
Sec
Wages
236.50
3
0
300.00
536.50
h
Soc
Sec
WH
9.93
3
0
12.60
22.53
i
Medicare
Wages
j
Medicare
WH
236.50
1500.00
300.00
2036.50
3.43
21.75
4.35
29.53
k
State
Tax
WH
4.97
31.50
4
0
36.47
l
Other
Deductions
m
Net Pay
37.00
115.00
43.00
195.00
167.17
1289.75
240.05
1696.97
Regular wages calculated as 42 hours at $5.50/hr. regular wage rate.
Overtime premium calculated as 2 overtime hours (42-40) at $2.75/hr. overtime premium rate ($5.50 x .5).
Employees year-to-date earnings exceed the Social Security maximum base.
Employees withholding allowances on Form W-4 are so great that no amounts are withheld for federal and state income taxes.
5-20
Printing Payroll Checks

515.09 Once the payroll register is correct, the payroll bookkeeper is ready to print the payroll
checks. The process of printing payroll checks is similar to that used to print accounts payable
checks (discussed beginning at Chapter 4, paragraph 415.10). The payroll bookkeeper should:
Keep all check stock in a secure place.
Record all receipts and uses of check stock. A check stock log such
as Appendix 4K in Chapter 4 can be used for this purpose.
Quickly distribute signed checks or keep them in a secure place.
File payroll check copies numerically in a check file.
515.10 State laws regulate:
When wages must be paid (pay day laws).
What wage information (such as the paycheck stub contents) must

accompany the paycheck.
If and how wages can be paid by direct deposit.
The employers actions when a paycheck is unclaimed (escheat

laws).
The payroll bookkeeper should know and follow the applicable laws.
Recording Payroll Information
515.11 Recording payroll information is an automatic function of most computerized payroll and
general ledger systems. The software posts the information in the general ledger and prints (or
produces the information necessary to prepare) quarterly and annual payroll tax returns and
employee Forms W-2. When payroll is prepared manually, however, bookkeepers must summarize
the information for each pay period and record it on the general ledger through journal entries.
They must also summarize the information by employee to provide the quarterly and year-to-date
information necessary to prepare payroll tax returns and employee Forms W-2. These two
activitiesrecording payrolls in the general ledger and summarizing employee payroll dataare
discussed in the following paragraphs.
515.12 The General Ledger. In most cases, wages, payroll taxes, and withholdings for each pay
period are summarized (in total or by department) and recorded in the general ledger through two
journal entriesone to record wages and employee withholdings and another to record the
employer portion of payroll taxes.
515.13 For example, assume that a companys payroll checks totaled $12,935 and consisted of
the following:
5-21
Processing Payrolls
Gross wage
Withholdings:
Federal income taxes
Social Security
Medicare
Insurance
$ 18,500
$ 3,450
777
268
700
Net pay
5,195
$ 13,305
515.14 Assume further that the wages paid are subject to employer-paid federal unemployment
taxes of 0.8% and state unemployment taxes of 2.8%. The companys payroll would be recorded in
the general ledger through the following entries:
Salaries
Federal income tax withheld
FICA taxes withheld
Insurance payable
Cash
18,500
3,450
1,045
700
13,305
To record salaries and employee withholdings.

Payroll taxes
Employer FICA taxes payable
Employer FUTA taxes payable ($18,500 x .8%)
Employer State unemployment taxes payable
($18,500 x 2.8%)
1,711
1,045
148
518
To record the companys portion of payroll taxes.
(While it is preferable to record the FUTA and SUTA taxes as part of the payroll journal entry many
businesses with small FUTA and SUTA taxes expense the taxes quarterly.)
515.15 The Employee Payroll History. To allow the preparation of Forms W-2 and properly
track the wage base limits of Social Security and FUTA taxes, the bookkeeper should post payroll
information to computer or manual files containing quarterly and year-to-date payroll information by
employee.
515.16 The posting is done automatically when payroll software is used. If payroll is calculated
manually, the payroll bookkeeper should complete an Employee Earnings History Form (Appendix
5F) for each employee. (A completed form is illustrated in Exhibit 5-5). The form accumulates an
employees gross wages; wages subject to Social Security, Medicare, and unemployment taxes;
withholdings; deductions; and net pay for each pay period. In addition, the form provides for
quarter and year-to-date totals of those amounts. The total of all such Employee Earning History
forms should agree to the balances on the payroll register or the Wage and Tax Control Log (see
Paragraph 515.08) for the same period.
5-22
Exhibit 5-5
Employee Earnings History
Employee name M. Sanders
Calendar Year
2012
FIRST QUARTER
Date
___1-16
___1-31
___2-16
___2-28
___3-16
___3-31
_______
_______
_______
_______
_______
Check #
____244
____253
____268
____282
____296
____311
_______
_______
_______
_______
_______
First quarter totals

Year-to-date totals
Social
Security
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
_______
_______
_______
__15000
__15000
Medicare
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
_______
_______
_______
__15000
__15000
FUTA
Wages
___2500
___2500
___2000
_______
_______
_______
_______
_______
_______
_______
_______
_______
_ _7000
_ _7000
SUI
Wages
___2500
___2500
___2500
___1500
_______
_______
_______
_______
_______
_______
_______
_______
___9000
___9000
FIT
W/H
____334
____334
____334
____334
____334
____334
_______
_______
_______
_______
_______
_______
___2004
___2004
Social
Security
W/H
105.00
105.00
105.00
105.00
105.00
105.00
_______
_______
_______
_______
_______
_______
_630.00
_630.00
Medicare
W/H
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_______
_______
_______
_______
_______
_______
_ 217.50
_ 217.50
Other Deductions
__ __30 _______ _______
__ __30 _______ _______
__ __30 _______ _______
__ __30 _______ _______
__ __30 _______ _______
__ __30 _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
____180 _______ _______
____180 _______ _______
Net
Pay
_1994.75
_1994.75
_1994.75
_1994.75
_1994.75
_1994.75
_______
_______
_______
_______
_______
_______
11968.50
11968.50
Gross
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
_______
_______
_______
Social
Security
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
_______
_______
_______
Medicare
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
_______
_______
_______
FUTA
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
SUI
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
FIT
W/H
____334
____334
____334
____334
____334
____334
_______
_______
_______
_______
_______
_______
Social
Security
W/H
105.00
105.00
105.00
105.00
105.00
105.00
_______
_______
_______
_______
_______
_______
Medicare
W/H
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_ _36.25
_______
_______
_______
_______
_______
_______
Other Deductions
__ __30 _______ _______
__ __30 _______ _______
__ __30 _______ _______
__ __30 _______ _______
__ __30 _______ _______
__ __30 _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
Net
Pay
_1994.75
_1994.75
_1994.75
_1994.75
_1994.75
_1994.75
_______
_______
_______
_______
_______
_______
___15000
___30000
__15000
__30000
__15000
__30000
_______
_ _7000
_______
___9000
___2004
___4008
_630.00
1260.00
_ 217.50
_ 435.00
____180
____360
11968.50
23937.00
Gross
Wages
___2500
___2500
___2500
___2500
___2500
___2500
_______
_______
_______
_______
_______
_______
___15000
___15000
SECOND QUARTER
Date
___4-16
___4-30
___5-16
___5-31
___6-16
___6-30
_______
_______
_______
_______
_______
Check #
____321
____342
____356
____372
____395
____395
_______
_______
_______
_______
_______
Second quarter
totals
Year-to-date totals
_______
_______
_______
_______
5-23
Processing Payrolls
Exhibit 5-5 (Continued)
Employee Earnings History
Employee name M. Sanders
Calendar Year
2012
THIRD QUARTER
Date
___7-16
___7-31
___8-16
___8-31
___9-16
___9-30
_______
_______
_______
_______
_______
Check #
____452
____478
____499
____531
____544
____571
_______
_______
_______
_______
_______
Third quarter
totals
Year-to-date totals
Gross
Wages
___2500
___2500
___2750
___2750
___2750
___2750
_______
_______
_______
_______
_______
_______
Social
Security
Wages
___2500
___2500
___2750
___2750
___2750
___2750
_______
_______
_______
_______
_______
_______
Medicare
Wages
___2500
___2500
___2750
___2750
___2750
___2750
_______
_______
_______
_______
_______
_______
FUTA
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
SUI
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
FIT
W/H
____334
____334
____401
____401
____401
____401
_______
_______
_______
_______
_______
_______
Social
Security
W/H
105.00
_ 105.00
_ 115.50
_115.50
_ 115.50
_ 115.50
_______
_______
_______
_______
_______
_______
Medicare
W/H
_ _ 36.25
_ _ 36.25
___39.88
___39.88
___39.88
___39.88
_______
_______
_______
_______
_______
_______
Other Deductions
Insurance
__ __30 _______ _______
__ __30 _______ _______
_____30 _______ _______
_____30 _______ _______
_____30 _______ _______
_____30 _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
Net
Pay
_1994.75
_1994.75
_2163.62
_2163.62
_2163.62
_2163.62
_______
_______
_______
_______
_______
_______
16000
__46000
16000
__46000
16000
__46000
_______
__7000_
_______
__ 9000
_ 2272
___6280
_672.00
1932.00
_ 232.02
_667.02
____180
____540
_______
_______
12643.98
36580.98
Social
Security
Wages
___2750
___2750
___2750
___2750
__ _600
_______
_______
_______
_______
_______
_______
_______
_ 11600
_ 57600
Medicare
Wages
___2750
___2750
___2750
___2750
___2750
___2750
_______
_______
_______
_______
_______
_______
_ 16500
__62500
FUTA
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_ _7000
SUI
Wages
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_ _9000
FIT
W/H
____401
____401
____401
____401
____401
____401
_______
_______
_______
_______
_______
_______
___2406
___8686
Social
Security
W/H
_ 115.50
_ 115.50
_ 115.50
_ 115.50
25.20
_______
_______
_______
_______
_______
_______
_______
__487.20
_2419.20
Medicare
W/H
___39.88
___39.88
___39.88
___39.88
___39.88
___39.88
_______
_______
_______
_______
_______
_______
__239.28
__906.30
Other Deductions
_____30 _______ _______
_____30 _______ _______
_____30 _______ _______
_____30 _______ _______
_____30 _______ _______
_____30 _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
_______ _______ _______
____180 _______ _______
____720 _______ _______
Net
Pay
_2163.62
_2163.62
_2163.62
_2163.62
_2253.92
_2279.12
_______
_______
_______
_______
_______
_______
13187.52
49768.50
_______
_______
FOURTH QUARTER
Date
__10-16
__10-31
__11-16
__11-30
__12-16
__12-31
_______
_______
_______
_______
_______
Check #
____593
____609
____624
____645
____668
____682
_______
_______
_______
_______
_______
Fourth quarter totals

Year-to-date totals
5-24
Gross
Wages
___2750
___2750
___2750
___2750
___2750
___2750
_______
_______
_______
_______
_______
_______
_ 16500
_62500
Depositing FICA and FITW Taxes

515.17 Many troubled businesses, unaware of the stiff penalties faced by both the business and
the responsible individuals, fail to make timely employment tax deposits. If the business fails to
withhold employment taxes or to remit the taxes, the IRS can levy a 100% penalty for the taxes
due on either (a) the business or (b) the businesss individual officers and employees. IRS
Publication 594, The Collection Process, contains the IRSs explanation of its powers to assess
and collect the 100% penalty. Payroll bookkeepers and business officers should read this IRS
publication.
515.18 Because banks typically will not knowingly loan money to be used for payroll or payroll
taxes, the best strategy is to never get behind on the tax deposits. Therefore, the authors strongly
urge the business to deposit payroll taxes every payday, even if the deposit is not legally due. The
authors also recommend that, before the last tax deposit in the quarter is due, the bookkeeper first
drafts the employment tax returns and then adjusts the tax deposit to pay all the taxes calculated
as due.
515.19 This section describes (a) how to determine the amount to be deposited, (b) the process
for completing the deposit coupon and depositing the taxes, (c) the required schedule for
depositing employment taxes, and (d) the penalties for late deposits.
515.20 Determining the Deposit Amount. If taxes are voluntarily deposited when every payroll
is run (see Paragraph 515.18), the amount of FIT and FICA taxes to be deposited can be
calculated using the Wage and Tax Control Log (Paragraph 515.08 and Appendix 5E, Wage and
Tax Control Log). The amounts withheld from the employees comes from the payroll register, while
the employers matching amounts are calculated by the payroll bookkeeper and entered in
columns j-l of the log. The payments of advance earned income credit (if any) are obtained from
the payroll register. The total deposit should be the amount of the withheld FIT and FICA taxes,
plus the employers matching FICA taxes, less any advance earned income credit payments.
515.21 Making the Deposits. The deposit process is relatively straightforward. The business
must make the deposit in an authorized institution, using available funds accompanied by a
properly completed deposit coupon. In addition, the payroll bookkeeper should ensure that the tax
payment is properly recorded in the companys records.
515.22 The bookkeeper must mail or deliver all tax deposits to an authorized financial institution
or a Federal Reserve Bank, also enclosing a federal tax deposit coupon, Form 8109. The deposit
must be as an immediate credit item, such as cash, postal money order, and checks or drafts
drawn on and made out to the order of the Federal Reserve bank or authorized depository (usually
larger banksa list can be obtained from the areas Federal Reserve bank). A check drawn on
another bank may be used only if the depository is willing to accept the check.
515.23 Deposit coupons are available at any IRS Service Center and are generally provided to
the employer upon application for an Employer Identification Number. If the employer must make
a deposit and a preprinted form is not available, Form 8109-B may accompany a deposit made
to any authorized depository or Federal Reserve Bank. An employer who has not received an
Employer Identification Number must remit the deposit directly to the IRS.
515.24 Appendix 5G, Form 8109 Preparation Checklist, is an aid the payroll bookkeeper can use
when reviewing the completed deposit coupon. The employer can obtain further guidance on
deposits in IRS Publication 15 (Circular E), Employers Tax Guide.
5-25
Processing Payrolls
515.25 When making the tax deposit, the payroll bookkeeper should have the bank validate a
deposit receipt, such as Appendix 5H, Payroll Tax Deposit Receipt, or a photocopy of the deposit
coupon. The payroll bookkeeper also should record each tax deposit made on the stubs provided
in the deposit coupon book and on Appendix 5E, Wage and Tax Control Log (Paragraph 515.08).
515.26 Due Dates. As stated previously, the authors recommend that the payroll bookkeeper
deposit payroll taxes after every pay period. However, this is not legally required. The following
paragraphs discuss the legal requirements for deposits of withheld FIT and FICA taxes (and of the
employers matching FICA taxes) on wages, tips, and sick pay. There are different rules for
deposits of FUTA taxes, as discussed beginning at Paragraph 525.18.
515.27 The IRS will determine the employers deposit category based upon the amount of
employment taxes recorded on Form 941 during the 12 months ending the previous June 30 (the
lookback period). The IRS will notify each employer before a new tax year about the employers
category. Under the deposit rules, employers fall into two categories:
Monthly depositor. Employers who deposited $50,000 or less in the

lookback period are classified as monthly depositors. Each months
employment taxes are due by the 15th of the following month. If banks
are closed on the 15th, the employer can deposit the taxes on the
next business day. New employers are also classified as monthly
depositors.
Semi-weekly depositor. Employers reporting more than $50,000 in

the lookback period are classified as semi-weekly depositors. If a
payday is on Wednesday, Thursday, or Friday, employment taxes are
due the following Wednesday. For paydays on all other days of the
week, employment taxes are due on the following Friday. If banking
holidays occur, the employer will always have three banking days to
deposit the taxes. For example, an employer with a payday on the
Friday before a Monday holiday has until Thursday to deposit the
employment taxes. Semi-weekly deposits that include paydays in two
different quarterly reporting periods require two separate deposits with
the period clearly marked on the deposit coupons.
515.28 For employers in either category, whenever the accumulated employment tax liability
reaches $100,000, the employer must deposit the taxes by the next banking day. In addition, such
an employer becomes classified as a semi-weekly depositor for the remainder of the year and for
the next year.
515.29 Employers with a deposit liability less than $2,500 during the quarter may remit their taxes
with the quarterly employment tax return.
515.30 Penalties. Generally, the timeliness of deposits is determined by the date (based upon
the banks deposit cutoff schedule) the authorized financial institution or Federal Reserve bank
receives it. One limited exception is possible. If the employer is not required to make deposits
more frequently than monthly and the deposit is less than $20,000, the deposit will be considered
timely if the employer can prove (by certified U.S. mail) that the deposit was mailed two days
before the due date.
515.31 Late deposit penalties vary with the time the deposit is overdue, as summarized in Exhibit
5-6.
5-26
Exhibit 5-6
Late Deposit Penalties for FITW and FICA
Period Late
Penalty as a Percentage of the Deposit
1 to 5 days
2%
6 to 15 days
5%
16 or more
10%
10 days or more after demand is made by IRS
15%
515.32 A penalty of 10% for 16 days calculates to an annual interest rate of over 225%. If
necessary, the company should borrow funds to pay the taxes, since the interest rate is lower than
the IRS charges. However, many lenders will refuse to lend money if they know the funds will be
used for payroll and payroll taxes.
515.33 Besides the preceding restrictions, the IRS may require the employer making late
deposits to file employment tax returns monthly rather than quarterly.
520
PERFORMING MONTHLY PAYROLL ACTIVITIES

520.01 Many payroll accounting software programs require the bookkeeper to perform certain
monthly closing procedures. Because of differences in systems, such procedures are not covered
in this Guide. Accounting staff should consult the software manual for their specific payroll software
program. However, whatever systems are used the payroll bookkeeper each month should
reconcile the payroll bank account and reconcile the employee payroll deductions.
Reconciling the Payroll Bank Account
520.02 If the business uses a separate bank account for payroll, the bookkeeper should reconcile
the account monthly. The procedures and forms for reconciling the account are the same as those
used for the businesss regular cash account (described in Chapter 3). Ideally, a bookkeeper other
than the payroll bookkeeper will reconcile the payroll account.
520.03 Accounting staff should follow the applicable state laws when dealing with outstanding
(uncashed) payroll checks. These laws are called escheat laws, and accounting staff can obtain
information about them from the state (usually the secretary of state or state controller), a CPA, the
controller, or an attorney.
Reconciling Employee Payroll Deductions
520.04 The payroll bookkeeper should reconcile the deductions made from employees to the
deductions remitted to benefit plan providers, insurers, the IRS, courts, and other payees. This
reconciliation should be made because the business has a high legal duty to forward such funds
and not use them for general business purposes. Sometimes the timetable for making the
remittances is set by state law; in other cases, it is part of a contractual agreement between the
5-27
Processing Payrolls
business and the employees. The bookkeeper should review with the controller or outside CPA
when all deduction remittances are due and record the dates on the Employment Tax Calendar,
Appendix 5I.
520.05 The bookkeeper can perform this reconciliation by analyzing monthly the general ledger
accounts used to record the employers liability. For example, the bookkeeper may perform the
following analysis of the health insurance withholdings account (used to record amounts withheld
from employees to pay for health insurance).
Description
Marchs beginning balance:
February withholdings
February liability
for B. Brown
Beginning balance
Added withholdings:
March 1 payroll
March 8 payroll
March 15 payroll
March 22 payroll
March 29 payroll
Total added withholding
Amount
Dr. (Cr.)
$ (1,250)
$
(50)
$ (1,300)
$
$
$
$
$
300
300
325
325
325
$ (1,575)
Remittances
AAAA Insurance 3/15/05 check #123
$ 1,300
Other
Coverage for B. Brown during
Cobra election period
Marchs ending G/L balance
(50)
$ (1,625)
This analysis shows that (a) the $1,300 remittance of the February deductions was timely and (b)
the amounts paid match those withheld.
520.06 The payroll bookkeeper should perform a similar monthly analysis on each deductions
general ledger account. Appendix 5J, Deduction Account Analysis Form, is a blank form the
bookkeeper can use for the analysis. The bookkeeper should then accumulate from all the
analyses (for insurance, savings plans, tax levies, and other deductions) the months total
withholdings and then agree the amount to the monthly totals in the payroll register or deduction
register.
525
PERFORMING QUARTERLY PAYROLL ACTIVITIES

525.01 Quarterly, the bookkeeper must file the IRS Form 941, Employers Quarterly Payroll Tax
Return, and deposit the federal unemployment taxes (FUTA taxes). This section discusses those
activities.
5-28
Filing Forms 941

525.02 This topic discusses the general requirements for Form 941 and the detail procedures to
prepare the form for the first three quarters of the year. The preparation of the fourth quarter Form
941 is considered part of the year-end activities and is addressed beginning at Paragraph 530.22.
525.03 Most employers report wages, tips, federal income tax withholding, and FICA taxes to the
IRS quarterly using Form 941, Employers Quarterly Payroll Tax Return. Exceptions to this
general rule include:
Agricultural employers. Such employers should file annually Form

943, Employers Annual Tax Return for Agricultural Employees.
Employers should refer to the IRS Circular A, Agricultural Employers
Tax Guide.
Household employers. Such employers should file quarterly Form

942, Employers Quarterly Tax Return for Household Employees.
Seasonal employers. Such employers file Form 941 but not for
quarters in which they regularly do not have payroll. If at least one
quarterly return is filed each year, seasonal employers should mark
the appropriate box at the top of Form 941 to indicate seasonal status.
525.04 If a business is sold or transferred during a quarter, the prior owner and the new owner
must both file Form 941 for that quarter. Each party should only report the wages it paid during
the quarter, however. Businesses that cease operations or cease to be employers should write
Final Return on the last return filed.
525.05 Preparing the Forms 941. Accounting staff should prepare the Form 941 first in draft
form before the quarters last tax deposit. This procedure allows the accounting staff to make
needed adjustments within the quarter and avoid filing any Forms 941C during the year.
525.06 Many payroll software programs prepare a Form 941 report. Specific instructions for
completing the return are provided with the form. In addition, the IRS presents a case, including
a completed return, in Publication 937, Employment Taxes and Information Returns (call 1 -800TAX-FORM or go to www.irs.gov to request or obtain). Appendix 5K, Form 941 Preparation
Checklist, presents a checklist accounting personnel can use as a guide to processing the form
correctly.
525.07 Reconciliations. Once the draft Form 941 is prepared the bookkeeper should perform
two reconciliations. In the first, the bookkeeper should reconcile the draft Form 941 to the payroll
register. Information that should be reconciled includes FIT wages, FITW, Social Security wages,
Social Security taxes (both employees and employer's), Medicare wages, Medicare taxes (both
employee and employers), tax deposits, and tax liabilities. The bookkeeper should also
recalculate the Social Security and Medicare taxes and determine that the employers portion of
the FICA taxes equals the employees withholdings.
525.08 In the second reconciliation, the payroll bookkeeper should perform a reconciliation of the
information within the Form 941 itself. The compensation subject to FITW (line 2) should be
reconciled to compensation subject to Medicare taxes (line 7) and Social Security taxes (lines 6ab). This reconciliation is necessary to ensure that the wage information is being properly reported.
The primary differences arise from the handling of the following four items:
5-29
Processing Payrolls
401(k) pre-tax contributions. Such amounts are excluded from line 2

but included in lines 6 and 7.
SEP employee contributions. Such amounts are excluded from line

2 but included in lines 6 and 7.
Deceased workers wages paid In year of death. Such amounts are

excluded from line 2 but included in lines 6 and 7.
Reimbursed nontaxable employee moving expenses. Such

amounts are included in line 2 but excluded from lines 6 and 7.
Nonqualified deferred compensation. The payroll bookkeeper

should consult with the controller or outside CPA to determine the
proper treatment of any nonqualified deferred compensation.
Generally, payments into the plan are excluded from line 2 but
included in lines 6 and 7, while payments from the plan are included in
line 2 but excluded from lines 6 and 7.
Appendix 5L, Form 941 Internal Reconciliation, provides a form the payroll bookkeeper may use
to reconcile internally the Form 941.
525.09 After performing these reconciliations and making any necessary corrections and
adjustments (addressed in the following paragraph), the bookkeeper is ready to make the
quarters final tax deposit (see discussion starting at Paragraph 515.17) and file the Form 941.
525.10 Correcting Withholding Errors. If the reconciliations uncover errors in withholding, the
payroll bookkeeper should make the following corrections:
5-30
If payroll taxes are overwithheld and the error is discovered before

filing Form 941, the employer should return the overwithholding to the
employee and obtain a signed receipt showing the date and amount
repaid.
If payroll taxes are underwithheld and the error is discovered before

filing Form 941, the employer should report the correct amount of
withholdings on Form 941, pay the employees portion of taxes that
were underwithheld, and deduct the needed withholdings from the
employees next payroll check.
If payroll taxes are overwithheld and the error is discovered after filing
Form 941, the employer may either (a) apply the excess amounts
against the next quarters liability or (b) repay the employee in the
next quarter, obtaining a signed receipt showing the date and amount
paid.
If payroll taxes are underwithheld and the error is discovered after

filing Form 941, the employer may either (a) correct the shortfall in a
later quarter of the year or (b) file Form 941C correcting Form 941 for
the quarter when the error occurred.
525.11 If the reconciliations uncover either a difference in the Social Security and Medicare taxes
calculated or an imbalance between the employees and employer portions, the employer should
add the balancing amount to the final tax deposit. Most businesses record small amounts
necessary to balance as employers FICA expense.
525.12 Due Dates. Form 941 generally is due on the last day of the month following the quarter.
For example, Form 941 for the quarter ended March 31, 2012 generally is due April 30, 2012. If
all payroll taxes are deposited when due during the quarter, however, Form 941 is not due until
the 10th day of the second month following the quarter. Thus, in the preceding example, if all
payroll taxes were deposited when due, the Form 941 would be due May 10, 2012.
525.13 Appendix 5I, Employment Tax Calendar, lists the due dates of federal payroll tax returns
and deposits.
525.14 Tax Return Signers. Accounting staff generally should not sign the Form 941 (or the Form
940 unemployment tax return). Employment tax returns must be signed by an authorized
representative of the company under penalty of perjury. Exhibit 5-7 lists authorized signers.
Exhibit 5-7
Employment Return Authorized Signers

Entity
Authorized Signers
Proprietor
Owner
Corporation
President, vice-president, or other principal officer
Partnership
Authorized partner
Unincorporated organization
Informed officer
Trust or estate
Fiduciary
1
Employers may authorize an agent (such as a tax preparer) to sign employment tax
returns by filing IRS form 2678, Employer Appointment of Agent. An entitys authorized signer may
delegate the signing authority to an employee only by filing IRS form 2848, Power of Attorney and
Declaration of Representative.
525.15 The IRS usually will not discuss an IRS notice with a bookkeeper who is not authorized to
sign the employment tax return. However, the authorized signer can grant the IRS permission to
talk to the bookkeeper by using either IRS Form 2848, Power of Attorney and Declaration of
Representative, or IRS Form 8821, Tax Information Authorization. The employer can specify on
these forms the limits to the bookkeepers authority.
525.16 Mailing Procedures. All employment tax returns should be mailed on or before the due
date by certified U.S. mail, return receipt requested. The payroll bookkeeper should keep a
photocopy of the return in the payroll files.
525.17 Penalties. The IRS may assess penalties for filing a return late unless there is a
reasonable cause. For each whole or partial month the employer fails to file a return when
required, the IRS imposes a penalty of 5% (up to a maximum of 25%) of the amount the employer
should have reported on the return.
5-31
Processing Payrolls
Calculating and Depositing FUTA Taxes

525.18 The Federal Unemployment Tax Act (FUTA), together with state unemployment systems,
provides for payments of unemployment compensation to workers that have lost their jobs. Most
employers pay federal and state unemployment taxes to fund the following two-tier system:
State level. Each state sets its state unemployment insurance (SUI)
tax rate and wage base so that sufficient funds are raised to pay
anticipated benefit claims (and provide a surplus for solvency). State
rates currently vary from 0.05% to 10%, and the wage base levels
range from $7,000 to $22,700.
Federal level. The federal government sets a federal unemployment

tax rate and wage base sufficient to establish a pool from which states
may borrow if their benefit funds become depleted. The federal tax
rate in 2012 is 6.2% and the wage base is $7,000.
525.19 State and federal unemployment taxes are interrelated. The federal government generally
allows employers a credit against FUTA taxes of up to 5.4% for fully paying state unemployment
taxes. (The credit generally is allowed even if the employers state unemployment tax rate is less
than 5.4%.) Thus, an employer that fully pays its state unemployment taxes would actually be
assessed federal unemployment taxes of only 0.8% (6.2% - 5.4%).
525.20 IRS Publication 15 (Circular E), Employers Tax Guide, lists various types of
compensation and discusses whether they are subject to FUTA taxes.
525.21 Determining the Deposit Amount. While some businesses have payroll software
programs that record the FUTA tax liability as a payable when each payroll is paid, many payroll
systems do not calculate the FUTA and SUI liability as part of the regular payroll processing. In
these cases, the payroll bookkeeper prepares a draft Form 940 each quarter, calculates the
wages subject to the FUTA tax and applies the FUTA tax rate. The payroll bookkeeper makes the
quarterly tax deposit on the basis of this calculation (but does not file the Form 940, which is filed
only at year end) and records the quarterly FUTA tax expense.
525.22 To illustrate the calculation of the FUTA tax liability, assume that a company whose wages
during the year were as follows:
YTD Wages as of the end of the:
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
M. Jones
B. Dugan
A. Roberts
5-32
$ 5,500
6,000
8,000
$ 11,000 $ 16,500 $ 22,000

12,000
18,000
24,000
16,000
24,000
38,500
$ 19,500
$ 39,000 $ 58,500 $ 84,500
Calculation of 1st quarter FUTA tax liability

Total year-to-date wages
Less wages in excess of FUTA limit:
A. Roberts ($8,000 -$7,000)
$ 19,500
1,000
Wages subject to FUTA

FUTA tax rate (assuming that state
unemployment taxes were fully paid)
0.8%
FUTA tax liability
148
Calculation of 2nd quarter FUTA tax liability

Total year-to-date wages
Less wages in excess of FUTA limit:
M. Jones ($11,000 - $7,000)
B. Dugan ($12,000 - $7,000)
A. Roberts ($16,000 -$7,000)
18,500
$ 39,000
$ 4,000
5,000
9,000
18,000
Year-to-date wages subject to FUTA

Less wages subject to FUTA in 1st quarter
21,000
18,500
2,500
FUTA tax rate (assuming that state

unemployment taxes were fully paid)
0.8%
FUTA tax liability
20
Calculation of 3rd and 4th quarter FUTA liability

No FUTA tax is due since wages paid for each employee in the 3rd and
4th quarters were in excess of the FUTA wage limit.
525.23 Because the federal and state unemployment taxes often use different taxable wage
bases, most payroll bookkeepers use payroll accounting software to make the calculation. The
software generally prepares a draft Form 940 or state unemployment tax return.
525.24 Reconciliations. When making the quarterly federal and state unemployment tax
calculations, the payroll bookkeeper should manually create or obtain from the computer program
the following two reconciliations:
An employee-by-employee listing reconciling the payroll registers

gross wages to the amount used in the FUTA tax calculation. Such
reconciliations are extremely helpful during unemployment tax audits
and for checking the reasonableness of the unemployment tax
calculations.
A reconciliation of wages reported on the FUTA calculation to the total

reported on quarterly SUI tax returns or calculations. State
unemployment auditors often want to inspect such reconciliations.
525.25 Due Dates. Employers must calculate and deposit FUTA taxes quarterly. (The FUTA tax
return, Form 940, is filed annually and is discussed beginning at Paragraph 530.29.) The quarterly
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FUTA tax deposit is due on April 30, July 31, October 31, and January 31. Appendix 5I,
Employment Tax Calendar, lists the deposit due dates.
525.26 If the liability at quarter end is $100 or less, the balance may be carried over to the next
quarter. If the liability at year end is $100 or less, the business has the option to include the tax
payment with the Form 940 return (due on January 31).
525.27 Making the Deposit. The FUTA tax deposit is made following the same procedures used
for depositing FITW and FICA taxes, discussed beginning at Paragraph 515.21. The bookkeeper
should clearly mark that the coupon is for a 940 remittance. The deposits should be recorded on
the stub in the deposit coupon book and on the worksheets used to calculate the quarterly FUTA
tax liability.
530
PERFORMING ANNUAL PAYROLL ACTIVITIES

530.01 At the end of the calendar year, the payroll bookkeeper must complete the fourth quarter
activities, report wages to both the government and the employee, and file the annual federal
unemployment tax return. In order to have complete, accurate, and consistent reports and tax
deposits, the authors recommend that the bookkeeper observe the following sequence of year-end
activities:
Recording non-payroll compensation. Many items of taxable

compensation do not flow through the payroll system or are not paid
in cash. For example, the employees personal use of a business auto
is considered taxable compensation. The payroll bookkeeper must
identify and value such compensation elements, calculate and
withhold the applicable taxes, and add this data to the wage and tax
data accumulated in the payroll system. Although the IRS regulations
sometimes require otherwise, in practice most bookkeepers value and
add such benefits to the payroll in the fourth quarter.
Prepare Forms W-2 and W-3. The Form W-3 (summarizing the
individual Forms W-2) should be reconciled to the total of the payroll
register and the non-payroll compensation data.
Prepare the Form 941 for the fourth quarter. The bookkeeper
should reconcile the draft Form 941, Employers Quarterly Federal
Tax Return, to the Form W-3, resolve differences, and adjust the
years last FITW and FICA tax deposit to balance with the Form 941
Prepare a Form 940. Again, the payroll bookkeeper should reconcile

the draft Form 940, Employers Annual Federal Unemployment
(FUTA) Tax Return, to the Form W-3, resolve differences, and adjust
the years last FUTA tax deposit to balance with the Form 940.
These activities are discussed in the following topics.

Recording Non-payroll Compensation
530.02 Taxable fringe benefits and other non-payroll compensation include, among other items,
country club dues paid for the employee, the value of personal use of company autos, and
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employer provided group life insurance coverage exceeding $50,000. As listed on IRS Publication
15 (Circular E), Employers Tax Guide, the business is required to report and withhold taxes from
many types of non-payroll compensation. The payroll bookkeeper and controller or outside CPA
should work together to identify which of the businesss compensation require reporting and the
value to assign the benefits. Appendix 5M, Non-payroll Compensation Checklist, is a checklist to
help the business identify reportable types of non-payroll compensation (including taxable fringe
benefits).
530.03 To properly withhold employment taxes and prepare the Forms W-2, 941, and 940, the
bookkeeper must combine the non-payroll compensation with the payroll information. How the
payroll bookkeeper accomplishes this depends on the payroll accounting software. With
sophisticated payroll software, the bookkeeper can easily enter such compensation and specify
the correct tax and withholding treatments. Other software requires the bookkeeper to enter such
items as both additions to gross pay and deductions from after-tax pay and to make manual
adjustments in the infrequent cases where the treatment for FITW and FICA taxes differ. In both
of these cases, because the amounts are entered into the payroll system, the fringe benefit and
non-payroll compensation is recorded in the payroll register. When preparing the Form 941, the
payroll bookkeeper can then rely on the quarterly payroll register without adjustment.
530.04 In other cases, the payroll bookkeeper must make manual additions to the information in
the payroll register to correctly state wages, and then the bookkeeper must recalculate the
employment taxes. Because the Social Security wage base maximum limit ($110,100 in 2012)
may apply to certain employees, the manual additions and recalculations must be made on an
employee by employee basis. Typically, the bookkeeper makes these manual adjustments before
the last payroll of the year, so there will be cash wages from which to withhold taxes arising from
the fringe benefits and non-payroll compensation.
530.05 Whatever the situation, the payroll bookkeeper should leave clear documentation as to
what adjustments were booked to the normal payroll. Appendix 5N, Employee Wage Adjustments
Form, is a schedule the payroll bookkeeper can use to document the adjustments made. (The
schedule assumes the payroll system calculates the FITW and FICA taxes.)
Issuing Forms W-2 and W-3
530.06 After the non-payroll compensation has been processed and combined with the payroll
data, the payroll bookkeeper is ready to prepare the draft Forms W-2, Wage and Tax Statement,
and Form W-3, Transmittal of Income and Tax Statements (which summarizes the Form W-2
information). The following paragraphs discuss the Form W-2 preparation.
530.07 A Form W-2 should be prepared for each employee for whom the employer:
a. Withheld income tax.
b. Would have withheld income tax if the employee had not claimed two
or more exemptions (including total exemption).
c.
Withheld Social Security and Medicare taxes.
d. Received a statement from a third-party payer of sick pay.

530.08 The IRS presents a case, including a completed return, in Publication 937, Employment
Taxes and Information Returns (call 1 -800-TAX-FORM or go to www.irs.gov to request).
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530.09 Preparing the Forms W-2 and W-3. Most payroll software systems prepare Forms W-2
and W-3. If the bookkeeper is using a manual payroll system, numerous low priced software
programs are available that prepare and print these forms only.
530.10 To avoid error when preparing Forms W-2 and W-3, the authors recommend the
following:
Verify employee names, Social Security numbers, and addresses.
Include cash bonuses in Social Security and Medicare wages.
Use only the current years versions of Forms W-2 and W-3.
File Forms W-2 with the Social Security Administration, not the IRS.
Report both Social Security and Medicare wages and taxes

separately for each employee.
Verify that the amount of wages and taxes withheld are reported in the
appropriate box on Form W-2.
Mark the Pension Plan box on the Forms W-2 of all employees that
are active in the companys pension plan. If the box is not marked, the
employee may make a contribution to an IRA that may later be ruled
nondeductible. Form W-2 provides instructions, and the employer may
also consult IRS Publication 1602. Where applicable, employers
should also mark the Deferred Compensation box.
Appendix 5O, Form W-2 Preparation Checklist, is an extensive checklist for the payroll
bookkeepers use.
530.11 Reconciliations. After the Forms W-2 and W-3 are prepared, the payroll bookkeeper
should perform two reconciliations:
The FIT wages and taxes withheld, Social Security wages and taxes
withheld, Medicare wages and taxes withheld, and advance EIC
payments on the W-3 should agree to the combined payroll data (in
the payroll register) and non-payroll data (either in the payroll register
or non-payroll compensation workpapers).
Within the Form W-3, the FIT wages should be reconciled to the
Medicare wages and Social Security wages. Appendix 5P, Form W-3
Internal Reconciliation, is a form the payroll bookkeeper can use
during this procedure.
The Forms W-2 and W-3 should be revised until the reconciliations above are in balance.
530.12 Due Dates. Forms W-2 are due to employees by the earlier of the following:
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January 31st. No extension beyond the January 31st deadline is

permitted.
If requested by a terminated employee, 30 days after the employees

request or after the final wage payment.
530.13 A copy of Forms W-2, along with Form W-3, is due to the SSA by the last day of
February. Thus, employers have the month of February to correct any errors noticed by
employees on their Forms W-2. A 30 day extension for filing with the SSA can be requested.
530.14 Forms W-2 must also be filed with certain states and cities. The dates that Forms W-2 are
due to states and cities vary, but generally range from January 31st to March 31st. When a
terminated employee requests a wage statement, some states have deadlines for the issuance of
the wage statements that are shorter than the federal deadlines.
530.15 Appendix 5I, Employment Tax Calendar, contains the Form W-2 due dates.
530.16 Replacement Forms. A lost or damaged employee copy of Form W-2 may be replaced
by issuing another Form W-2 and marking the reissued form Reissued Statement. Employers
should not send reissued statements to the SSA. (The rules for corrected Forms W-2 are
discussed at Paragraph 530.26.)
530.17 Undelivered Forms. If an employer has attempted to deliver Forms W-2 to the employee
by mail but has been unsuccessful, the returned envelope (which is proof of the attempt) should be
kept on file until the form is claimed. Forms that cannot be delivered should be kept on file for four
years.
530.18 Filing on Magnetic Media. In general, employers that file 250 Forms W-2 must use
magnetic media (such as computer disks or tapes) to file the returns. (They should not file the
same returns on paper.) If filed on magnetic media, the forms must meet the requirements
described in the SSAs Technical Information Bulletin No. 4. Many CPAs can prepare the returns
using magnetic media, and several computer programs that cost around $100 are available to help
in the process. Businesses that file using magnetic media for the first time should file Form 4419,
Application for Filing Information Returns Magnetically/Electronically, at least 30 days before the
deadline for filing the returns (February 28).
530.19
If filing on magnetic media would be an undue hardship, a waiver from the requirement
may be obtained. (The waiver must be obtained each year.) Waivers should be requested from the
IRS at least 45 days before the due date of the returns using Form 8508, Request for Waiver from
Filing Information Returns on Magnetic Media.
530.20
Employers can obtain information about magnetic media filing in IRS Publication 1220,
Specifications for Filing Forms 1098, 1099, 5498, and W-2G on Magnetic Media or Electronically.
530.21
Penalties. Penalties may be assessed for failing to file Forms W-2. The federal
penalties for failure to file are presented in Exhibit 5-8.
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Exhibit 5-8
Form W-2 Filing Penalties

Penalty
Maximum Annual Penalty

1
Regular Business
Small Business
$50 per each failure to furnish the

employee a correct form by the due
date
$100 per each intentional failure to
provide employees or SSA with correct forms
$100,000
[NA]
$100,000
[NA]
$15 for each form if correctly filed with

SSA within 30 days of date due
$ 75,000
$ 25,000
$30 for each form if correctly filed with

SSA after 30 days of date due but
before August 1
$150,000
$ 50,000
$50 for each form not correctly filed

with SSA by August 1
$250,000
$100,000
A small business is a firm with average annual gross receipts of $5 million or less for the three most
recent taxable years.
Preparing the Fourth Quarter Form 941

530.22 Ideally, the payroll bookkeeper prepares a draft fourth quarter Form 941 after recording
the non-payroll compensation and preparing the Form W-3 and before the years final FITW and
FICA tax deposit. The bookkeeper should first prepare the Form 941 in accordance with the
procedures described beginning at Paragraph 525.02 for use in the first three quarters. These
procedures include reconciling the draft Form 941 to the payroll register, performing an internal
reconciliation of FIT wages to Medicare and Social Security wages, and correcting withholding or
adjusting the tax deposit as necessary.
530.23 Reconciliation to Forms W-3. Once the draft fourth quarter Form 941 has been
prepared (and includes the non-payroll compensation and taxable fringe benefits), the payroll
bookkeeper should reconcile the years four Forms 941 to the Form W-3. This reconciliation is
necessary because the IRS and SSA will require the employer to explain discrepancies between
the following information reported on both sets of forms:
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Wages, tips, and other compensation.
Federal income tax withheld.
Social Security wages.
Social Security tips.
Social Security tax withheld.
Medicare wages and tips.
Medicare tax withheld.
Advance earned income credit.
530.24 Appendix 5Q, Reconciliation of Forms 941 to Form W-3, presents a worksheet the
bookkeeper can use when performing this procedure.
530.25
Reconciling items that are designed to exist include the following:

amounts are excluded from Form W-2, box 1 (wages, tips, and other
compensation) but included in Form 941, line 2 (total wages and tips
subject to withholding, plus other compensation).
Third partys withholding on sick pay. Such amounts are included

in Form W-2, box 2 (federal income tax withheld) but excluded from
Form 941, line 3 (total income tax withheld from wages, tips, and sick
pay).
530.26 Correcting Errors In Forms 941 or W-2. The following are common errors that create
differences between the two reports that must be corrected:
Properly applying the Social Security wage base limit on the Forms
W-2, but mistakenly not applying the limit to the data reported on the
Form 941.
Properly including other compensation or taxable fringe benefits (such

as auto usage or group term life insurance exceeding $50,000) on
Forms W-2 but improperly omitting the amounts from the Form 941
return.
530.27 How an employer corrects these or other detected errors depends on what returns have
been filed. Exhibit 5-9 presents corrective actions for Forms 941 as well as Forms W-3 and W-2.
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Exhibit 5-9
Error Type
Error in current year FIT or FICA
data on Form 941 or Forms W-2,
found before Form W-3 is filed
Error in current year FIT or FICA

data on Form 941 or Forms W-2,
found after Form W-3 is filed
Error in prior years FIT or FICA
data on Form 941, FormsW-2, or
Form W-3
Corrections of Reported Wages

Reports to Employee
If Form W-2 was already issued,
give employee a new Form W-2
marked corrected.
Reports to IRS or SSA

IRS: File Form 941C
SSA: Check Void box on
original Form W-2, Copy A. The
void Copy As are included in
counting the sequence of forms
for subtotals, but the amounts
included on the void forms
should not be included in the
subtotal. Do not mark corrected
Copy A as Corrected.
Issue Form W-2C
IRS: File Form 941C

SSA: File Form W-3C and Forms
W-2C
Issue Form W-2C
IRS: File Form 941C

SSA: File Form W-3C and Forms
W-2C
530.28 After the Form 941 has been reconciled to the Form W-3, the bookkeeper can make the
years final deposit of FIT and FICA taxes.
Filing Form 940
530.29 After preparing the Forms W-2, and before making the years final deposit of FUTA
taxes, the bookkeeper should prepare a draft Form 940, Employers Annual Federal
Unemployment (FUTA) Tax Return.
530.30 Federal unemployment taxes are reported to the IRS annually, generally on Form 940 or
940-EZ. Employers (other than household or agricultural employers) must file the form if they paid
wages of $1,500 or more in any calendar quarter or had at least one employee (including parttime and temporary employees) in any 20 different weeks during the year.
530.31 Household and agricultural employers are exceptions to the general rule. Household
employers must only file Form 940 if they paid cash wages of $1,000 or more during any calendar
quarter in the current or prior year. Agricultural employers must only file Form 940 if they (a) paid
cash wages of $20,000 or more during any calendar quarter in the current or prior year or (b)
employed 10 or more farm workers during some part of a day for at least one day during any 20
different weeks in the current or prior year.
530.32 Employers that receive Form 940 from the IRS and are not liable for federal unemployment taxes during the year should write Not Liable on the front of the form, sign it, and return it
to the IRS. If returns will not be required in the future, employers should mark the box above Part
I of the form indicating that the return is a final return.
530.33 Form 940-EZ. Form 940-EZ is a simplified version of Form 940 that may be used by
employers that (a) pay unemployment contributions to only one state, (b) pay their unemployment
contributions by January 31st, (c) do not have taxable FUTA wages that are exempt from state
unemployment tax, and (d) do not pay wages that are subject to the unemployment
5-40
compensation laws of a credit reduction state.

530.34 Preparing the Form 940. Specific instructions for completing the return are provided
with the form. In addition, the IRS presents a case, including a completed return, in Publication
937, Employment Taxes and Information Returns (call 1-800-TAX-FORM or visit www.irs.gov to
request). Appendix 5R, Form 940 Preparation Checklist, is an aid that the payroll bookkeeper can
use to ensure that the Form 940 has been prepared properly.
530.35 In practice, bookkeepers commonly complete the Form 940 by (a) listing on line 1 the
total wages on the payroll register, (b) leaving line 2 blank, and (c) calculating employee wages in
excess of $7,000 for inclusion in line 3. This procedure is quick and generally accurate.
530.36 However, as unemployment taxes increase at the state and federal levels, accounting
staff have a greater desire to minimize the taxes and avoid problems in an increasing number of
audits. One response is to more precisely calculate the total payments (line 1) and, especially,
the exempt payments (line 2). The following paragraphs discuss procedures to more precisely
complete the Form 940.
530.37 Reconciliations between Forms 940 and W-3. After completing the draft Form 940,
the payroll bookkeeper should reconcile reported wages between the Form 940 and the Form W3. Proper reconciling differences between the Form W-3, box 1 (wages, tips, and other compensation) and Form 940, Part 1, line 1 (Total wages and tips subject to withholding, plus other
compensation) include:
530.38
401(k) plan pre-tax contributions. Such amounts are excluded from

the Form W-3 but included in the Form 940.
SEP employee contributions. Such amounts are excluded from the

Form W-3 but included in the Form 940.
Section 125 plan pre-tax contributions. Such amounts are

excluded from the Form W-3 but included in the Form 940.
Deceased worker wages paid in year of death. Such amounts are

excluded from the Form W-3 but included in the Form 940.

amounts are excluded from the Form W-3 but included in the Form
940. However, these amounts are deducted from the FUTA taxable
base by inclusion on Form 940, Part 1, line 2.
The payroll bookkeeper can use Appendix 5S, Form 940 Reconciliations, as a work aid.
530.39 Identifying Excluded Payments. If the payroll bookkeeper has entered into the payroll
register the value of taxable fringe benefits used to draft the Form 940, the bookkeeper should
remove certain of the fringe benefits amounts exempt from FUTA taxation. The bookkeeper does
this by listing such items as excluded payments on Part 1, line 2 of Form 940. Benefits excluded
from FUTA taxation include:
Employer paid group-term life insurance coverage on current and

former employees in excess of $50,000.
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Reimbursed employee moving expenses not taxed by FIT. (Such

amounts are included in both lines 1 and 2 of Form 940, Part 1. The
result is to exclude such amounts from the FUTA tax base).
Section 125 plan pre-tax contributions.
530.40 Calculating Payments in Excess of $7,000. The Form 940 (on Part 1, line 3) also
requires the bookkeeper to calculate the amount of wages paid in excess of the federal FUTA
wage base of $7,000. Most payroll software programs will do this calculation automatically.
Bookkeepers who must perform the calculation manually can use a worksheet similar to
Appendix 5T, FUTA Tax Worksheet.
530.41 Making the Final FUTA Tax Deposit. After completing the Form 940, the bookkeeper
should reconcile the calculated FUTA tax liability with the years deposits to date. Any differences
should be added to the final FUTA tax deposit for the year. The deposit procedures are the same
as for the quarterly FUTA deposits (see Paragraph 525.27).
530.42 Signing and Mailing the Form 940. The procedures surrounding the return signing and
mailing are the same as for the Form 941 and are discussed at Paragraphs 525.14-525.16.
530.43 Due Date. Form 940 or 940-EZ is due by January 31st of the following year. Employers
that deposit all taxes properly and on time receive an additional 10 days to file the return. A 90day filing extension may be obtained by submitting a written request to the IRS. The due date for
the Form 940 is listed on the Appendix 5I, Employment Tax Calendar.
535
SUMMARY
535.01 To accurately calculate payrolls, the payroll bookkeeper needs information about the
employer, the job, the employee, and the time worked or taken on leave. This information is
usually recorded in company procedural memos, employee information documents, and time
sheets. Information about the employer, the job, and the employee changes infrequently, while
information about the time worked or taken for leave changes during each pay period. Information
the payroll bookkeeper must know includes:
a. Employer identification number (EIN). This nine digit number in the
form xx-xxxxxxx is the means used by the federal employment tax
system to identify employers.
b. The workweek. This employer-chosen period of seven consecutive
24-hour periods (168 consecutive hours) is used in calculating
overtime under the Fair Labor Standards Act (FLSA).
c. The pay period. The employers control over when wages must be
paid is restricted by various state laws.
d. Jobs FLSA category. A jobs FLSA category (exempt or nonexempt
status) has consequences for the wage rate, pay deductions, and time
records used to calculate the employees paycheck.
e. Employee identifying Information. Such information includes name
and social security number (both of which should agree to the social
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security card) and address.

g. Job title. The job title (and job description) is generally used to
identify the jobs FLSA category.
h. Wage rate. The wage rate is comprised of the wage base (whether
the employee is paid by the hour, by the piece produced, or by the
amounts sold) and the wage amount. Under the FLSA, nonexempt
employees have two wage rates (regular and overtime) and these
rates vary weekly.
i.
Withholding status. Employees indicate their status under the

federal income tax laws by completing a Form W-4 before or on
employment commencement. Because claims for excessive allowances and exemptions may result in civil and criminal penalties, the
payroll bookkeeper should never suggest or recommend to the
employee a number of withholding allowances.
j.
Advanced earned income credit (EIC) status. Employees with

income less than $50,270 for taxpayers that are married filing jointly in
2012 and $45,060 for all other taxpayers in 2012 and claiming a
dependent child may qualify for an advance earned income credit
(EIC) that will increase the paycheck amount.
k. Other authorized deductions. To accurately compute the

employees net pay, the payroll bookkeeper must know the nature and
amount of other payroll deductions (for example, for retirement plans,
insurance, or loan repayments). The FLSA requires the payroll
records to clearly show the date, amount, and description of deductions from wages.
I.
Time information. The FLSA dictates the data the employer must
collect about how much time was used and what type of time was
used. For nonexempt employees, the general recommendation is that
the employer should record, to the nearest five minutes, the times a
nonexempt employee begins and ends work. Time worked is
generally considered to be either time that an employer requires an
employee to be on duty, or time an employee is suffered or permitted to work. Paid or unpaid leave is not counted when determining if
overtime pay is owed.
535.02 To compute the employees gross wages, the bookkeeper usually determines if the
employee is in an exempt or nonexempt position. For nonexempt employees, the business must
pay an overtime premium equal to one-half the regular wage rate applied to the hours in excess
of 40 worked during a workweek. After calculating the gross wages, the payroll bookkeeper
should calculate the federal employment taxes that are required to be deducted from wages using
one of several methods selected by the employer (usually the wage bracket or percentage
methods). Certain wages, called supplemental wages, can be withheld at a flat 28% rate. In 2012,
Social Security taxes are withheld at 4.20% on the first $110,100 in taxable wages; Medicare
taxes are withheld at 1.45% of all taxable wages. The third step in computing wages is to make
other authorized deductions from the wages. The bookkeepers files should show every
deductions authorization and amounts withheld.
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535.03 There are minor differences between the definitions of an employee and of taxable
wages between the laws regulating FITW and Social Security/Medicare taxes. Employment taxes
must be collected on many non-payroll types of compensation, such as personal use of company
autos and excess group life insurance coverage.
535.04 Each pay period the bookkeeper usually calculates the batch total of the time records,
enters the time into the payroll software system, and compares the payroll softwares results with
the calculated batch total. The software then produces a payroll register (a listing of the wages,
taxes, and other deductions to be made from each employees next pay check). The bookkeeper
reviews the payroll register for reasonableness, recalculates the tax withholding, and copies the
information into a wage and tax control total log used to determine that the payroll software is
working properly. Once the payroll register is considered correct, the bookkeeper prints the
paychecks. The bookkeeper generally follows the companys procedures for preparing vendor
checks. The bookkeeper must also follow any state laws that regulate many aspects of payroll
check preparation and distribution. The bookkeeper then records the payroll in the general ledger
and in detailed history files for each employee (employee history files).
535.05 Although withheld federal employment taxes (FITW, Social Security, and Medicare)
generally are due either monthly or semi-weekly, the authors strongly urge the business to
deposit such taxes each pay day. Deposits should be made in an authorized depository and
accompanied by a properly completed deposit coupon (Form 8109). Late deposits carry high
interest, and company officers may be personally liable for undeposited tax withholdings.
535.06 Monthly, the payroll bookkeeper should reconcile the payroll bank account. In addition,
the payroll bookkeeper should reconcile the deductions made from employees to the deductions
remitted to benefit plan providers, insurers, the IRS, courts, and other payees.
535.07 Quarterly, in addition to the required maintenance of the payroll software, the
bookkeeper must file the IRS Form 941, Employers Quarterly Payroll Tax Return, and deposit
the federal unemployment taxes (FUTA taxes). Each Form 941 should be reconciled to the
related payroll register and information within the Form 941 should be reconciled internally. If
errors in withholding are detected, the bookkeepers response depends on the particular
circumstances.
535.08 Annually, the bookkeeper must record non-payroll compensation; prepare Forms W-2
and W-3, the fourth quarter Form 941, and the annual Form 940; and make the final tax deposits
for the year. Because the information must reconcile between all these employment tax forms,
the authors suggest that the payroll bookkeeper perform the year-end activities in a set
sequence.
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Appendixes
5
Table of Contents
Appendix
Description
Page
Obtaining Payroll Information

5A
Employee Payroll Information Sheet ..........................................................
5-47
5B
Payroll Change Form ...................................................................................
5-49
5C
Time Sheet Form ..........................................................................................
5-51
Performing Pay Period Activities

5D
Time Entry Control Log ...............................................................................
5-53
5E
Wage and Tax Control Log .........................................................................
5-57
5F
Employee Earnings History Form .............................................................
5-59
5G
Form 8109 Preparation Checklist ..............................................................
5-61
5H
Payroll Tax Deposit Receipt .......................................................................
5-63
Performing Monthly Payroll Activities

5I
Employment Tax Calendar ........................................................................
5-65
5J
Deduction Account Analysis Form ...........................................................
5-69
Performing Quarterly Payroll Activities

5K
Form 941 Preparation Checklist ...............................................................
5-71
5L
Form 941 Internal Reconciliation ..............................................................
5-75
Performing Annual Payroll Activities

5M
Non-payroll Compensation Checklist .......................................................
5-77
5N
Employee Wage Adjustments Form .........................................................
5-79
5O
Form W-2 Preparation Checklist ................................................................
5-81
5P
Form W-3 Internal Reconciliation .............................................................
5-87
5Q
Reconciliation of Forms 941 to Form W-3 ................................................
5-89
5R
Form 940 Preparation Checklist ...............................................................
5-91
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Appendixes
5
Appendix
Description
Page
5S
Form 940 Reconciliations............................................................................
5-93
5T
FUTA Tax Worksheet ..................................................................................
5-95
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Appendix 5A

Instructions
Accounting staff with manual payroll accounting systems may use the Employee Payroll Information
Sheet to gather information needed to process an employees wages. A form should be completed for
each employee. A new form should be completed as changes in an employees general information,
pay rate, or payroll deductions occur. The information should be kept confidential.
Additional Guidance: See Paragraphs 505.16-505.19.
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Processing Payrolls
Appendix 5A
Company Name:
Competed by:
GENERAL INFORMATION
Employee number
Name
Address
City
Department
Date employed
Date:
Social Security number
State
Title
Date terminated
Zip
PAYMENT INFORMATION
Pay frequency
Weekly
Biweekly
Semimonthly
Pay type
Salaried
Hourly
Pay rate (annual salary if salaried or hourly rate if hourly)
DEDUCTION INFORMATION
Income taxes
Federal
Marital status
Married
Single
State
Monthly
Local
Earned income credit:

Yes
Yes
No
No
Other deductions:
Enter the deduction amount or percentage of gross wages that should be deducted before and after
income taxes in each pay period.)
Before tax
After tax
Insurance
__________
Retirement plan
___________
________
Savings plan
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
5-48
Processing Payrolls
Appendix 5B
Payroll Change Form

Instructions
The business can use the following form to document that payroll changes were approved and were
entered accurately into the payroll software system or posted to a new Employee Payroll Information
Sheet (Appendix 5A). The form should be completed by the employee or supervisor (as appropriate),
approved according to company procedures, and forwarded to payroll accounting for entry into the
payroll software system or revision of the Employee Payroll Information Sheet.
5-49
Processing Payrolls
Appendix 5B
Payroll Change Form

PAYROLL CHANGE FORM
Employee Number:
Name:
EFFECTIVE DATE OF CHANGE:

PAYMENT INFORMATION
New Hire
Promotion
Demotion
Layoff
Recall
Merit Increase
Resignation Retirement Discharge
Death
Transfer
Leave of Absence (Describe)
from:
to:
Other (Describe)
CHANGES IN GENERAL INFORMATION
Name
Address
City
Department
State
Job Title
Zip
CHANGES IN PAYMENT INFORMATION

Pay frequency
Weekly
Biweekly
Semimonthly
Pay type
Salaried
Hourly
Pay rate (annual salary if salaried or hourly rate if hourly) $
CHANGES IN DEDUCTION INFORMATION
Income taxes
Federal
Marital status
Married
Single
State
Monthly
per
Local
Earned income credit:

Yes
Yes
No
No
Other deductions:
Enter the deduction amount or percentage of gross wages that should be deducted before and after
income taxes in each pay period.
Before tax
After tax
Insurance
__________
Retirement plan
___________
________
Savings plan
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
_______________________________________
___________
___________
Change authorized by: _____________________
Change approved by: ______________________
Payroll changes processed by: ______________
5-50
Date: _____
Date: _____
Date: _____
___________
___________
___________
Processing Payrolls
Appendix 5C
Time Sheet Form

Instructions
Businesses may use the following time sheet to record the time worked-and leave taken by hourly
employees. The time sheet is designed to comply only with the FLSA. It should not be used without
modification by businesses in those states that require overtime pay based on the number of hours
worked daily or on the number of days worked weekly.
Employees. Employees should record in column b the days calendar date and in columns c-f the time
when won was started or stopped. Time should be recorded to the nearest five minutes. The leave
code and hours used (such as H-8 or S-4) should be entered in column g. Suggested codes are as
follows:
Leave Type
Vacation
Time Sheet Code

V
Holiday
Unapproved absence
Paid Sick Leave
Disability
Jury\Witness
Military
Bereavement
Family and Medical
Personal
All information should be recorded in ink and any corrections initialed. The employee and the
supervisor should then sign the time sheet and forward it to payroll accounting.
Payroll accounting. Payroll accounting should calculate the daily time recorded, enter the total in
column h, categorize the total hours among columns ik, and then total columns ik to obtain the
weekly totals (line B). The sum of the weekly total amounts (line 8) of columns ik should equal the
weekly total time recorded (column h, me 8). The weekly total paid time worked (column i, line 8)
should then be categorized as either regular time (line) or overtime (line 10) using the following rule: the
first 40 hours are considered regular time and any excess time is then considered overtime. When the
time sheet has been checked for addition and entered into the payroll accounting system, the payroll
accountant should sign and date the time sheet and file the time sheet in the payroll Files (along with
the time sheets of other employees for the payroll run).
Additional Guidance: See Paragraphs 505.42-505.50
5-51
Processing Payrolls
Appendix 5C
Time Sheet Form
Name:
ID Number:
Department:
Employee:
Supervisor:
processed by Payroll:
Day
Date
(M/D/Y)
Pre meal Time
1.
2.
3.
4.
5.
6.
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
7.
Sunday
8.
Start
Stop
Post meal Time

Start
Stop
g
Leave
Code
and
Hours
Total Time
Recorded
(For accounting use only)

Paid Time
Worked
Paid Leave
Unpaid Leave
Weekly Totals
9.
Regular Time
10.
11.
Overtime
5-52
Week Ending:
(not to exceed 40 hours)

(begins only after 40
regular hours are
worked)
Processing Payrolls
Appendix 5D
Time Entry Control Log
Company:
Instructions: Payroll accounting staff may use this control log to help verify that time reported was
accurately entered into the computerized payroll accounting system. For each payroll period, the
accountant should list the date in column a, calculate the total hours of all time sheets or time cards and
list the information in columns be and then enter the time information in the payroll accounting
software. The accountant should then compare the totals reported by the software system (via the
hours and earnings register, report of hours, or other report) to the listed on this control log. Once all
differences have been resolved and the payroll system reports agree to the control log, the accountant
should initial column f, indicating that the entry of the time data into the payroll software program was
verified.
Additional Guidance: See Paragraphs 515.02-51 5.04.
Period
Ending
a
Total
Hours
b
Regular
Hours
c
Overtime
Hours
d
Paid
Leave
e
Unpaid
Leave
f
Entry Verified
5-53
Processing Payrolls
5-54
Processing Payrolls
Appendix 5E
Wage and Tax Control Log

Instructions
The accountant may use this form to (a) help ensure that the payroll software is properly computing
cumulative totals of wage and tax data and (b) calculate and record FICA and FITW tax deposits. After
each payroll, the accountant should enter the listed data from each payroll register (and void checks
handled separately), compute updated quarter-to-date totals, and compare the balances to those on
the payroll register. Differences should be identified and corrected promptly. The accountant may carry
forward data to additional pages if necessary.
A separate form should be completed for each quarter, and the four quarterly schedules should be
totaled and compared to the year-to-date amounts calculated by the payroll system.
Additional Guidance: See Paragraphs 515.08 and 515.21-515.24.
5-55
Processing Payrolls
Appendix 5E
a
Wage and Tax Control Log

b
f
g
h
Employee Withholding
FICA
total
(j + k)
Advance
EIC
Payment
s
Employer Match
Pay
Period
1.
2.
3.
4.
5.
6.
7.
8.
QTD
9.
10.
11.
12.
13.
14.
QTD
15.
QTD
5-56
QTD
QTD
QTD
QTD
Gross
Wages
Soc
Sec
Wages
Medicare
Wages
FITWH
Soc
Sec
Medicare
FICA
total
(g + h)
Soc
Sec
Medicare
n
o
Total
Tax
Dep.
Due
(f + I + l - Dep.
m)
Date
Processing Payrolls
Appendix 5F
Employee Earnings History Form

Instructions
Accounting staff with manual payroll systems may use the Employee Earnings History Form to
accumulate wage information necessary to calculate and report employment taxes. After each payroll,
the employees information listed on the payroll register should be listed on the Employee Earnings
History. Every pay period, the accounting staff should agree the totals of all the individual Employee
Earnings History forms to the payroll register or the Wage and Tax Control Log (Appendix 5E).
5-57
Processing Payrolls
5-58
Processing Payrolls
Appendix 5F
Employee Earnings History Form
Employee Name:
Calendar year:
FIRST QUARTER
Date
______
______
______
______
______
______
______
______
______
______
______
______
Check #
______
______
______
______
______
______
______
______
______
______
______
______
First quarter totals

Year-to-date totals
Gross
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Social
Security
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Medicare
Wages
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
FUTA
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
SUI
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
FIT
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Social
Security
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Medicare
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Other Deductions
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
Net
Pay
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Gross
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Social
Security
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Medicare
Wages
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
FUTA
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
SUI
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
FIT
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Social
Security
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Medicare
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Other Deductions
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
Net
Pay
______
______
______
______
______
______
______
______
______
______
______
______
______
______
SECOND QUARTER
Date
______
______
______
______
______
______
______
______
______
______
______
______
Check #
______
______
______
______
______
______
______
______
______
______
______
______
Second quarter totals

Year-to-date totals
5-59
Processing Payrolls
Appendix 5F
Employee Earings History Form

(Continued)
Employee Name:
Calendar year:
THIRD QUARTER
Date
______
______
______
______
______
______
______
______
______
______
______
______
Check #
______
______
______
______
______
______
______
______
______
______
______
______
Third quarter totals

Year-to-date totals
Gross
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Social
Security
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Medicare
Wages
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
FUTA
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
SUI
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
FIT
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Social
Security
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Medicare
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Other Deductions
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
Net
Pay
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Gross
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Social
Security
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Medicare
Wages
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
FUTA
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
SUI
Wages
______
______
______
______
______
______
______
______
______
______
______
______
______
______
FIT
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Social
Security
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Medicare
W/H
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Other Deductions
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
______
______ ______
Net
Pay
______
______
______
______
______
______
______
______
______
______
______
______
______
______
SECOND QUARTER
Date
______
______
______
______
______
______
______
______
______
______
______
______
Check #
______
______
______
______
______
______
______
______
______
______
______
______
Fourth quarter totals

Year-to-date totals
5-60
Processing Payrolls
Appendix 5G
Company: ________________________________
Completed by: _____________________________
Reviewed by: _____________________________
Form 8109 Preparation Checklist

Period: ____
Date: _____
Date: _____
___________
___________
___________
Instructions: The accountant may use this checklist for guidance when preparing and reviewing Form
8109 Federal Tax Deposit Coupon. The preparer should answer each question by checking Y, N, or
N/A (for no applicable). No answers indicate possible errors.
Procedure
1. Is the preprinted name and employer identification number (EIN) correct? (To
indicate a change, place an X in the change box and enter the correct name and
EIN.)
2. If an address change needs to be made:
Yes
No
N/A
a. If the address where the Forms 8109 are sent is to be changed, did the accountant use Form 81 09C (which is included in the coupon book)?
b. If the address where the tax forms, refunds, and notices are sent is to be
changed, did the accountant use Form 8822, Change of Address?
3. Was the form completed using a soft lead pencil?
4. When filling in the money amount, did the accountant:
a. Handwrite the amount?
b. Omit dollar signs, commas, decimal points, or leading zeroes?
c. Enter 00 in the Cents boxes, if the deposit is for whole dollars only?
5. In completing the left side of the form:
a. Was the box on the left of the form darkened to indicate the type of tax?
b. Was the box IRS USE ONLY left unmarked?
c. Was only one type of tax marked on each coupon?
d. Was only one period marked on each coupon? Was the period marked the
quarter the deposit is for, not the quarter when the deposit is made?
6. Was the businesss daytime telephone number included on the form?
7. On the payment check, did the accountant list the business EIN, the type of tax, and
the tax period to which the payment applies?
8. Was the payment recorded in the stub of the deposit coupon book?
9. Was the deposit accompanied by a tax deposit receipt that the bank stamped?
5-61
Processing Payrolls
5-62
Processing Payrolls
Appendix 5H
Payroll Tax Deposit Receipt
Instructions: Payroll accounting staff may use this form to obtain proof of a timely tax deposit. The
receipt form should accompany the payroll tax deposit and be stamped by the depository
acknowledging receipt.
PAYROLL TAX DEPOSIT RECEIPT
Taxpayer name: ___________________________
Federal ID No.:
Amount of deposit: _________________________
Type of tax:
(circle one)
Name of depository: ________________________
Date of deposit:
___________
941 940 1120

Other ________
___________
Depository stamp
5-63
Processing Payrolls
5-64
Processing Payrolls
Appendix 5I
Employment Tax Calendar
Instructions: Payroll accounting staff may use the information in this chart to construct a calendar of
payroll-related activities for the business.
This calendar lists important federal employment tax dates. However, the dates for semi-weekly
depositors of FITW and FICA taxes (generally large businesses) are not listed. Deadlines falling on a
weekend or holiday apply to the next regular workday. Other deadline information for special situations
is included in IRS Publication 509, Tax Calendars (call 1-800-TAX-FORM to order).
Due Date
January 1
January 10
January 15
January 31
Form
Given to or
Received from
[Not Applicable]
[Not Applicable]
Form 4070, Employees Report of Tips To employer from

to Employer
employee
Form 8109 for FIT and FICA deposit
To depository
Form W-2, Wage and Tax Statement
To each employee
Form 4782, Employee Moving

Expense Information
To employees whose
moving expenses were
paid or reimbursed
Written notice that the employer elects

not to withhold federal income tax on
personal use of vehicle
Written notice that employer is
adopting a special accounting period
for taxable fringe benefits
To any or all drivers of

employer-provided
vehicles
To each employee
receiving the specific
benefit
Comments
Stop advance payments of
EIC for employees failing to
return a new Form W-5.
Not required in months that
tips net to less than $20.
Monthly filers only.
Subsequent corrections
made on Form W-2C.
See IRS Pub. 15,
Employers Tax Guide, Pub.
521, Moving Expenses, and
Form 3903, Moving Expenses.
Written notice that certain employees To each employee

may be eligible to receive a tax refund whose wages are not
through the earned income credit (EIC) subject to FITW
Employers can comply by

giving IRS Notice 797 with
the Forms
W-2.
Either Form 940, Employers Annual

Federal
To IRS
Unemployment (FUTA) Tax Return, or
Form 940-EZ
If amounts were deposited

and paid on time and in full,
due date extended 10 days.
Form 8109 for FUTA tax deposit
Covers October
December.
Form 8109 for backup withholding

deposit
Most forms in the series Form 1099,
Information Returns
Form 941, Employers Quarterly
Federal Tax Return
To depository
To IRS
To recipient
To IRS
Covers October
December. If amounts were
deposited and paid on time
and in full, due date
extended 10 days.
5-65
Processing Payrolls
Appendix 5I

(Continued)
Due Date
January 31
February 10
February 15
February 28
Given to or
Form
Received from
Form 945, Annual Return of Withheld
To IRS
Federal Income Tax
to Employer
employee
From each employee
Form W-4, Employees Withholding
claiming total exemption
Allowance Certificate
from withholding in the
prior year
Form 8109 for FIT and RCA deposit
To depository
Form 1096, Annual Summary and
Transmittal of US. Information Returns To IRS
and Forms 1099, Copy A
Form W-3, Transmittal of Income and
Tax Statements and Forms W-2, Copy To SSA
A
March 10
March 15
April 10
Form 8027, Employers Annual

Information Return of Tip Income and
Allocated Tips
Form 4070, Employees Report of Tips
to Employer
Form 1042, Annual Withholding Tax
Return for US, Source Income of
Foreign Persons, and Form 1042S,
Foreign Persons U.S. Source
Income Subject to Withholding
Last day to pay any prior years
accrued bonus and retain prior year
corporate deduction
Form 8109 for FIT and RCA deposit
to Employer
To IRS
To employer from
employee
April30
5-66

deposit
May be extended using

Form 8809.
Subsequent corrections
made using Form W-3C
and Forms W-2C. May be
extended using Form 8809.
Filers for more than one
establishment should also
include Form 8027-T.
Not required in months tips
net to less than $20.
To IRS, both forms To

recipient, Form 1042S
To employees other than

owners
To depository
To employer from
employee
To depository
April30
Federal Tax Return
Comments
New form first due on
January 31, 1995.
If not received, begin
withholding on Feb. 16 as if
employee is single with no
withholding allowances.
To IRS
To depository
To IRS

Covers JanuaryMarch. If
amounts were deposited
Covers JanuaryMarch.
Processing Payrolls
Appendix 5I

(Continued)
Due Date
May 10
May 15
June 10
June 15
July 10
July15
Form
to Employer
to Employer
to Employer
Given to or
Received from
To employer from
employee
To depository
To employer from
employee
To depository
To employer from
employee
To depository
July 31
Federal Tax Return
deposit
To depository
Form 5500, 5500CR, or 5500EZ
To IRS

to Employer
August15
September 10 Form 4070, Employees Report of lips
to Employer
September 15 Form 8109 for FIT and FICA deposit
October 10
to Employer
October 15
October31
Federal Tax Return
August 10
October31
November 10
November 15
To IRS

deposit
to Employer
Comments
Covers AprilJune. If
Covers AprilJune.
To IRS
To employer from
employee
To depository
To employer from
employee
To depository
To employer from
employee
To depository
To IRS
To depository
For employee benefits

plans.
Not required In months tips
Covers JulySeptember. If
and paid on time and In full,
Covers JulySeptember.
To IRS
To employer from
employee
To depository

5-67
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Appendix 5I

(Continued)
Due Date
December 1
Form
Form W-4, Employees Withholding
Allowance Certificate
December 5
Form W-5, Earned Income Credit

Advance Payment Certificate
December 10
December 15
Given to or
Received from
From each employee
whose withholding will
change in the following
1
year
From each employee

wanting to continue
receipt of EIC advance
payments In the
following year.
to Employer
employee
To depository
Upon hiring
Form SS-4, Application for Employer
first employee Identification Number
May be faxed or obtained by

telephone. See IRS Pub.
583, Taxpayers Starting a
Business.
To employer from vendor
[NA]
Form W-9, Request for Taxpayer

Identification Number and Certification
Form I-9, Employment Eligibility
Verification Form
Within 30 days
of giving
employee a
car
Notice of employers election to not

To employee from
withhold taxes on the personal use of
employer
the vehicle and any special accounting
period.
5-68
Social Security card number

To IRS
When adding
a new vendor
Within three
business days
of the date
employment
begins
Before first
wages paid
After hiring
Form W-4
Comments
Employees should read IRS
Pub. 919, Is My Withholding
Correct? Employer may also
want to update Forms W4S, Request for Federal
Income Tax Withholding
From Sick Pay and Forms
W-4P, Withholding
Certificate for Pension or
Annuity Payments.
Form expires on December
31.
To employer from
employee
To employer from
employee
To employer from
employee
[NA]
Special withholding rules if

not received.
Call (800) 772-1213 for
SS5. Application for Social
Security Card.
[NA]
Processing Payrolls
Appendix 5J
Deduction Account Analysis Form
Company: ________________________________
Period: ____
___________
Completed by: _____________________________
Date: _____
___________
Reviewed by: _____________________________
Date: _____
___________
Instructions: Accounting personnel may use this form monthly to reconcile the general ledger accounts
recording the businesss liabilities for employee payroll deductions. Accountants should document in a
memo any additional steps performed or unusual matters noted while completing the reconciliation.
The accountant should list the items that comprise the balances in the spaces following lines 1 and 12.
Deduction
Amount
1.
Beginning G/L Account Balance (Acct. #:
2.
+ Amounts Deducted from Employees Wages (include the payroll date):
3.
4.
5.
6.
- Amounts Remitted (include the payee, date, and check number)
7.
8.
9.
10.
11.
Other Entries (Describe)
12.
= Ending Balance
13
14.
15
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5-70
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Appendix 5K
Company: ________________________________
Pay period:
___________
Completed by: _____________________________
Date: _____
___________
Reviewed by: _____________________________
Date: _____
___________
Instructions: This checklist provides guidance for preparing and reviewing the January 2005 version of
Form 941 (Employers Quarterly Federal Tax Return). No answers indicate possible errors in
completing the Form 941. Practitioners should document in a memo any additional steps performed or
unusual matters noted while completing Form 941.
Note: Beginning with the first quarter of 2005, the IRS significantly revised Form 941. This changed
many of the line numbers referenced in this checklist.
PROCEDURE
Yes
No
N/A
General Information
1. Is the original Form 941 provided by the IRS or a substitute Form 941 that complies
with Rev. Proc. 2005-21 being used?
2. Are:
a. Dollar entries made without dollar signs and decimals? (Commas are optional.)
b. Data fields with a value of zero left blank (except line 10)?
c. Negative amounts in parentheses?
d. Name and EIN on all pages and attachments? (Note: Filers using the IRS-preaddressed Form 941 are not required to enter their name and EIN on page 2.)
e. No fonts other than 12-point Courier font used (if possible) for all entries that are
typed or if a computer is used to complete the form?
3. Is the following information correctly stated on the return:
a. Employer identification number?
b. Employer name and trade name?
c. Address?
4. Are address changes reported by changing the preprinted information on the form and
by completing and mailing Form 8822 (Change of Address) to the IRS?
5. Is the appropriate box at the top of the form checked to indicate the quarter that is
being reported? If filing Schedule B, is the quarter checked at the top of Form 941 and
Schedule B the same?
6. Is the number of people employed during the pay period that includes the 12th day of
the last month of each quarter entered on line 1? (If the amount is 250 or more, the
employer should take steps to file Forms W-2 and Form W-3 using magnetic media or
electronically.)
7. Is the correct preprinted form used in the correct period? Is only one quarter included
on the return?
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Appendix 5K

(Continued)
PROCEDURE
Wage and Tax Withholding Information
8. Is the total of all wages paid, tips reported, taxable fringe benefits provided, and other
compensation paid to employees during the quarter that would be reported in box 1 of
Form W-2 entered on line 2 even if the employer does not have to withhold income or
FICA taxes on the payments? [Nonpayroll payments (e.g., pensions, annuities, or
gambling winnings) should not be included even if income tax was withheld on them;
such payments should be reported on Form 945.] Supplemental unemployment
compensation benefits are also not reported here.
9. Is the amount of income tax withheld from wages, tips, taxable fringe benefits, and
other compensation (including supplemental unemployment compensation benefits)
entered on line 3? Are excise taxes that were required to be withheld on golden
parachute payments, if any, included on line 3?
10. For reporting social security and Medicare wages and tips:
a. If wages, tips, and other compensation are not subject to social security or
Medicare taxes, is the box on line 4 checked?
b. Are social security wages, social security tips, and Medicare wages and tips
properly reported in column 1 on lines 5a, 5b, and 5c, respectively? (No employees
wages in excess of the $90,000 social security 2005 wage base should be included
on lines 5a and 5b. There is no limit in 2005 on the Medicare wage base included
on line 5c,)
c. Are the calculations of the taxes in column 2 of lines 5a, 5b, and 5c mathematically
correct?
11. Are the differences between line 5d and the amounts actually withheld from the
employees paychecks caused by rounding fractions of cents, entered on line 7a?
12. Are the social security and Medicare taxes included in column 2 on lines 5a, 5b, and
5c, but which the employer is not responsible for withholding (such as the uncollected
employees share of taxes on tips, uncollected former employees share of taxes on
group-term life insurance, or withholdings from third-party sick pay), included on lines
7b and 7c as a reduction of social security and Medicare taxes due?
13. If income tax withholdings reported in returns for previous quarters of the same
calendar year were incorrect:
a. Are adjustments to correct those amounts included on line 7d?
b. Is Form 941 c (or a statement showing similar information) attached to explain any
adjustments entered on line 7d?
c. Are adjustments reflected in the monthly tax liability on line 15, or on Schedule B
(Form 941), Report of Tax Liability for Semiweekly Schedule Depositors?
14. If income tax withholding adjustments included on line 7d are for quarters in previous
years, are these adjustments only for correcting an administrative error?
15. If social security and Medicare taxes reported in prior returns were incorrect:
a. Are adjustments to correct those amounts included on line 7e?
b. Is Form 941 c (or a statement showing similar information) attached to explain any
adjustments entered on line 7e?
c. Are adjustments reflected in the monthly tax liability on line 15, or on Schedule B
(Form 941), Report of Tax Liability for Semiweekly Schedule Depositors?
5-72
Yes
No
N/A
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Appendix 5K

(Continued)
PROCEDURE
Yes
No
N/A
d. If adjustments are made to an employees prior year social security wages or tips,
or Medicare wages or tips, have Form W-2c and Form W-Sc been filed?
16. Are advance payments of the earned income credit properly reported on line 9?
17. Are total deposits for the quarter, including any overpayments applied from the previous
quarter, properly reported on line 11?
18. If more taxes were deposited than necessary during the quarter, is the appropriate box
on line 13 marked to indicate whether the overpayment should be applied to the next
return or refunded?
19. Is the Postal Service two-letter state code for the state where the employer made its
employment tax deposits (or MU if deposits were made in more than one state)
entered in the spaces on line 14?
20. If the net taxes shown on line 10 are $2,500 or more:
a. If the employer is a monthly depositor, are the monthly tax liabilities properly
reported on line 15, and is the proper box on tine 15 marked?
b. If the employer is a semiweekly depositor, is the proper box on line 15 marked, and
is Schedule B properly completed and attached?
c. Do the amounts entered on line 15 or on Schedule B represent liabilities for taxes
and withholdings rather than deposits of taxes and withholdings?
d. Does the total of the amounts entered on line IS or on Schedule B equal the net tax
liability reported on line 10?
21. If returns do not have to be filed in the future (i.e., because the employer ceases
operations or stops paying wages):
a. Is the box on line 16 checked to indicate that fact?
b. Is the date final wages were paid entered in the space below line 16?
22. If returns will not be filed every quarter during the year because the employer is a
seasonal employer, is the box on line 17 marked to indicate that fact?
Procedures to Be Performed before Filing the Return
23. Have all questions on the return been answered?
24. Has the third-party designee section in Part 4 of the form been completed?
25. Is the form signed:
a. For a sole proprietorship: by the individual owning the business?
b. For a corporation (including an LLC treated as a corporation): by a president, a vice
president, or other principal officer?
c. For a partnership (including an LLC treated as a partnership) or other unincorporated organization: by a partner, member, or officer who is responsible and duly
authorized and has knowledge of the organizations affairs?
d. For a single member LLC treated as a disregarded entity: by the LLC owner?
e. For a trust or estate: by a fiduciary?
f. By an agent or employee for whom an acceptable Form 2848 (Power of Attorney
and Declaration of Representative) has been filed?
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Appendix 5K

(Continued)
PROCEDURE
Yes
No
N/A
26. If not filed electronically, is the return being sent by certified mail, return receipt
requested or by an IRS designated delivery service to the appropriate address
(depending on whether a payment is included with the return) listed in the Form 941
instructions?
27. If the net liability shown on line 10 is less than $2,500, has the employer enclosed a
check made payable to the United States Treasury for the amount due or followed the
IRSs procedures for paying by credit card?
a. Has the employer included on the payment check its EIN, Form 941, and the tax
period to which the payment applies?
b. Is a completed Form 941-V included with the payment?
c. Are the payment and the Form 941-V not stapled together?
d. If paying by credit card, has the payment been made through a service provider
approved by the IRS?
28. If the net liability shown on line 10 is $2,500 or more, is the balance due shown on line
12 zero, and has the employer deposited all amounts due with an authorized financial
institution or by electronic funds transfer?
Reconciling Forms 941 with Forms W-2
29. Have the amounts reported on the quarterly Forms 941 been reconciled with the totals
on the Forms W-2 as reported on Form W-3?
30. If there is a discrepancy caused by an acquisition, statutory merger, or consolidation,
has Schedule D (Form 941) been filed with the Form 941?
COMMENTS:
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
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Appendix 5L
Form 941 Internal Reconciliation
Company: ________________________________
Pay period:
___________
Completed by: _____________________________
Date: _____
___________
Reviewed by: _____________________________
Date: _____
___________
Instructions: This form may be used to reconcile the amounts within Form 941. Document in a memo any
additional steps performed or unusual matters noted during the reconciliation and attach that memo to this
reconciliation.
Item
Form 941, line 2
Amount
$
+ 401(k) plan employee pre-tax contributions up to $14,000a

+ SIMPLE retirement contributions up to $14,000a
+ Salary reduction SEP employee pre-tax contributions up to $14,000a
+ Deceased workers wages paid in year of death
+ Adoption assistance not exceeding $10.630 limit
+ Payments to a nonqualified deferred compensation plan
- Payments from a nonqualified deferred compensation plan
Other (describe):
= Form 941, line 7a (taxable Medicare wages and tips)
- Wages in excess of taxable Social Security wage base

= Form 941, total of lines 6a (taxable Social Security wages) plus 6c (taxable Social
Security tips)
Note:
a
SIMPLE and SEP contributions are added with 401(k) contributions when determining the $14,000 limit. Note
that this limit increases to $15,000 for 2006-2010. Taxpayers who are age 50 or over are also eligible for
additional catch-up payments of up to $4,000.
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Appendix 5M
Non-payroll Compensation Checklist
Instructions: This checklist may be used to identify special compensation subject to employment taxes and to be
reported on Forms W-2, 941, and 940. After each item, the accountant should indicate (by checking Yes or No)
whether the compensation is included in employee taxable compensation or check N/A (not applicable) where the
compensation is not present. No responses indicate a possible error in the reporting and taxation of
compensation. The accountant should document at the end of the checklist or in a memo any additional steps
performed or unusual matters noted while identifying non-payroll compensation and attach that memo to this
checklist. Refer to IRS Publication 15, Circular E, Employers Tax Guide and Publication 15-A, Employers
Supplemental Tax Guide (Supplement to Circular E, Employers Tax Guide, Publication IS) for additional
information.
Item
Yes
No
N/A
1.
2.
3.
4.
Advances not repaid in the time required by the IRS.

Advances-permanent.
Flat rate auto allowances (not substantiated mileage or per diem).
Business expenseunsubstantiated or in excess of government approved
allowances.
5. Group-term life insurance coverage over $50,000 on an employee.
6. Group-term life insurance coverage over $50,000 on a former employee.
7. Group-term life insurance coverage over $2,000 on a dependent.
8. Third-party sick pay-taxable portion.
9. Taxable portion of reimbursed employee moving expenses.
10. Personal use of organizations vehicle.
11. Cash achievement awards.
12. Compensation bonuses.
13. Commissions.
14. Employer-paid dues and fees for employees membership in a country club, athletic
club, or social club.
15. Dependent care assistance over $5,000 ($2,500 for employees married and filing
separately).
16. Reimbursed employee (not employer) employment agency fees.
17. Group legal services plan costs.
18.
19.
20.
21.
Pay while on jury duty.

Tips reported to the employer by the employee.
Cash received through a cafeteria plan.
Life, health, accident and disability insurance premiums paid for partners and S
corporation shareholder-employees with interest of 2% or more.
22. Personal use of business aircraft or of business-paid commercial aircraft.
23. Cash Christmas bonus.
24. Wages paid to an employee performing work outside normal duties (casual labor).
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Appendix 5M
Non-payroll Compensation Checklist

(Continued)
Item
25.
26.
27.
28.
29.
Yes
No
N/A
Cash gifts to employees.

Employer paid supplements to noncombat military pay.
Cash parking allowance.
Supplemental unemployment compensation plan payments.
Retirement inducements.
30. Employees taxes paid by the employer.

31. 401(k) pre-tax employee contributions (for Medicare and social security taxes but not
for FITW).
32. Cash allowances for non-overnight travel.
33. Loans with below market interest.
34. Financial counseling.
35. Severance, dismissal pay (including golden parachute payments).
36. Season tickets to entertainment or sporting events for personal use.
37. Uniform allowances for uniforms not required as a condition of employment and not
street wearable.
a
38. Educational assistance that is over $5,250
39. Meals or lodging furnished for the convenience of the employer, cafeteria plans, and
qualified transportation fringe benefits paid for S corporation shareholder-employees
with interests of greater than 2%.
40. Excess contributions to an employees medical savings account (MSA).
41. Employer-provided coverage under a long-term care insurance contract if provided
through a cafeteria plan or if reimbursed under a flexible spending account.
42. Payments of qualified adoption assistance under an adoption assistance program in
excess of the $10,630 limit.
COMMENTS:
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
Note:
a
The $5,250 exclusion also applies to graduate-level courses.
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Appendix 5N
Employee Wage Adjustments Form
Employee Name: __________________________
ID Number:
___________
Employee SSN: ___________________________
Year Ending:
___________
Prepared by: ______________________________
Date: _____
___________
Instructions: The payroll accountant may use this form to document adjustments made to an
employees payroll history amounts. Accountants should document in a memo any additional steps
performed or unusual matters noted while adjusting the employees wages. Separate forms should be
completed for each employee.
This form assumes that the accountant enters the adjustments to wages into a payroll computer
program, which then calculates the withholding taxes. If that is not the case, the accountant will need to
manually calculate and document the adjustments to the employment taxes. If the accountant manually
maintains the employee history, the adjustments should be documented on the Employee Earnings
History Form (Appendix 5F).
FIT Income
$
Amounts Added to
Soc Sec
Medicare
Income
Income
$
$
SIT Income
$
Subtotal of added benefits and non-payroll items

+ Year-to-date payroll data before additions
= Year-to-date payroll data after additions
Description of Benefits and

Non-payroll Compensation
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Appendix 5O
Form W-2 Preparation Checklist
Company: ________________________________
Year: _____
___________
Completed by: _____________________________
Date: _____
___________
Reviewed by: _____________________________
Date: _____
___________
Instructions: This checklist provides guidance for preparing and reviewing the annual Form W-2 (Wage and Tax
Statement). After each step is a question the accountant should answer by checking Yes, No, or N/A (not
applicable). No answers indicate possible errors in the Forms W-2. Accountants should document in a memo any
additional steps performed or unusual matters noted while preparing the Forms W-2 and W-3.
Note: This Checklist applies to the 2005 paper W-2, details concerning magnetic and electronic filing
requirements can be found in the SSAs MMREF-1.
Inquiry
General
Yes
No
N/A
1. Are the Forms W-2 typed:

a. In black ink and without erasures, whiteouts, or strikeovers?
b. Without script type, inverted fonts, italics, or dual case alpha characters?
c.
d.
e.
I.
With entries that do not cross the lines separating the boxes?
Without dollar signs and commas?
With decimals and cents for all amounts?
In order (either alphabetically by the employees last names or numerically by
social security numbers)?
g. In a manner that all six copies of the form are legible?
2. Are the Forms W-2 not stapled together or to Forms W-3?
3. Does the employee learn of the advance earned income credit (EIC) through either:
a. Using the official Form W-2 which contains the notice on the back of Copy B?
b. Having the official IRS notification printed on the back of Copy B or C of a
substitute Form W-2?
c. Timely sending IRS Notice 797 (Possible Federal Tax Refund due to the Earned
Income Credit)?
Identifying Data
4. Regarding employee names and social security numbers:
a. Are employee names free of titles or academic degrees (such as Dr. or Ph.D.)?
b. Are names the same as shown on the employees social security card (first,
middle initial, last)?
c. Do all W-2s contain correct social security numbers in the xxx-xx-xxx format?
d. If an employee does not have a social security number, has the employee filed a
Form SS-5?
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Appendix 5O

(Continued)
Inquiry
e. If the employee has filed Form SS-5 but still does not have a social security
number when the Form W-2 is to be filed, has applied for been entered into box
d of the Form W-2?
f. If the employee receives the social security number after the Form W-2 is filed,
has the employer seen the SS card and has Form W-2c been filed?
g. If the employees name changed, is the original name used until the employer
sees the corrected social security card.
5. Regarding employer names and FINs:
a. Does the employer name and address match that used on the Forms 941,
Schedule H, or 943?
b. Is only one address used, even if the employer is decentralized?
c. Do all W-2s (and the W-3) contain the correct EIN in the xx-xxxxxxx format?
d. Is the FIN the same as used on Forms 941 or 943 during the year?
e. If the employer has not received an FIN, has applied for been entered into box
b? Forms Distribution
6. Are Forms W-2 being given to employees:
a. By January 31?
b. If requested by a terminated employee, within 30 days of the employees final
wages or the request, whichever is later?
c. For employers terminating business by the date the final Form 941 is due?
7. Are the copies of the Form W-2 distributed as follows:
a. Copy A to the SSA?
b. Copy 1 to the state, city, or other local tax department?
c. Copies B, C, and 2 to the employee?
d. Copy D to the employers payroll files?
8. If a Form W-2 is reissued:
a. Does the form have REISSUED STATEMENT written on it?
b. Has only one Copy A (the original) been sent to the SSA?
9. Are undeliverable Forms W-2 retained for 4 years?
Magnetic Diskette and Electronic Filing
10. If 250 or more Forms W-2 are being filed:
a. Are the filings by magnetic diskette or electronically meeting SSA
specifications?
b. For filings not by magnetic diskette or electronically, has Form 8508 (Request
for Waiver from Filing Information Returns on Magnetic Media) been filed at
least 45 days before the returns are due?
11. If magnetic diskette or electronically is used to file the Forms W-2, have no paper
forms been sent to the SSA?
5-82
Yes
No
N/A
Processing Payrolls
Appendix 5O

(Continued)
Inquiry
Yes
No
N/A
12. Are forms with errors marked Void?

13. Are amounts shown on voided forms excluded from the totals reported on Form W3?
Multiple Forms W-2
14. Are multiple Forms W-2 issued to the same employee if:
a.There is a situation that requires issuing more than one form (e.g., cases with more
than four codes in box 12)?
b.The employer wishes to report sick pay separately?
c. The employer wishes to meet the requirements of Rev. Rul. 70-579?
15. Does the second Form W-2:
a.Contain the same information as the first form in boxes b, c, d, e, and f?
b.Report additional items not included on the first Form W-2 in the appropriate
boxes?
c. Avoid repeating the same federal tax data contained on the first W-2? Statutory
Employees
16. Are payments to statutory employees:
a.Included in boxes 1, 3, and 5?
b.Indicated by having the statutory employee box marked in box 13?
17. Are all the following identified as statutory employees:
a.Driver agents (such as route driver/salespersons) paid only by commission?
b.Full-time life insurance salespersons?
c. Certain homeworkers?
d.Full1ime traveling or city salespersons?
Reporting of Wage Data
18. Have taxable, noncash, and special wages, compensation, and other benefits been
included on the Form W-2s?
19. Have all fringe benefits and special compensation amounts that were added to the
normal payroll data been clearly documented?
20. Are the following wages and other compensation properly recorded:
a.Dependent care assistance, nontaxable portion included in box 10?
b.Dependent care assistance, excess taxable portion included in boxes 1, 3, 5, and
10?
c. Business expenses under a nonaccountable plan included in boxes 1, 3, and 5?
d.Employer-paid group-term life insurance over $50,000 in coverage on current or
former employees included in boxes 1, 3, 5, and 12code C?
e.401(k) [including a SIMPLE 401(k)] pre-tax employee contributions (including
catch-up provisions) included in boxes 3,5, 12code D, and 13retirement
plan?
f. SEP employee contributions (including catch-up provisions) included in boxes 3, 5,
12code F, and 13retirement plan?
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Appendix 5O

(Continued)
Inquiry
g. Section 501 (c)(1 B)(D) plan employee contributions (including catch-up
provisions) included in boxes 1, 3, 5, 1 2code H, and 1 3retirement plan?
h. Taxable fringe benefits not included in boxes 10 or 12 (e.g., personal use of
company auto) included in boxes I, 3, and 5 (or 14 at the option of the employer)?
i. If the annual lease value of a company auto is included in the employees income
(i.e., is reported in box 1), is the value also reported either in box 14 or on a
separate statement?
j. Deceased workers wages paid prior to death in boxes 1, 3, and 5. Deceased
workers wages paid after death (but in the same year employee died) in boxes 3
and 5, and on Form 1099-MISC?
k. Deceased workers wages paid after death (but not in the same year the
employee died) reported on Form 1099-MISC?
I. Reimbursed nontaxable moving expenses included in box 12code P?
m. Reimbursed taxable moving expenses included in boxes 1, 3, and 5?
n. Tips, allocated included in box 8 only?
o. Tips, reported by the employee included in boxes 1, 5, and 7?
p. Uncollected social security tax on tips included in box 12code A?
q. Uncollected Medicare tax on tips included in box 12code B?
r. Accident and health insurance premiums for more than 2% shareholderemployees paid by an S corporation included in box 1, and also boxes 3 and 5 if
the exclusion under IRC Sec. 3121 (a)(2)(B) is not satisfied?
s. Employee business expenses with per diem or mileage allowances in excess of
IRS federal rate allowances. Excess included in boxes 1, 3, and 5; and the
allowed government rate reported in box 12code L?
t. Advance earned income credit payments included in box 9?
u. Distributions or constructive receipts from a nonqualified plan or a
nongovernmental Section 457 plan included in boxes 1 and 11?
v. Distributions from a nonqualified plan or a nongovernmental Section 457 plan, or
if no distributions were made, wage deferrals into a nonqualified or any Section
457 plan that are no longer subject to a substantial risk of forfeiture but were for
prior year services in boxes 3, 5, and 11? (If distributions are made and deferrals
are also reported in boxes Sands, do not complete box 11. Instead, Form SSA-1
31 may need to be completed.)
w. Nontaxable sick pay included in box 12code J?
x. All employer contributions to an employees Archer medical savings account
(Archer MSA) included in box 12code R? All employer contributions to an
employees health savings account (HSA) included in box 12code W?
y. Employee salary reduction contributions (including catch-up contributions) to a
SIMPLE retirement account [but not a SIMPLE 401(k)] included in box 12-code 5?
z. All employer payments for qualified adoption expenses under an adoption
assistance plan included in box 12code T?
5-84
Yes
No
N/A
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Appendix 5O

(Continued)
21.
22.
23.
24.
25.
Inquiry
aa. All current year deferrals plus any earnings on current or prior year deferrals
under a Section 409A nonqualified deferred compensation plan included in box
12code Y? Deferred compensation that does not meet the Section 409A
requirements and is currently taxable included in box 12code Z?
Inbox 12:
a. Are all amounts preceded by the capital letters AZ and one space?
b. Are codes AZ reported to the left of the vertical line and the money amount
to the right?
c. On paper Copy A, are no more than four codes entered in box 12 (and
additional codes entered on additional Forms W-2)?
Is box 13 retirement plan marked if the employee was an active participant in any of
the following:
a. A defined benefit plan, if the employee is eligible to participate (even though
the employee has declined participation or does not meet the prescribed
number of hours of service in a particular year?
b. A defined contribution plan, if contributions or forfeitures are allocated to the
employees account in a plan year ending within the year covered by the Form
W-2?
Reconciliations and Checks
Has the Form W-3 (summarizing the Forms W-2) been reconciled to the four
quarterly Form 941 reports?
Do all amounts on Form W-3 equal the total amounts for the corresponding boxes
from the Forms W-2?
For the individual Forms W-2, have checks been performed to ensure that:
a. The totals of boxes 3 and 7 do not exceed $90,000 in 2005?
b. Box 4 does not exceed $5,580.00 in 2005?
c. Box 3 and box 5 are equal if the amount of wages paid was $90,000 or less in
2005?
d. Box 4 equals box 3 plus box 7 times .0620? If not, are differences reconciled
by the amounts in box 12, codes A and M?
e. Box 6 equals box 5 times .0145? If not, are differences reconciled by the
amounts in box 12, codes B and N?
f. Box 7 agrees to the amounts reported by the employee?
g. Box 8 amounts are excluded from boxes 1, 3, 5, or 7?
Yes
No
N/A
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Appendix 5P
Form W-3 Internal Reconciliation
Company: ________________________________
Year: _____
___________
Completed by: _____________________________
Date: _____
___________
Reviewed by: _____________________________
Date: _____
___________
Instructions: This form may be used to reconcile the amounts within Form W-3. Document in a memo
any additional steps performed or unusual matters noted during the reconciliation.
Amount
Item
Form W-3, box 1 (Wages, tips, other compensation)
+ 401 (k) pre-tax contributions

+ SIMPLE retirement contributions
+ SEP employee contributions
+ Adoption assistance not exceeding the $10,630 limit
- Tips with FICA not withheld
Other (describe):
= Form W-3, box 5 (Medicare wages and tips)
- Wages in excess of taxable Social Security wage base

= Form W-3, total of box 3 (Social Security wages) plus box 7 (Social Security tips)
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Appendix 5Q
Reconciliation of Forms 941 to Form W-3
Instructions: Accountants may use this worksheet to reconcile the quarterly Forms 941 with the annual Forms W-3 and 940. Accountants
should enter the listed information from the Forms 941 and the draft Forms W-3 and 940. The totals of the first five columns under the Form
941 headings should be recorded in the Total column. The Differences should be calculated and recorded in the appropriate columns.
The disposition is documented in the last column. Lines E. and H. are for calculations to ensure that the proper statutory ratio between taxes
and wages has been met; differences may indicate that employer payments matching withholdings were not made, amounts were not fully
withheld, or reported FICA wages exceeded the wage bases.
Form 941
st
Item
1. Total compensation
2. Total adjusted FITW
1
Qtr.
nd
2
Qtr.
rd
3
Qtr.
Disposition
th
4
Qtr.
Adj.
Total
(A)
Form
W-3
(B)
Difference
(A) (B)
Form
940
(C)
Difference
(A) (C)
Explanation
Of Differences
3. SS wages
4. SS taxes
5. Effective SS tax rate
(4. 3.) (2005
statutory is 12.4%)
6. Total Medicare
wages
7. Medicare taxes
8. Effective Medicare
tax rate (7. 6.)
(2005 statutory is
2.9%)
9. Advance EIC
payments
Notes:
a
b
If the employer is required to file Form 943 rather than Form 941, enter the information from the Form 943 in these columns.
Current year adjustments previously reported on Form 941c.
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Appendix 5R
Company: ________________________________
Year: _____
___________
Completed by: _____________________________
Date: _____
___________
Reviewed by: _____________________________
Date: _____
___________
Instructions: This checklist provides guidance for preparing and reviewing Form 940 [Employers Annual Federal
Unemployment (FUTA) Tax Return]. After each step is completed, the accountant should answer each question
by checking Yes, No, or N/A (not applicable). No answers indicate possible errors in completing the Form 940.
Accountants should document below or in a memo any additional steps performed or unusual matters noted while
completing Form 940.
Procedure
General
Yes
No
N/A
1. Have all the questions preceding Part I been answered?

2. Is the business filing the correct version (Form 940 or Form 940-EZ)?
3. If Form 940 is being filed to correct a previously filed return:
a. Is the business using a Form 940 for the year being amended?
b. Is the appropriate box (i.e., the amended return box) above Part I marked?
c. Is the return being sent to the same IRS address as the original return?
However, do not send an amended return to a P.O. box location (even if it
includes a payment).
d. Is a statement attached explaining why an amended return is being filed?
e. If the amended return is filed after June 30 to claim contributions to a state
unemployment fund paid after the due date of form 940, is a copy of the states
certification attached to the Form 940?
f. If correcting an error on an erroneously filed Form 940-EZ (i.e., Form 940
should have been filed instead of Form 940-EZ), is the amended return being
filed on a Form 940?
4. If filing a previously extended return, is the IRS extension approval attached to the
Form 940?
5. If applicable, are the rules to obtain the successor employer credit being followed?
Part I
6. Has Form 940, line 1 been reconciled to Form W-3?
7. Have exempt payments on line 2:
a. Been identified?
b. Been accompanied by a written description on Part I, line 2 of Form 940 or on
an attached sheet?
8. Do excluded excess wage payments listed on Part I, line 3:
a. Omit any exempt payments included on Part I, line 2?
b. Use the federal $7,000 limit and not the states limit?
c. Have a supporting detail calculation in the employers records?
5-91
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Appendix 5R

(Continued)
Procedure
9. Is the additional tax from credit reduction states properly reflected by state
on Part 1, line 6 and in total on Part 1, line 7?
Part II
10. Are the taxable state payrolls [Part II, line 3(c)] reconciled to the total taxable
FUTA wages (Part, line 5)?
11. Do the amounts of state contributions claimed for credit:
a. Represent 100% for on time payments and for late payments, 90% of
the amount that would have been allowable if the payments were
timely?
b. Exclude penalties, interest, voluntary contributions (to obtain lower
rates), special administrative taxes, excise taxes, assessments,
surcharges, or job training taxes?
12. Is the total credit allowable limited to 5.4% of taxable FUTA wages?
Part Ill
13. Do FUTA tax deposits recorded on the Farm 940:
a. Agree, in total and by quarter, to the businesss records?
b. Exclude state tax deposits?
14. Is the third-party designee section of the form completed?
15. Is the form signed:
a. For a sole proprietorship: by the individual owning the business?
b. For a corporation: by a president, a vice president, or other principal
officer?
c. For a partnership or other unincorporated organization: by a partner,
member, or officer who is responsible and duly authorized and has
knowledge of the organizations affairs?
d. For a trust or estate: by a fiduciary?
e. For a single member LLC treated as a disregarded entity: by the LLC
owner?
f. By an agent or employee for whom an acceptable Form 2646 (Power of
Attorney) has been filed?
16. If not filed electronicallya, is the return being sent by certified mail, return
receipt requested or by an IRS designated delivery service?
17. If payment is being made with the return, is the balance due $500 or less
and is Form 940-V completed?
18. Is any payment check accompanying the return made payable to the United
States Treasury and does it have the employer identification number, Form
940, and the tax year written on it or, if paying by credit card, have the
proper procedures been followed?
19. If the total FUTA tax shown on Part II line 7 is greater than $500, has the
employer timely with an authorized financial institution or, if required, by
electronic funds transfer?
Yes
No
N/A
Note:
a
Taxpayers whose total tax deposits exceed $200,000 are required to make all tax deposits using the Electronic
Federal Tax Payment System (EFTPS). The threshold applies to aggregate tax deposits of all depository taxes
(i.e. payroll taxes, corporate income taxes, backup withholding, etc.) for the calendar year.
5-92
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Appendix 5S
Form 940 Reconciliations
Company: ________________________________
Year: _____
___________
Completed by: _____________________________
Date: _____
___________
Reviewed by: _____________________________
Date: _____
___________
Instructions: This form may be used to reconcile the amounts within Form W-3. Document in a memo
any additional steps performed or unusual matters noted during the reconciliation.
Calculation of Total Payments

Form W-3, box 1 (wages, tips, and other compensation)
+ 401(k) plan pre-tax contributions
+ SIMPLE retirement contributions
+ SEP employee contributions
Amount
$

+ Adoption assistance not exceeding the $10,630 limit
- Tips with FICA not withheld
Other (describe):
= Form W-3, box 5 (Medicare wages and tips)

- Wages in excess of taxable social security wage base
= Form W-3, total of box 3 (social security wages) plus box 7 (social security tips)
5-93
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Appendix 5T
FUTA Tax Worksheet
Company: ________________________________
Year: _____
___________
Completed by: _____________________________
Date: _____
___________
Reviewed by: _____________________________
Date: _____
___________
Instructions: The accounting staff may use this worksheet to manually calculate amounts for FUTA
quarterly tax deposits and complete the annual Form 940. Accountants should document in a memo
any additional steps performed or unusual matters noted while completing this form.
Additions to wages (columns d and e) include 401(k) plan pre-tax contributions, SEP employee
contributions, Section 125 plan pre-tax contributions, deceased worker wages paid in year of death,
and reimbursed nontaxable employee moving expenses.
Exempt payments (columns g and h) include employer paid group-term life insurance coverage on
current and former employees in excess of $50,000, Section 125 plan pre-tax contributions, and
reimbursed nontaxable employee moving expenses.
(Section 125 plan pre-tax contributions and reimbursed nontaxable employee moving expenses are
included in both lines 1 and 2 of Form 940, Part 1. The result is to exclude such amounts from the
FUTA tax base.)
5-95
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Appendix 5T
Employee
Name & ID
FUTA Tax Worksheet

(Continued)
b
d
e
Additional Wages
State
Wages
(W-2,
box 1)
$
Amount
$
Description
g
h
Exempt Payments
Total
Payments
(c+d)
$
Amount
$
Description
Adj.
Wages
(f-g)
$
1994
FUTA
Wage
Limit
$7,000
k
Futa
Wage
base
(lower
of I or j)
$
Excess
Payments
(i-k)
$
$7,000
$7,000
$7,000
$7,000
$7,000
$7,000
$7,000
Totals
Total should agree to Form W-3.
Total should agree to Form 940, Part I, line 1.
5-96
Making Accounting Adjustments
6
Table of Contents
Section
Description
Page
600
INTRODUCTION .................................................................................................... 6-1
605
RECOGNIZING REVENUES AND COSTS ............................................................. 6-2

.02
.07
.12
.20
610
.18
.22
.28
.34
.36
.42
Accruing Recurring Monthly Expenses ........................................................... 6-7

Accrued Interest Expense ............................................................................... 6-7
.08 Accrued Interest on Term Notes............................................................. 6-8
.13 Accrued Interest on Line of Credit .......................................................... 6-9
Accrued Payroll Expense ................................................................................ 6-10
Accrued Commission Expense ....................................................................... 6-11
Accrued Vendor Payables .............................................................................. 6-13
Accrued Interest Income on Notes Receivable ............................................... 6-14
Accrued Interest Income on Short-term Investments ...................................... 6-14
Reversing Month-end Accruals ....................................................................... 6-16
ADJUSTING ASSET VALUATIONS ........................................................................ 6-17

.02
.08
620
6-2
6-2
6-2
6-2
6-3
6-3
6-4
6-5
6-5
6-6
ACCRUING EXPENSES AND INCOME.................................................................. 6-7

.05
.06
615
Revenues .......................................................................................................
.04 Delayed Billings .....................................................................................
.05 Advance Billings .....................................................................................
Cost of Sales ..................................................................................................
Fixed Asset Transactions................................................................................
.13 Gain or Loss on Fixed Asset Sales ........................................................
.18 Gain or Loss on Fixed Asset Trade-ins ..................................................
Income Taxes .................................................................................................
.23 Obtaining the Average Income Tax Rate................................................
.25 Calculating Monthly Income Tax Expense ..............................................
Uncollectible Accounts Receivable ................................................................. 6-17

.04 Percentage of Sales Method .................................................................. 6-17
.05 Aging Method ......................................................................................... 6-17
.07 Writing Off the Bad Accounts ................................................................. 6-18
Inventory Reserves ......................................................................................... 6-18
DEPRECIATING AND AMORTIZING ASSETS ....................................................... 6-19

.02
.06
.13
Prepaid Asset Amortization ............................................................................. 6-20

Fixed Assets Depreciation .............................................................................. 6-20
Other Long-term Assets Amortization ............................................................. 6-23
.14 Goodwill ................................................................................................. 6-23
.16 Organizational Costs .............................................................................. 6-24
TOC 6-1
6
Section
625
Description
MAKING OTHER ADJUSTMENTS.......................................................................... 6-24

.02
.09
630
Page
Life Insurance Cash Surrender Value ............................................................. 6-24

Retained Earnings Adjustments ...................................................................... 6-25
SUMMARY .............................................................................................................. 6-25
Appendix
6A
Fixed Asset Gain or Loss Calculation Worksheet .................................................... 6-29
6B
Term Loan Accrued Interest Calculation Worksheet ................................................ 6-31
6C
Line of Credit Interest Expense Worksheet.............................................................. 6-33
6D
Payroll Accrual Worksheet ...................................................................................... 6-35
6E
Sales Commission Accrual Worksheet .................................................................... 6-37
6F
Short-term Investment and Interest Accrual Worksheet ........................................... 6-39
6G
Bad Debt Expense Worksheet................................................................................. 6-41
6H
Prepaid Asset Amortization Worksheet ................................................................... 6-43
TOC 6-2

o
RECOGNIZING REVENUES AND COSTS
ACCRUING EXPENSES AND INCOME
ADJUSTING ASSET VALUATIONS
DEPRECIATING AND AMORTIZING ASSETS
MAKING OTHER ADJUSTMENTS
600 INTRODUCTION
600.01 After processing the day-to-day transactions covered in previous chapters, the general
ledgers of most small businesses are on a cash basis or modified cash basis. For example, cash
received and cash disbursed have been recorded and basic accrual transactions (such as trade
accounts receivables and trade payables) have been recognized. However, various noncash
adjustments are often needed before closing out the period if the company wishes its books to be
on an accrual basis.
600.02 Chapters 3 through 5 provided guidance on recording sales and cash receipts, accounts
payable and cash disbursements, and payroll. This chapter provides detailed guidance on making
various period-end adjustments and recording certain other transactions, such as property and
equipment, not discussed in previous chapters. The guidance assumes the company prepares its
financial statements on an accrual basis, which differ in some respects from financial statements
prepared according to tax rules. (Accounting personnel typically should consult with a tax
professional for additional guidance if financial statements are prepared using tax rules.)
600.03 The adjustments discussed in this chapter have been grouped into the following
categories:
Recognizing Revenues and Costs.
Accruing Certain Income and Expenses.
Adjusting Asset Valuations.
Depreciating and Amortizing Assets.
Making Other Adjustments.
Many of the worksheets in this chapter will also help save time during annual audits and when
preparing financial statements and tax returns.
6-1
605
RECOGNIZING REVENUES AND COSTS

605.01 This section provides guidance on when and how to recognize certain revenues and costs
in a small business. It discusses policies for recognizing general revenues, cost of sales, gains
and losses on fixed asset transactions, and for recording income taxes.
Revenues
605.02 Accounting personnel should recognize a sale as revenue only when the revenue has
been earned, generally when the goods or services have been delivered to the customer.
Revenue should not be recognized when the contract is signed or the order is taken. As
discussed in Chapter 3, the typical sales transaction is recorded by simply debiting accounts
receivable and crediting sales for the invoice amount. (Accounting personnel would also record
any related costs of sales as discussed in Paragraphs 605.07-.11).
605.03 In most small businesses, the sales invoice triggers the general ledger entry to recognize
revenues. However, as discussed in the following paragraphs, recognizing revenues based on
customer billings may not be appropriate in certain situations.
605.04 Delayed Billings. There is often a delay between when the goods or services are
delivered and when the customer is billed. This delay generally does not pose a day-to-day
problem for accounting personnel. However, at month ends, accounting personnel should prepare
a journal entry to accrue the revenues related to those goods that have been shipped but not
billed. The entry should simply debit accounts receivable and credit sales. In addition, accounting
personnel should prepare a journal entry to reverse the entry in the following month. Accounting
personnel should also ensure that the related costs of sales have been recorded in the same
period (see Paragraphs 605.07-.11).
605.05 Advance Billings. If a customer is billed in advance, however, accounting personnel
should generally defer the amount until the related goods or services are delivered or provided.
For example, assume a customer is billed $2,400 under a six-month maintenance agreement.
Accounting personnel should make the following entry to record the initial transaction:
Accounts receivable
Deferred revenue
$2,400
$2,400
If, however, the accounting system made an automatic entry to record accounts receivable and
revenue (instead of deferred revenue) when the sales journal was posted, accounting personnel
would simply make a period-end adjusting entry to debit revenue and credit deferred revenue.
605.06 At the end of each month, accounting personnel typically would make the following entry
to recognize one-sixth of the amount as revenue:
Deferred revenue
Revenue
$ 600
$ 600
Cost of Sales
605.07 Accounting principles require that cost of sales be recorded in the same period as the
related revenues to properly match revenues and expenses. As discussed in Chapter 3,
paragraph 325.13, many accounting systems are designed to automatically record cost of sales at
the same time sales are recorded. However, if the company does not maintain a perpetual
6-2
inventory system (a subsidiary ledger listing inventory items and their costs) or a system to
automatically record cost of sales, a month-end entry must be made to record estimated cost of
sales.
605.08 The approach used to estimate cost of sales depends on various factors, such as the
companys inventory valuation method and type of business. Because of its complexity, the cost
of sales estimation process is often handled by the companys controller or outside CPA.
However, in companies where accounting personnel are expected to calculate and prepare
monthly cost of sales estimates, the cost of sales percentage method (also called the gross profit
method) is frequently used.
605.09 Companies that use the cost of sales percentage method generally record cost of sales by
using the historical cost of sales percentage. For example, assume the companys cost of sales
percentage historically averages about 65% of sales. If monthly sales were $10,000, accounting
personnel would make a journal entry to record cost of sales of $6,500. Assuming inventory
purchases during the month were recorded to the inventory asset account in the general ledger,
accounting personnel would prepare the following entry:
Cost of sales
Inventory
$6,500
$6,500
605.10 Alternatively, assume inventory purchases were recorded during the month to the cost of
sales account in the general ledger. If the monthly total in the cost of sales account was $8,000,
accounting personnel would make the following entry to properly reflect inventory and cost of
sales:
Inventory
Cost of sales ($8,000 - $6,500)
$1,500
$1,500
605.11 Under the cost of sales percentage method, accounting personnel must also periodically
adjust the inventory and cost of sales accounts when physical inventory counts are taken. After
the physical inventory count has been taken and valued, inventory per the general ledger should
be increased or decreased to agree with the physical inventory count total. Accounting personnel
should record the offsetting debit or credit to an inventory adjustment account (a subcomponent of
the cost of sales account).
Fixed Asset Transactions
605.12 The sale or disposal of fixed assets often requires month-end entries to properly reflect
the transactions. The following paragraphs provide guidance on recording gains or losses on fixed
asset sales and trade-ins. Paragraphs 620.06-.12 discuss recording depreciation on fixed assets.
605.13 Gain or Loss on Fixed Asset Sales. When a companys fixed assets are sold,
accounting personnel often record the total sales proceeds by simply crediting a fixed asset
gain/loss account or miscellaneous income account in the general ledger. At month end, an
adjusting entry must be made to remove the fixed assets cost and accumulated depreciation from
the general ledger and record the proper gain or loss.
605.14 The appropriate gain or loss is calculated by comparing the sales proceeds with the
assets net book value (original cost less accumulated depreciation). A gain results if the sales
proceeds exceed the net book value, and a loss occurs if the sales proceeds are below the net
book value. To properly calculate the gain or loss, accounting personnel must ensure that
6-3
depreciation has been calculated through the date of sale (see Paragraphs 620.06-.12 for
guidance on calculating depreciation).
605.15 To illustrate the calculation of the gain or loss on a fixed asset sale, assume the following
facts:
Sales proceeds
Net book value:
Original cost
Accumulated depreciation at sale date
$ 5,000
$9,000
(4,600)
Differencenet gain
4,400
600
Income initially recorded in general ledger
5,000
Income adjustment needed
$(4,400)
605.16 In the above situation, income is overstated by $4,400 because the $5,000 sales
proceeds were initially recorded to miscellaneous income. The adjusting journal entry needed to
properly record the above transaction is as follows:
Accumulated depreciation
Miscellaneous income
Fixed assets
$4,600
$4,400
$9,000
The journal entry properly writes off the fixed asset and accumulated depreciation amounts and
recognizes the appropriate gain of $600 ($5,000 - $4,400). In addition to making the above entry,
accounting personnel should also ensure that the fixed asset amount and related accumulated
depreciation have been removed from the fixed asset subsidiary ledger.
605.17 Appendix 6A presents a worksheet that accounting personnel may use to calculate actual
gains or losses on sales of fixed assets. The worksheets are also useful to outside auditors, tax
return preparers, and preparers of the statement of cash flows (see Chapter 8 for guidance on
preparing the statement of cash flows).
605.18 Gain or Loss on Fixed Asset Trade-ins. When a company acquires a fixed asset by
trading in another fixed asset, accounting personnel often initially record only the additional cash
paid, if any, at the trade-in date by debiting the fixed asset account in the general ledger. At
month end, accounting personnel must decide whether an adjusting journal entry is needed to
properly reflect the accounts.
605.19 When similar fixed assets are exchanged, a gain or loss is generally not recognized. The
recorded amount of the new asset simply equals the net book value of the old asset plus any
cash or other monetary consideration given to the other party. Thus, the initial entry made by
accounting personnel to debit fixed assets for the additional consideration paid is appropriate; no
additional entry is generally needed. (If the transaction is significant to the company and cash or
other monetary consideration paid is more than 25% of the fair value of the asset received,
special accounting rules could apply. In that case, accounting personnel should consult with the
companys controller or outside CPA.)
6-4
Income Taxes
605.20 The following paragraphs provide guidance to help accounting personnel make a rough
income tax estimate on a monthly basis. Because of the complexity of tax calculations, precise
calculations are typically made only at year end (sometimes at each quarter end) by the controller
or outside CPA.
605.21 Accounting personnel can usually make a rough estimate of the monthly income tax
expense by performing the following steps:
a. Obtaining the expected average state and federal income tax rate.
b. Calculating tax expense by multiplying the companys earnings
(before any income taxes have been deducted) by the rate.
605.22 Each step is described in the following paragraphs. Before making an estimated tax
calculation, accounting personnel should ensure any necessary income statement adjustments
have been made, including those discussed in the remainder of this chapter. However, if
accounting personnel encounter difficulty or unusual situations when estimating income tax
expense, they should seek help from the controller or outside CPA. Also, since many entities
(such as sole proprietorships, Sub S Corporations, and partnerships) are generally not subject to
income taxes, accounting personnel should first consult with an experienced tax professional to
determine the companys tax status.
605.23 Obtaining the Average Income Tax Rate. Typically, accounting personnel obtain the
estimated current year average income tax rate from their controller or outside CPA. The
controller or outside CPA usually calculates the rate by obtaining last years annual financial
statements and dividing income tax expense by income before taxes.
605.24 However, if the current years annual income is expected to differ significantly from the
prior years annual income, or if current year income tax rates are expected to change, the
controller or outside CPA will usually calculate the rate by estimating the current years annual
income before taxes. Once the estimated income amount is determined, the average federal
income tax rate can then be obtained for that tax bracket. Exhibit 6-1 shows 2009 average
corporate federal income tax rates for taxable incomes up to $10 million.
6-5
Exhibit 6-1
Average Corporate Federal Income Tax Rates
Annual Taxable Income

From
$
0
$ 50,000
$ 75,000
$ 100,000
$ 150,000
$ 200,000
$ 250,000
$ 300,000
To
$
50,000
$
75,000
$
100,000
$
150,000
$
200,000
$
250,000
$
300,000
$ 10,000,000
Average
1
Tax Rate
15%
17%
20%
25%
29%
31%
33%
34%
The average federal income tax rates were calculated based on the 2009 corporate federal
income tax rates. The rates do not consider the alternative minimum tax (AMT) rate. If the
company is subject to AMT, that rate should be added to the above average tax rates.
605.25 Calculating Monthly Income Tax Expense. After accounting personnel obtain the
appropriate current year average tax rate, they can estimate monthly income tax expense by
multiplying that rate by the current months income before taxes per the general ledger. If the
company has a loss in the current month but expects to have income for the year, accounting
personnel should simply calculate and record a negative tax expense amount. (However, if the
company expects to have a net loss for the year, accounting personnel generally should not
attempt a monthly tax calculation. In this situation, the tax calculation should typically be made by
the controller or outside CPA at year end.)
605.26 Accounting personnel would typically record the current periods calculated tax expense
to the current tax expense account and the current taxes payable account in the general ledger.
At year end, the controller or outside CPA would adjust the estimated amount in these accounts
to reflect actual tax expense and any taxes for which payment is deferred to future years.
605.27 To illustrate, assume a companys expected average tax rate for the current year is 31%
(based on last years total tax expense of $71,000 divided by income before taxes of $225,000).
Based on the current months income of $10,000, estimated tax expense is $3,100 ($10,000 x
31%). Thus, accounting personnel would make the following entry to record the current months
estimated tax account:
Current tax expense
Current taxes payable
$3,100
$3,100
605.28 As estimated taxes are paid during the year, accounting personnel would record the
payments as a debit to current taxes payable. As mentioned above, the controller or outside CPA
would typically make an entry at year end to record the appropriate tax expense and properly
reclassify any deferred taxes.
605.29 If the company is subject to state income taxes, a separate, but similar calculation must
be made to accrue state income taxes. Close consultation with the controller or outside CPA is
even more important in these situations since each state has different tax rates and methods for
calculating the taxes. Also, some states even subject S Corporations to state income tax.
6-6
610 ACCRUING EXPENSES AND INCOME

610.01 Generally accepted accounting principles (GAAP) is built on accrual-based accounting
instead of cash basis accounting. That is, expenses are generally recorded when they are
incurred regardless of when they are actually paid. Similarly, income is generally recognized
when it is earned rather than when it is actually received. Unrecognized expenses and income at
each month end often require accounting personnel to record an accrued liability or asset.
610.02 Fortunately, most computerized software incorporates some accrual-based accounting.
Thus, most revenues and expenses are initially recorded by accounting personnel on an accrual
basis. For example, the accounts receivable and sales invoice processing system ensures that
revenues are recognized when the sale takes place, not when the cash is later collected from the
customer. Also, the accounts payable system helps ensure that expenses are recognized when
incurred, not when the vendor is paid.
610.03 Even though most transactions are handled on an accrual basis by accounting systems,
certain transactions still require an accrual adjustment at month end. Once the accruals have
been recorded, the process often can be simplified by reversing the accrual in the following
month. This reversing entry approach allows accounting personnel to ignore the accrual balance
when recording the day-to-day transactions in the following month.
610.04 This section provides accounting personnel guidance on making specific month-end
accrual adjustments and assumes the entries are reversed in the following period. Paragraphs
610.42-.46 discuss the reversal process in more detail.
Accruing Recurring Monthly Expenses
610.05 Certain expenses are billed to companies on a regular monthly basis, but the billing
period often does not end on the calendar month. For example, utility companies bill customers
using a cycle billing system unrelated to the calendar month. Accounting personnel generally
should not be overly concerned about making monthly accrual adjustments for these recurring
monthly expenses. As long as each month includes the expense for only one utility bill,
accounting personnel should generally not attempt to accrue the additional utility expense from
the service cutoff date through the end of the month.
Accrued Interest Expense
610.06 The need to accrue interest expense on notes payable and other debt varies depending
on how the lender calculates and bills interest expense. If the lender calculates interest through
the end of the month and bills the company monthly, no accrual is generally needed. Accounting
personnel simply record the invoice for the applicable months interest. However, if interest is not
calculated and billed on a calendar month basis, accounting personnel should calculate and
accrue interest through month end if amounts are significant.
610.07 The approach used to make the accrued interest calculation will frequently vary
depending on the type of note instrument. There are basically two types of notes that small
businesses deal with:
a. Term notes. Term notes generally have a fixed principal and interest
payment schedule and a stated maturity date. Interest rates may
either be fixed or vary with the prime rate. Payments are generally
made monthly.
6-7
b. Line of credit. Lines of credit generally do not require regular

principal payments. Instead, principal payments are required
whenever specified assets (referred to as the borrowing base) fall
below a predetermined minimum. Interest is usually paid monthly
based on a variable interest rate.
The following paragraphs provide practical guidance for accruing interest on both types of debt.
610.08 Accrued Interest on Term Notes. Accruing interest at month end on term notes is
relatively simple because the only changes to the principal balance are caused by the regularly
scheduled note payments. The banks typically send bills (but usually not at the companys
accounting period end) that break out the principal and interest portion of the payment and show
the current interest rate. Accounting personnel can check the accuracy of the bill by referring to
the loan amortization schedule. Accounting personnel simply need to verify the information on the
bill and calculate the accrued interest amount.
610.09 For example, assume the company has a $200,000 loan with a 10% interest rate, and
interest is billed through the 10th of each month. For the month of April, accounting personnel
should accrue 20 days of interest equal to $1,120 calculated as follows:
Loan amount
$ 200,000
Interest rate
10%
Annual interest amount
20,000
Daily interest amount ($20,000/360 days)
55.56
Number of days to accrue (4/11 - 4/30)

Amount of interest to accrue ($55.56 x 20)
20
$
1,120
610.10 Appendix 6B includes a worksheet that accounting personnel may use to caIculate
accrued interest on term notes having a fixed interest rate. The worksheet may be used as a
supporting document for the related journal entry. (Accounting personnel may use the worksheet
discussed at Paragraphs 610.13-.17 to calculate accrued interest on term notes with variable
interest rates.)
610.11 Accounting personnel would make the following entry at month end to accrue the 20 day
of interest:
Interest expense
Accrued interest payable
$1,120
$1,120
610.12 In the May general ledger, accounting personnel should post the following reversing
journal entry:
Interest expense
6-8
$1,120
$1,120
The logic of reversing entries is discussed at Paragraphs 610.42-.46.

610.13 Accrued Interest on Line of Credit. Because of the generally higher volume of monthly
activity on a line of credit, accounting personnel often maintain a worksheet that tracks both
principal activity (draws and repayments) and related interest on the line. Although accounting
personnel could conceivably use the worksheet discussed in Paragraphs 610.08-.10 to calculate
accrued interest, the line of credit worksheet shown in Exhibit 6-2 better serves this purpose.
Exhibit 6-2
Line of Credit Worksheet
(a)
(b)
Transactions
Description
January,
2009:
Beg.
Balance
Principal
Beg. Bal.
Accrual
Interest
Payment
Draw
New Rate
9.25%
Ending
Balance
EOM Totals
February,
2009:
Int.
Payment
Dates
(c)
(d)
Principal Activity
Receipts
Cumulative
(Payments) Balance
12/31/04
$25,000
(e)
(f)
Interest Rate
Data
Days
Rates O/S
(g)
(h)
Interest Activity
(i)
Interest Expense/Payments
Computed Interest Diff.
Expense
Paid
(if any)
(d) x (e)
360 x (f)
(g) (h)
9.50%
12/31/04
$ (195)
1/2/05
$ 195
$ 251
1/7/05
1/26/05
$7,500
1/31/05
1/31/05
2/1/05
$7,500
$32,000
$32,000
9.50%
9.50%
7
19
$ 46
163
$32,000
9.25%
42
31
$251
$32,000
$ 251
610.14 Exhibit 6-2 shows each principal change and each interest rate change. Each time there
is a change in either the principal amount or the interest rate, the number of days outstanding
before the change (column f) and the related interest expense for those days (column g) must be
calculated. At month end, accounting personnel must then make the following two calculations:
a.
Calculate interest through month end. Interest expense must be

calculated from the last calculation date through month end. In the
above example, this amount totals $42 for the five days from 1/26/X5
through 1/31/X5.
b. Determine total accrued Interest. Total accrued interest is

calculated by adding up the applicable columns. The $251 difference
(column i) between the calculated interest expense ($251 per column
g) and actual interest paid ($0 per column h) at month end represents
the unpaid interest expense for the month that should be accrued.
610.15 The following entry would be made to record the accrued interest expense for January
2009:
6-9
Interest expense
$ 251
$ 251
610.16 After making the entry, the total computed expense in column g should agree to interest
expense per the general ledger. Accounting personnel would usually reverse the entry in the
following month (see Paragraphs 610.42-.46 for a discussion of reversing entries).
610.17 In addition to calculating the month end accrual, the worksheet shown in Exhibit 6-2
allows accounting personnel to check the accuracy of the banks monthly interest expense billing
and monitor available balances. Appendix 6C includes a blank copy of the line of credit worksheet
that accounting personnel may use. To simplify the process, accounting personnel may wish to
use the worksheet as a model for developing an automated spreadsheet using a spreadsheet
program, such as Microsoft Excel.
Accrued Payroll Expense
610.18 Generally, salaried employees are paid either once or twice a month, and hourly
employees are paid once a week or every two weeks. Because hours worked by hourly
employees often vary from one payroll to the next, there is typically a lag of one week between
the last day of the workweek and the day they are paid (that is, they are paid one week in
arrears). For example, if a company pays its hourly employees on Fridays, the paycheck they
receive typically covers the work period that ended on the previous Friday. Because of this time
lag, accounting personnel generally must make an accrual adjustment to properly reflect this
unrecorded payroll expense at month end.
610.19 Accruals are typically calculated by using the most recent payroll register. The payroll
register typically calculates gross payroll by employee category, as well as the employers portion
of payroll taxes, such as social security, medicare, and unemployment taxes. Thus, accounting
personnel can add the two amounts (gross payroll and employers taxes) together and make a
single accrued payroll calculation.
610.20 The number of days of payroll to accrue each month will vary depending on the
companys pay cycle and the date the payroll falls on in each month. For example, assume a
company pays its hourly employees once a week and its salaried employees every other week.
The pay period ends on Saturday, and hourly employees are paid one week in arrears. For the
month ending November 30, 2009, the companys workweek ends on Saturday, the 26th. Thus,
accounting personnel must accrue three days (Monday, the 28th, through Wednesday, the 30th)
of payroll and employer taxes for all employees and one additional six-day week for hourly
employees as shown in Exhibit 6-3.
6-10
Exhibit 6-3
(a)
Gross Payroll Accrual

(b)
Description
Hourly:
Dept A
Dept B
Dept C
Salaried:
Marketing
Accounting
Executive
Totals
(c)
(d)
(e)
(f)
Latest Payroll Register
G/L
Gross
Co.s
No.
Payroll
Taxes
Total
Days
(c) x (d)
530.01 $ 8,500 $1,211 $ 9,711
6
530.02 $ 3,728 $ 531 $ 4,259
6
530.03 $ 6,480 $ 923 $ 7,403
6
660.01 $ 5,872
720.01 $ 3,948
820.01 $ 4,500
$33,028
$ 837
$ 563
$ 641
$4,706
$ 6,709
$ 4,511
$ 5,141
$37,734
12
12
12
(g)
(h)
(i)
Total Payroll Accrual
Days
9
9
9
3
3
3
%
$
(g) (f) (e) x (h)
1.50% $14,567
1.50% $ 6,389
1.50% $11,105
25% $ 1,677
25% $ 1,128
25% $ 1,285
$36,151
610.21 Accounting personnel would make the following entry to accrue the gross payroll and the
employers payroll tax for November:
Dept A payroll expense (#520.01)
Dept B payroll expense (#520.02)
Dept C payroll expense (#520.03)
Marketing payroll expense (#660.01)
Accounting payroll expense (#720.01)
Executive payroll expense (#820.01)
Accrued payroll (#220.01)
$14,567
$ 6,389
$11,105
$ 1,677
$ 1,128
$ 1,285
$36,151
Accounting personnel would then reverse the above entry in December (see Paragraphs 610.42.46 for a discussion of reversing entries). Appendix 6D includes a worksheet accounting
personnel may use to calculate the combined gross payroll and employers tax accrual at month
end.
Accrued Commission Expense
610.22 Companies with commission salespersons often must calculate and accrue commission
expense at month end if the actual commission amounts cannot be readily determined. Since
commission arrangements can be complex and often vary from one company to the next,
accounting personnel should not try to be too precise when making the estimated monthly accrual
calculation. The calculation should simply be a ballpark estimate of unrecorded commissions due
through month end.
610.23 Commissions are usually paid on a monthly basis, although they are sometimes paid
semi-monthly. The simplest and most common commission arrangement used by small
businesses is to base them on sales, but they also may be based on product gross profit, units
sold, etc. Commission rates may be a flat rate, or rates may vary with sales volumes, products
sold, or other factors.
610.24 For companies with a simple commission arrangement tied to sales, the accrual
calculation is straightforward. Accounting personnel simply obtain the sales summary for the
month, calculate commissions for the month (by salesperson if needed), and deduct any
6-11
commission expense already recorded in the month as shown in Exhibit 6-4:

Exhibit 6-4
Salesperson Commission Accrual
(a)
(b)
(c)
(d)
Salesperson
G/L No.
Monthly
Sales
Commission
Rate
T. Smith
B. Davis
C. Graham
625.01
625.02
625.03
Total
$10,500
$ 6,700
$11,600
$28,800
22.5%
25.0%
21.0%
(e)
(f)
(g)
Commission Expense
Expense
Estimated
Already
Monthly
Expense for
Booked
Accrual
Full Month
(if any)
Needed
(c) x (d)
(e) (f)
$2,362
$ 985
$1,377
$1,675
$ 458
$1,217
$2,436
$1,125
$1,311
$6,473
$2,568
$3,905
610.25 Exhibit 6-4 reveals that estimated commission expense for the full month is $6,473, of
which $2,568 has already been recorded in the general ledger for this month. Thus, accounting
personnel should record additional commission expense of $3,905 ($6,473 - $2,568) for the
month as follows:
Commission expense (# 625.01)
$1,377
$1,217
$1,311
Accrued commission payable
$3,905
Accounting personnel would then typically reverse the entry in the following months general
ledger (see discussion of reversing entries at Paragraphs 610.42-.46). Appendix 6E includes a
Sales Commission Accrual Worksheet that accounting personnel may use to estimate the
monthly accrual.
610.26 Even when commissions are not based on sales, actual monthly commission expense as
a percentage of sales is usually fairly consistent from one month to the next. In these situations,
sales amounts often can still be used as the basis for making the rough accrual calculation. Thus,
accounting personnel can frequently calculate commission expense as a percentage of sales for
the last several months and use the average percentage for accruing monthly commission
expense.
610.27 The following shows how to compute an average commission percentage for use in
calculating a month-end commission accrual:
Actual
Commission
Month
Actual Sales
Commissions
Rate
August, 2009
September, 2009
October, 2009
Total
6-12
$ 1,580,670
$ 1,675,352
$ 1,987,258
$ 5,243,280
$ 316,134
$ 301,563
$ 377,579
$ 995,276
20%
18%
19%
19%
The calculation reveals an average commission rate for the last three months of 19%. Accounting
personnel may generally use this rate to accrue sales commissions for the current month even if
commissions are not based simply on a percentage of sales.
Accrued Vendor Payables
610.28 In addition to accruing the expenses discussed in the preceding paragraphs, accounting
personnel should also ensure that the cost of any other goods or services are recorded in the
month they are received. This often involves simply reviewing vendor invoices received after the
end of the current month and setting up an accrued liability for those invoices relating to that
month. Accounting personnel should also review any unmatched receiving reports representing
goods received but not yet invoiced by the vendor. This review process is often referred to as a
search for unrecorded liabilities.
610.29 Accounting personnel are sometimes less concerned about accruing payables at month
end for inventory items since the companys earnings are thought to be unaffected. That is, the
credit to trade payables is merely offset by a balance sheet debit to the inventory account.
Although this reasoning is often accurate, failing to accrue inventory-related payables can be
misleading if physical inventory counts are being taken.
610.30 When physical inventory counts are taken at month end, inventory per the general ledger
is adjusted to agree to the inventory value per the physical inventory count. Thus, if inventory is
counted during the physical inventory, but the related invoice has not been recorded, costs of
sales and trade payables will be understated when the physical inventory adjustment is recorded.
610.31 For example, assume inventory per the general ledger is $200,000, but inventory per the
physical count is $210,000. The $10,000 difference is due to the receipt of inventory that
accounting personnel failed to reflect in the general ledger. If accounting personnel are unable to
determine what caused the difference, they would generally assume the physical count is
accurate and adjust the general ledger balance to agree to the physical inventory count by
debiting inventory for $10,000 and erroneously crediting cost of sales for $10,000 instead of trade
payables.
610.32 When the vendors invoice is eventually received and recorded in the following month,
inventory will become overstated by $10,000 in the general ledger. When the next physical
inventory count is taken, accounting personnel will record the opposite of the above physical
inventory adjustment to correct the accounts in the following month. Although the inventory
balance and year-to-date cost of sales is now correct, cost of sales is still understated in the first
month and overstated in the second month by the $10,000.
610.33 Therefore, accounting personnel should ensure that all goods or services received during
the month are properly recorded at month end, particularly when physical inventory counts are
being taken. A reversing entry (see Paragraphs 610.42-.46) should generally be posted to the
following months general ledger for any vendor payables accrued at month end.
Accrued Interest Income on Notes Receivable
610.34 Debtors are typically required to make interest payments in monthly installments
beginning 30 days after the date of the note. Thus, accounting personnel generally should make
a monthly journal entry to accrue interest income through the end of each month if amounts are
significant. Accounting personnel would make the following entry to record an accrued interest
receivable for $1,120:
6-13
Accrued interest receivable

Interest income
$1,120
$1,120
However, if the debtor quits making payments, accounting personnel should generally cease
accruing any interest income until the debtor resumes making regular payments.
610.35 The process for accruing interest income on notes receivable generally follows the same
approach used for accruing interest expense on notes payable (see Paragraphs 610.08-.12).
Appendix 6B includes a simple worksheet that accounting personnel may use to calculate
accrued interest on both notes receivable and notes payable. Alternatively, Chapter 7, Appendix
7C-2, includes a more comprehensive workpaper that accounting personnel may use to track
principal and interest payments as well as accrue interest at month end. Accounting personnel
generally should record a reversing entry in the following month.
Accrued Interest Income on Short-term Investments
610.36 Companies with certificates of deposit (CDs) or similar short-term investments often
require financial institutions to remit interest payments monthly. Thus, at month end, there is
generally no more than 30 days of unremitted interest. In this situation, companies often record
interest income as it is received and record accrued interest receivable only at year end.
However, if unrecorded interest amounts are significant, accrued interest income should also be
recorded at each month end.
610.37 Accounting personnel often track short-term investments and related interest using
worksheets or automated spreadsheets, such as Microsoft Excel. These worksheets typically
include separate columns showing all principal and interest activity. Automated spreadsheets
allow expected interest income to be recalculated and compared to actual interest income per
the general ledger. A difference between expected and actual interest income generally should
be accrued since it usually represents interest income earned, but not yet received.
610.38 Exhibit 6-5 shows how accrued interest may be calculated using an automated
investment spreadsheet. Column k computes expected income, which is compared to actual
income per the general ledger. The amounts should agree, except for any accrued interest
income not recorded at month end. The last column calculates the ending monthly accrual. The
interest received amount (column j) is revised each month to reflect any additional interest
received since the last month. If the worksheet is prepared using an electronic spreadsheet
program, accounting personnel can easily revise the interest received and other amounts.
6-14
Exhibit 6-5
Sample Short-term Investment Interest Accrual Worksheet
Company Name:
Prepared by:
(a)
ABC Company
Current Month End:
D. Thomas
(b)
(c)
Date Prepared:
(d)
(e)
(f)
(g)
(h)
3/31/09________________ _____
4/5/09
(i)
(j)
(k)
Principal
Description
Bank
Date
Date
Interest
Beg. Of Yr
Bought
Matures
Rate
Balance
Additions
Maturities
This M/E
Beg. Of Yr
YTD
YTD
This M/E
Balance
Accrual
Received
Computed
Accrual
(Note 1)
(k)[(j)(i)]
(e) + (f) (g)

CD # 1487053
CD # 1492048
SW
SW
11/15/03
02/13/04
5.25%
$125,000
1/18/04
4/18/04
5.45%
CD # 1498702
SW
2/13/04
3/15/04
5.00%
CD # 1499230
SW
3/15/04
6/14/04
5.30%
Totals
125,000
839
100,000
100,000
125,000
125,000
125,000
$125,000
350,000
250,000
Balance per G/L (before accrued interest adjustment)

Difference
(l)
Interest
1,641
802
1,090
1,090
521
521
125,000
294
294
225,000
839
2,162
2,707
1,384
225,000
1,323
$1,384
1,384
Note 1: the YTD Computed column should equal year-to-date interest income per the general ledger after making the month-end-journal entry to accrue interest.
6-15
610.39 Accounting personnel would make the following entry to accrue the interest receivable at
month end per Exhibit 6-5:
Accrued interest receivable
Interest income
$1,384
$1,384
A reversing entry generally should be prepared the following month.

610.40 The calculation in Exhibit 6-5 assumes the bank pays interest only at maturity of each
CD. If the company had requested that interest be paid monthly, an accrual may not have been
needed since the unaccrued interest at month end would have been less significant.
610.41 Accounting personnel should use an automated spreadsheet to simplify the investment
tracking and interest calculation process whenever possible. If accounting personnel do not have
access to an automated spreadsheet, Appendix 6F includes a sample worksheet that may be
used manually.
Reversing Month-end Accruals
610.42 Accounting personnel generally should prepare reversing journal entries in the following
month for the accrual entries discussed previously in this section. (Reversing entries generally do
not apply to adjustments discussed in the other sections of this chapter.) Reversing entries simply
require accounting personnel to prepare an entry in the following month that is exactly opposite
the original accrual entry. The following shows the original entry and reversing entry for the
interest expense accrual discussed in Paragraphs 610.08-.12:
Original Entry in April
Interest expense
$1,120
$1,120
Reversing Entry in May

Interest expense
$1,120
$1,120
610.43 Reversing entries simplify the general ledger account coding process. They allow
accounting personnel to process and code the subsequent vendor invoice or other source
documents to the appropriate expense or income account without considering how much had
been accrued in the previous period. If reversing entries were not used, accounting personnel
would have to post a portion of the subsequent transaction amount to the accrual account.
610.44 Continuing the above example, assume the company subsequently receives the May
interest expense billing from the bank totaling $1,667. Accounting personnel would simply code
the entire invoice amount to interest expense in the May general ledger, even though only $547
of the expense relates to the current month. However, because of the reversing entry, interest
expense is properly stated in May as shown below:
Reversing entry
Subsequent invoice
May interest expense
$(1 ,120)
1,667
$ 547
610.45 If the reversing entry were not made, accounting personnel would have to adjust the
accrual balance at the next month. end or split the May invoice by making the following entry:
6-16
Interest expense
Cash (or accounts payable)
$ 547
$ 1,120
$ 1,667
610.46 Thus, to simplify the account coding process, accounting personnel should prepare
reversing journal entries at the same time they prepare the original accrual entry. The reversing
journal entry should be filed in the next months journal entry binder for subsequent posting in that
month.
615 ADJUSTING ASSET VALUATIONS

615.01 Generally accepted accounting principles (GAAP) require that certain asset accounts be
written down below their book or recorded value if it appears the book or recorded amounts will
not be fully recovered. The two most common accounts that require these valuation adjustments
are accounts receivable and inventory. Both types are discussed in this section.
Uncollectible Accounts Receivable
615.02 GAAP requires companies to record a loss when all or a portion of a receivable is
estimated to be uncollectible. The loss is generally recognized by debiting bad debt expense and
crediting the allowance for doubtful accounts. The allowance account is a balance sheet asset
account that carries a credit balance (referred to as a contra-asset account), which is offset
against accounts receivable in the companys financial statements.
615.03 Accounting personnel generally estimate uncollectible accounts using the percentage of
sales method or the aging method, each of which are discussed below. When the company give
up on collecting a receivable, the company writes off the receivable, a process that is also
discussed below.
615.04 Percentage of Sales Method. The percentage of sales method is most often used when
a company has a large number of uniformly sized accounts with a stable market and customer
base. Under this method, uncollectible accounts are estimated by applying a predetermined bad
debt percentage to each months sales. For example, if credit sales are $300,000 in the current
month, bad debt expense in the current month would be $7,500 using a 2.5% bad debt estimate.
The percentage is usually determined based on the trend of bad debt expense over the past few
years. The calculated bad debt expense amount is recorded by making the following entry:
Bad debt expense
Allowance for doubtful accounts
$7,500
$7,500
Each month, a similar entry is made. At year end, a more detailed analysis of uncollectible
accounts is made and the allowance account is adjusted upward or downward.
615.05 Aging Method. The aging method is generally used when accounts are less uniform in
size and sales activity fluctuates widely. Under this method, the balance for the allowance
account is recomputed each month by applying a predetermined percentage to each aging
category per the aged accounts receivable report. The percentages will vary from one company
to the next depending on credit terms, market conditions, and collection experience. (If the older
aging categories contain unusually large balances, accounting personnel should ask the credit
manager to provide individual bad debt estimates for those accounts.) For example, the following
percentages might be used under the aging method:
6-17
(a)
Aging
Category
0 30
31 60
61 90
91 120
Over 120
Totals
(b)
(c)
Bad Debt
Percent
2%
4%
10%
25%
50%
N/A
Receivable
Balances
$ 335,000
$ 128,000
$ 75,000
$ 42,000
$ 28,000
$ 838,000
(d)
Bad Debt
Estimate
(b) x (c)
$ 6,700
$ 5,120
$ 7,500
$10,500
$14,000
$43,820
615.06 The calculated bad debt estimate is then compared to the allowance for doubtful
accounts general ledger balance. The balance and related bad debt expense is then increased or
decreased to agree to the calculated balance. For example, assuming the general balance in the
allowance for doubtful accounts is currently $35,000, accounting personnel would make the
following entry to record additional bad debt expense of $8,820 ($43,820 - $35,000):
Bad debt expense
$8,820
$8,820
Appendix 6G includes a worksheet that accounting personnel may use to estimate bad debts
using the aging method.
615.07 Writing Off the Bad Accounts. After recording the allowance account under either of
the above methods, specific accounts that are written off because management believes further
collection efforts are futile should be charged against the allowance account. For example, if
$2,500 due from a customer is considered uncollectible, accounting personnel should make the
following general ledger entry to write off the account:
Accounts receivable
$2,500
$2,500
Accounting personnel should also write off the account in the accounts receivable subsidiary
ledger to ensure the general ledger and subsidiary ledger remain in balance.
Inventory Reserves
615.08 Generally accepted accounting principles (GAAP) require that inventory be recorded at
the lower of its cost or estimated market value. If the inventorys recorded cost is not expected to
be recovered through its normal selling price, GAAP requires that a loss be recorded as soon as
the business determines that a loss is likely to occur.
615.09 The process of applying this lower of cost or market rule is complex. If accounting
personnel suspect this rule may apply, they should consult with the controller or outside CPA.
Some red flags that accounting personnel should be alert for include the following:
6-18
The company is experiencing overall operating losses.
Certain product lines are losing money.
Vendor purchase prices are increasing at a much faster rate than

selling prices.
Quantities on hand of certain inventory items or inventory lines

appear excessive.
615.10 Even though the lower of cost or market rule should not be applied without the help of the
controller or outside CPA, accounting personnel should still record losses for any inventory items
or lines that appear obsolete or damaged by writing them down to their net realizable value. Net
realizable value equals the estimated net price that the items could be sold for, which frequently
equals the scrap value for obsolete or damaged items.
615.11 Accounting personnel should record the estimated losses to an inventory reserve
account. The reserve account is essentially an asset account with a negative (credit) balance.
The account is generally referred to as a contra account since it offsets or is netted against the
inventory account in the financial statements. Assuming an inventory reserve of $12,000 is
required, accounting personnel would make the following entry to record the loss and reserve:
Inventory write-down expense
Inventory reserve
$12,000
$12,000
615.12 As the items are subsequently sold or disposed of, accounting personnel should charge
the items against the inventory reserve account. For example, assume all of the above obsolete
and damaged items, which have an original book value of $20,000, are later sold for $6,000.
Accounting personnel would make the following entry to record the sale and recognize an
additional $2,000 loss:
Cash
Inventory reserve
Inventory loss (#585)
Inventory
$ 6,000
$12,000
$ 2,000
$20,000
620 DEPRECIATING AND AMORTIZING ASSETS

620.01 Expenditures that directly benefit a limited number of future periods must be initially
recorded as assets and written off to expense over those periods. The process of writing off the
assets is called either depreciation or amortization. Depreciation applies to tangible assets, such
as property and equipment, and amortization applies to intangible assets, such as prepaid
insurance. This section discusses:
Prepaid asset amortization.
Fixed assets depreciation.
Other long-term assets amortization.
6-19
Prepaid Asset Amortization

620.02 Certain expenditures commonly paid in advance by small businesses include property
and casualty insurance, property taxes, and advertising. Since these expenditures benefit more
than one month, they should be recorded as prepaid assets when paid and amortized over the
appropriate number of months covered by the expenditure. For example, insurance prepayments
often cover six or twelve months and property taxes generally cover one year.
620.03 Accounting personnel should initially record a $24,000 insurance prepayment as follows:
Prepaid insurance
Cash
$24,000
$24,000
620.04 Assuming the policy covers a 12 month period, the company would record an expense of
$2,000 ($24,000 12) in each of the following 12 months as follows:
Insurance expense
Prepaid insurance
$ 2,000
$ 2,000
620.05 If a company has several types of prepaid expenses, it is often helpful to prepare a
schedule that shows the monthly amortization amount and ending asset balances. Exhibit 6-6
presents a schedule that calculates prepaid amortization expense and monitors remaining
unamortized asset balances. Appendix 6H includes a blank copy of the worksheet that accounting
personnel may use.
Fixed Assets Depreciation
620.06 Generally accepted accounting principles (GAAP) allow businesses to choose among
several different methods to depreciate fixed assets, but the IRS requires the Accelerated Cost
Recovery System (ACRS) for assets acquired after 1980 and Modified ACRS (MACRS) for
assets acquired after 1986. In addition, many states require businesses to use state-mandated
depreciation methods when calculating state income taxes. Thus, many businesses are
compelled to keep two or more sets of fixed asset depreciation schedules.
620.07 The following paragraphs focus on GAAP depreciation methods. For companies that wish
to avoid calculating depreciation under both GAAP and tax methods, GAAP allows companies to
use tax methods if they do not produce significant differences from GAAP methods. Frequently,
GAAP and tax methods produce similar results for assets with short lives, say, less than seven
years. Because of the complexity of depreciation rules, accounting personnel should consult with
their controller or outside CPA when selecting or changing a depreciation method.
620.08 There are three common depreciation methods allowed by GAAP. Each method requires
accounting personnel to depreciate the fixed assets over their estimated useful lives. Some
methods require estimated salvage value (if significant) to be considered before making the
calculation, but others do not. Each of the methods is discussed below. The first depreciation
method is the straight-line method that allocates depreciation equally over the assets life,
whereas the other two methods are accelerated methods that allocate more depreciation during
the assets early years.
6-20
Exhibit 6-6
Description
Payee:
Amount Paid:
Date Paid:
Period Covered:
Monthly Expense:
Month End
January 31
February 28
March 31
April 30
May 31
June 30
July 31
August 31
September 30
October 31
November 30
December 31
Prepaid Asset Amortization Worksheet

Property Insurance
ABC Agency
$24,000
1/5/09
1/1/09 12/31/09
$2,000
Activity
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
Balance
$22,000
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
$ 8,000
$ 6,000
$ 4,000
$ 2,000
$
0
Type of Prepaid Asset

Auto Insurance
Property Taxes
XYZ Insurance Co.
Bexar County
$9,000
$36,000
6/8/09
1/31/08
6/1/09 11/30/09
2/1/08 1/31/09
$1,500
$3,000
Asset Activity and BalancesDR (CR)
Activity
Balance
Activity
Balance
($1,500)
($1,500)
($1,500)
($1,500)
($1,500)
($1,500)
$7,500
$6,000
$4,500
$3,000
$1,500
$
0
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
($3,000)
$33,000
$30,000
$27,000
$24,000
$21,000
$18,000
$15,000
$12,000
$ 9,000
$ 6,000
$ 3,000
Advertising
Sinc Advertising Co.
$42,000
3/31/09
4/1/09 9/30/09
$7,000
Activity
($7,000)
($7,000)
($7,000)
($7,000)
($7,000)
($7,000)
Balance
$42,000
$35,000
$28,000
$21,000
$14,000
$ 7,000
$
0
6-21
a. Straight-line method. Under this method, the fixed assets costless

salvage value (if significant) is allocated evenly over the assets
estimated useful life. For example, annual depreciation expense for a
company owning a $15,000 asset with no expected salvage value and
a five year estimated life would be $3,000. The bookkeeper would
record monthly depreciation expense of $250 ($3,000/12).
b. Double declining balance method. This accelerated method
allocates the assets cost disproportionately over its life so that the
early years are charged with most of the cost. The rate used to
depreciate the assets is twice the straight-line rate. In the above
example, the straight-line rate was 1/5 or 20%. Under the double
declining balance method, the rate would be 40%. Depreciation would
equal $6,000 ($15,000 x 40%) in the first year and $3,600 ($9,000 x
40%) in the second year. Since a constant rate is applied to a
declining net book value, the DDB method will not fully depreciate the
asset. Companies either assume the remaining undepreciated
balance equals the salvage value, or they switch to the straight-line
method in the year the depreciation falls below the straight-line
calculated amount.
c. Sum-of-the-years digits method. This accelerated method also
allocates more of the assets cost to its early years. The depreciation
rate is based on a fraction tied to the assets life. The numerator is the
number of years remaining at the beginning of each year and the
denominator is the sum of the numerators that are used in each
years calculation. In the above example, the numerator for the first
year is five and the denominator for each year is 15 (5+4+3+2+1).
Thus, depreciation is $5,000 ($15,000 x 5/15 in the first year and
$4,000 ($15,000 x 4/15) in the second year.
620.09 Under each method, monthly depreciation is calculated by simply dividing the annual
depreciation expense amount by 12. The monthly amount is then recorded by debiting
depreciation expense and crediting accumulated depreciation. For example, assuming a monthly
depreciation expense of $500, accounting personnel would make the following entry:
Depreciation expense
$500
$500
The accumulated depreciation account is a contra account to the fixed asset accounts. It carries
a negative (credit) balance and is presented as an offset against the fixed asset balances in the
financial statements.
620.10 Exhibit 6-7 presents depreciation calculations over a five year life under each of the
methods.
6-22
Exhibit 6-7
Comparative Depreciation Calculations

Straight Line (SL)
Year Rate
1
2
3
4
5
.20
.20
.20
.20
.20
Expense
$3,000
$3,000
$3,000
$3,000
$3,000
Book
Value
$15,000
$12,000
$ 9,000
$ 6,000
$ 3,000
$
0
Double Declining Balance

Sum-of-the-years Digits
(DDB)
(SYD)
Book
Book
Rate
Expense
Value
Rate
Expense
Value
$15,000
$15,000
.40
$ 6,000
$ 9,000 5/15
$ 5,000 $10,000
.40
$ 3,600
$ 5,400 4/15
$ 4,000 $ 6,000
.40
$ 2,160
$ 3,240 3/15
$ 3,000 $ 3,000
.40
$ 1,296
$ 1,944 2/15
$ 2,000 $ 1,000
.40
$ 778
$ 1,166 1/15
$ 1,000 $
0
620.11 Notice in Exhibit 6-7 that the DDB method leaves a net book value at the end of year 5 of
$1,166 since that method does not fully depreciate assets as mentioned previously.
620.12 Most companies use fixed asset software to track fixed assets and calculate depreciation.
Companies with fewer fixed assets, however, sometimes use automated spreadsheets, such as
Microsoft Excel, or occasionally use manual worksheets. Because of the complexity of
depreciation calculations, accounting personnel should seriously consider acquiring fixed asset
software. The software generally will not only calculate GAAP depreciation, but it will also make
separate tax depreciation calculations.
Other Long-term Assets Amortization
620.13 In addition to fixed assets, accounting personnel are sometimes confronted with how to
record and amortize certain other long-term intangible assets. The following paragraphs provide
guidance on accounting for goodwill and organizational costs.
620.14 Goodwill. When a company acquires another business, it often pays more than the fair
market value of the net tangible assets. When this occurs, the difference is recorded by the
acquiring company as an asset usually called goodwill. The goodwill is generally assumed to
relate to intangible assets, such as good customer relations, patents, trademarks, customer lists,
company name, and sales force.
620.15 The companys controller or outside CPA is generally heavily involved in calculating and
recording goodwill when an acquisition occurs. Accounting personnel must simply record the
monthly goodwill amortization. Generally, goodwill should be amortized over the estimated life of
the intangible assets underlying the goodwill, not to exceed forty years for GAAP purposes. For
example, the monthly entry to amortize $48,000 of goodwill over 20 years is as follows:
Amortization expense ($48,000/240)
Accumulated amortization
$200
$200
Although the expense is usually recorded to an accumulated amortization account, it is usually

netted against the goodwill asset account in the financial statements. In other words, only the net
asset amount appears in the financial statements.
620.16 Organizational Costs. Newly-formed businesses generally incur various legal costs and
6-23
other expenses relating to establishing the legal entity. Because the IRS allows these costs to be
recorded as assets and amortized over a five year period, businesses will occasionally treat them
the same way for GAAP purposes. However, for GAAP purposes, these costs do not qualify as
assets and should not be capitalized. Thus, accounting personnel should expense the costs as
incurred for book purposes if the amounts are significant.
625 MAKING OTHER ADJUSTMENTS
625.01 In addition to the adjustments covered in the preceding sections, this section addresses
the following miscellaneous adjustments:
Life insurance cash surrender value.
Retained earnings adjustments.
Life Insurance Cash Surrender Value

625.02 Key executive officers lives are frequently insured by the company using either whole life
or universal live cash surrender value (CSV) policies. Unlike term insurance policies, the policies
have an investment element that allows a portion of the premiums to accumulate as CSV. At any
point in time, the policy holder may use the CSV by borrowing against it (referred to as a policy
loan), paying premiums with it, or withdrawing it.
625.03 Traditionally, the company pays for the policies and is entitled to the CSV and any death
benefits. In these situations, the CSV is considered an asset of the company under generally
accepted accounting principles (GAAP). Thus, even though accounting personnel typically record
the premiums as an expense when they are paid, an adjustment is needed at period end to record
the CSV portion of the premiums as an asset. How often the adjustment is made (monthly,
quarterly, or annually) generally depends on the significance of the change in the CSV amount
from one period to the next. Many companies choose to make only an annual adjustment.
625.04 If the company has borrowed against the CSV amount, the monthly statement received
from the insurance company will show both the CSV amount and the policy loan amount. For
GAAP purposes, accounting personnel should report only the net amount (CSV less policy loan)
as an asset in the financial statements. The following example shows how to record CSV at period
end.
625.05 Assume a company pays premiums of $2,000 per month for a traditional whole life CSV
policy. The company recently borrowed $10,000 from the policy and recorded the cash received
by debiting cash and crediting the CSV amount in the general ledger. Interest of $500 has
accrued on the policy loan. The policy has a $35,000 CSV at period end. Since the general ledger
shows a $22,000 net CSV balance at period end, the following computes the $2,500 CSV
adjustment needed at month end:
CSV per most recent insurance statement
Less policy loan
10,500
Net cash surrender value
24,500
CSV per general ledger
22,000
CSV adjustment needed
6-24
$ 35,000
$ 2,500
625.06 Accounting personnel would make the following entry to record the increase in cash
surrender value at period end:
Cash surrender value (asset)
Insurance expense
$ 2,500
$ 2,500
625.07 The above accounting treatment assumes the company combines the cash surrender
value and policy loan payable amount into a single general ledger account. This is acceptable
since many companies do not intend to repay the loan amount or the interest. In other words, the
borrowing is permanent and interest payments are simply deducted from the companys CSV
amount. If the company intends to repay the loan and make regular interest payments, accounting
personnel may prefer to set up a separate general ledger account for the policy loan.
625.08 The above paragraphs apply to the traditional CSV policy. However, with some CSV
policies (such as split dollar arrangements) the company may be entitled to only a portion of the
cash surrender value amount. In that situation, only the portion of the CSV that the company is
entitled to should be recorded as an asset. Because the accounting for these nontraditional types
of policies can be complex, accounting personnel should consult the controller or outside CPA if
this situation is encountered.
Retained Earnings Adjustments
625.09 Accounting personnel frequently encounter revenue and expense transactions that apply
to the income statement of a previous periods general ledger that has already been closed. Since
net earnings in the current period will be misstated if the transaction is recorded in the current
period, accounting personnel will sometimes decide to record the transaction to retained earnings
instead.
625.10 Generally accepted accounting principles (GAAP), however, severely restrict the types of
transactions that may be recorded to retained earnings. Although GAAP does permit adjustments
to retained earnings for significant prior period errors that accounting personnel discover in a later
period, the controller or outside CPA should usually be consulted before posting such a
transaction to retained earnings.
625.11 Thus, retained earnings in most small businesses should generally include only the prior
periods ending retained earnings balance plus or minus the current periods net earnings or loss.
If the company pays dividends to shareholders, the dividends should also be posted as a debit to
the retained earnings account.
630
SUMMARY
630.01 This chapter has covered some common noncash adjustments small businesses often
make at month end to convert their general ledgers to full accrual. Prior to making these entries,
the general ledgers are typically on a cash or modified cash basis. That is, the general ledgers
usually only reflect the day-to-day transactions recorded through the major summary journals,
such as sales, cash receipts, purchases, cash disbursements, and payroll.
630.02 Revenues that have not been earned as of the balance sheet date should be deferred
and later recognized when they are earned. Cost of sales should be recorded individually as items
are sold or in the aggregate by using monthly estimates of cost of sales percentages. When fixed
6-25
assets are sold, a gain or loss should be recognized equal to the difference between the sales
price and the net book value. The net book value of fixed assets that are traded-in can often be
carried forward to the newly acquired asset without recognizing a gain or loss. Accounting
personnel can often make reasonable estimates of monthly income tax expense by using an
average income tax rate.
630.03 Accounting personnel should accrue certain expenses and income through month end to
ensure revenues and expenses of each period are properly matched. Generally, accounting
personnel must estimate for each item the number of days of expense or income in each period
that have not been recorded. Once the days have been determined, accounting personnel can
use available financial data to estimate the unaccrued amounts in each period. Common
expenses that are accrued include interest, payroll, commissions, and vendor payables. Common
income items that are accrued include interest income on both notes receivable and short-term
investments. For each accrual, accounting personnel should typically prepare a reversing entry in
the following month.
630.04 Generally accepted accounting principles (GAAP) require certain asset values to be
adjusted at period end to more fairly reflect their net realizable values. Accounts receivable and
inventory are the two most common asset accounts affected by this rule. Accounts receivable
balances are adjusted by recognizing a loss for those accounts estimated to be uncollectible.
Inventory accounts are adjusted by recognizing a loss for inventory items whose cost exceeds
their net realizable value. The rules for recognizing inventory losses are complex and frequently
require accounting personnel to consult with their controller or outside CPA.
630.05 Certain expenditures that benefit more than one period should be recorded as assets and
amortized or depreciated over their estimated useful lives. Amortization applies to intangible
assets, such as prepaid insurance, whereas depreciation applies to tangible assets, such as
property and equipment. The monthly amortization amount for prepaid insurance, prepaid
property taxes, and similar intangible assets is determined by dividing the prepaid amount by the
benefit period. The GAAP depreciation amount for fixed assets is usually determined by using a
straight-line method, double declining balance method, or sum-of-the-years digits method,
whereas the IRS specifies different depreciation methods and periods for tax purposes. Because
of the complexity of the depreciation calculation, most small businesses should acquire a
depreciation software package to track fixed assets and compute GAAP and tax depreciation.
630.06 Other miscellaneous adjustments that accounting personnel sometimes encounter include
cash surrender value of life insurance and retained earnings adjustments. Certain life insurance
policies have an investment feature that allows a cash surrender value (CSV) amount to
accumulate for the companys benefit. This CSV amount should be recorded as an asset at period
end.
630.07 Accounting personnel will occasionally post income or expense items directly to retained
earnings because the items actually relate to a previous period. Since GAAP severely restricts the
type of items that may be posted to retained earnings, accounting personnel generally should not
post such items to retained earnings without first consulting their controller or outside CPA.
6-26
Appendixes
6
Table of Contents
Appendix
Description
Page
Recognizing Revenues and Costs

6A
Fixed Asset Gain or Loss Calculation Worksheet .....................................
6-29
Accruing Expenses and Income

6B
Term Loan Accrued Interest Calculation Worksheet.................................
6-31
6C
Line of Credit Interest Expense Worksheet ..............................................
6-33
6D
Payroll Accrual Worksheet ........................................................................
6-35
6E
Sales Commission Accrual Worksheet .....................................................
6-37
6F
Short-term Investment and Interest Accrual Worksheet ..........................
6-39
Adjusting Asset Valuations

6G
Bad Debt Expense Worksheet ..................................................................
6-41
Depreciating and Amortizing Assets

6H
Prepaid Asset Amortization Worksheet ...................................................
6-43
6-27
6-28
6-29
Appendix 6A
Fixed Asset Gain or Loss Calculation Worksheet
Asset Description:
Dates: Acquired
Prepared by:
Date Prepared:
Sold:
Instructions: Accounting personnel may use this worksheet to calculate the gain or loss on fixed assets
sold and make the appropriate general ledger entry.
After calculating the gain or loss, make the appropriate journal entry to record the gain or loss and
remove the asset and accumulated depreciation from the general ledger and fixed assets subsidiary
ledger. Attach this worksheet to the journal entry as supporting documentation.
No.
1.
Description
Sales Proceeds
Amount
$
Subtract net book value:

2.
3.
4.
Cost of Asset
Less accumulated depreciation through the sale date
Net book value (Line 2 Line 3)
$
$
$
5.
Differencenet gain (or loss) (Line 2 Line 4)
6.
Gain (or loss) already recorded in general ledger
7.
6-30
Adjustment needed(DR) or CR (Line 5 Line 6)
6-31
Appendix 6B
Term Loan Accrued Interest Calculation Worksheet
Loan Name or Number:
Lenders Name:
Prepared by:
Date Prepared:
G/L Numbers: Loan
Accrued Interest
Interest Exp. or Inc.
Instructions: Accounting personnel may use this form to calculate accrued interest at month end on
term loans receivable or payable with fixed interest rates. Simply list the basic information about the
note in Part A. Then complete the accrued interest calculation by completing Part B.
After completing the calculation, accounting personnel should attach this worksheet to the journal entry
to provide supporting documentation. Accounting personnel typically should prepare a reversing journal
entry in the following month.
Additional Guidance: See Paragraphs 610.08.12 and 610.34.35.
No.
Description
Part ABasic Facts
1.
Loan amount
2.
Stated interest rate
3.
Number of days in this month
4.
Number of days of this month included in this months invoice
5.
6.
Part BAccrued Interest Calculation

Interest amounts:
Annual interest amount (Line 1 x Line 2)
Daily interest amount (Line 5 360 days)
7.
Number of days to accrue (Line 3 Line 4)
8.
Amount of interest to accrue (Line 6 x Line 7)
6-32
Amount
$
%
$
$
6-33
Appendix 6C
Line of Credit Interest Expense Worksheet
Bank Name:
Bank Contact Person:
Available Line of Credit Amount:
Interest Rate:
Instructions: Accounting personnel may use this worksheet to accrue interest on a line of credit and
monitor principal and interest activity. Simply enter the date and amount of each change, including an
interest rate change. At month end, calculate accrued interest expense through the end of the month.
Totals should be calculated at each month end. After making the monthly accrual, the total of column g
should agree to interest expense per the general ledger.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Interest Activity
Transactions
Description
Dates
Principal Activity
Receipts
Cumulative
(Payments) Balance
Interest Rate
Data
Days
Rates O/S
Beg Bal + (c)
6-34
Interest Expense/Payments
Computed
Interest
Diff.
Expense
Paid
(if any)
(g) (h)
(d) x (e) 360x(f)
$
$
$
$
%
%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
%
%
%
%
%
%
%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
%
%
%
%
%
%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
%
%
%
%
%
%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
%
%
$
$
$
$
6-35
Appendix 6D
Payroll Accrual Worksheet
Instructions: Accounting personnel may use this worksheet to calculate the monthly payroll accrual. It
calculates an accrual for both the gross payroll and the employers portion of taxes. This worksheet
may be used as supporting documentation for the journal entry.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Latest Payroll Register

Description
(Account Name
or Department
Hourly:
Gross
Payroll
Co.s
Taxes
Total
(c) x (d)
Salaried:
Totals
6-36
G/L
No.
(h)
(i)
Total Payroll Accrual
Days
Days
(g) (f)
(e) x (h)
6-37
Appendix 6E
Sales Commission Accrual Worksheet
Accrual for Month of:

Prepared by:
Date:
Instructions: Accounting personnel may use this worksheet to make a rough estimate of unrecorded
commissions at month end. Simply calculate total commission for the month (column e) and subtract
commissions already recorded for the month (column f) to arrive at the accrual needed at month end
(column g).
Accounting personnel may use this worksheet as supporting documentation for the accrued
commission month-end journal entry.
(a)
(b)
Salesperson
Total
6-38
(c)
Monthly
Sales
G/L No.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(d)
(e)
Commission
Rate
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
(f)
(g)
Commission Expense
Estimated
Expense
Expense
Already
Monthly
for
Booked
Accrual
Full Month
(if any)
Needed
(c) x (d)
(e) (f)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Appendix 6F
Short-term Investment and Interest Accrual Worksheet
Company Name:
Current Month End:
Prepared by:
Date Prepared:
Instructions: The accounting staff may use this worksheet to calculate accrued interest income and check interest income on CDs and other
short-tern, investments.
(a)
Description
(b)
Bank
(c)
(d)
(e)
Date
Date
Interest
Beg. Of Yr
Bought
Matures
Rate
Balance
(f)
(g)
Principal
Additions
Maturities
(h)
(i)
(j)
This M/E
Beg. Of Yr
YTD
YTD
This M/E
Balance
Accrual
Received
Computed
Accrual
(Note 1)
(k)[(j)(i)]
(e) + (f) (g)
Totals
(k)
Interest
(l)
Balance per G/L (before accrued interest adjustment)
Difference
Note 1: the YTD Computed column should equal year-to-date interest income per the general ledger after making the month-end-journal entry to accrue interest.
6-39
6-40
Appendix 6G
Bad Debt Expense Worksheet
Company Name:
Month End:
Prepared by:
Date Prepared:
Instructions: Accounting personnel may use this worksheet to estimate the required monthly balance in
the allowance for doubtful accounts. Simply multiply the month-end receivable balances in each aging
category by the predetermined bad debt percentage for each category. The resulting uncollectible
accounts estimate should then be compared to the corresponding general ledger balance. Accounting
personnel should prepare a journal entry to adjust the general ledger balance to the estimate in column
d.
(a)
(b)
Predetermined
Bad Debt Percentage
%
%
%
%
%
%
Totals $
%
(d) (b)
Current Allowance for Uncollectible Accounts Balance
Aging Category
0 30 Days
31 60 Days
61 90 Days
91 120 Days
Over 120 Days
Month-end
Receivable Balances
$
$
$
$
$
(c)
Adjustment NeededIncrease or (Decrease)
(d)
Uncollectible
Accounts Estimate
(b) x (c)
$
$
$
$
$
$
$
$
6-41
Appendix 6H
Prepaid Asset Amortization Worksheet
Instructions: Accounting personnel may use this worksheet to calculate monthly prepaid amortization and track amortization expense and
remaining asset balances. Enter amortization expense and any additions or other changes in the activity column.
Type of Prepaid Asset
Description
Payee:
Amount Paid:
Date Paid:
Period Covered:
Monthly Expense:
Month End
Activity
Balance
Asset Activity and BalancesDR (CR)

Activity
Balance
Activity
Balance
Activity
Balance
6-43
6-44
Maintaining the General Ledger
7
Table of Contents
Section
Description
Page
700
INTRODUCTION ................................................................................................... 7-1
705
OVERVIEW: CONTROLLING THE MONTHLY CLOSING PROCESS .................. 7-2

.04
.06
.08
.11
710
.25
Journal Entry Checklist .................................................................................. 7-13

Journal Entry Form ........................................................................................ 7-13
General Ledger Review .................................................................................

Financial Statements Review .........................................................................
.08 Income Statement .................................................................................
.12 Balance Sheet .......................................................................................
7-13
7-15
7-15
7-15
BACKING UP AND STORING GENERAL LEDGER RECORDS ............................ 7-16

.02
.05
730
7-5
7-5
7-8
7-8
7-8
7-9
7-10
7-10
7-11
REVIEWING THE GENERAL LEDGER AND FINANCIAL STATEMENTS ............. 7-13

.02
.07
725
Bank Reconciliation Workpapers ...................................................................

Subsidiary Ledger Reconciliation Workpapers ...............................................
Amortization Schedules .................................................................................
Continuing Workpaper Schedules ..................................................................
.17 Certificates of Deposit (CD) Workpaper.................................................
.18 Notes Receivable Workpaper ................................................................
.21 Line of Credit Workpaper ......................................................................
.22 Equity Accounts Workpaper ..................................................................
Detailed Account Analysis Schedules ............................................................
PREPARING JOURNAL ENTRIES......................................................................... 7-12

.02
.03
720
7-2
7-3
7-3
7-4
MAINTAINING GENERAL LEDGER SUPPORTING WORKPAPERS .................... 7-4

.05
.08
.12
.16
715
Phase One: Generating the General Ledger Trial Balance ...........................

Phase Two: Generating the Preliminary Detailed General Ledger ................
Phase Three: Generating the Preliminary Financial Statements ...................
Phase Four: Generating the Final Ledger and Statements............................
Backup Process ............................................................................................. 7-16

Backup Devices ............................................................................................. 7-16
SUMMARY ............................................................................................................. 7-17
TOC 7-1

7
Appendix
Description
Page
7A
Summary Closing Checklist .................................................................................... 7-21
7B
Supporting Workpapers Closing Checklist .............................................................. 7-23
7C
Supporting Workpapers .......................................................................................... 7-27
7D
Journal Entry Checklist ........................................................................................... 7-35
7E
Journal Entry Form ................................................................................................. 7-37
7F
Review Comments Form ........................................................................................ 7-39
TOC 7-2
700
LEDGER OVERVIEW: CONTROLLING THE CLOSING PROCESS
MAINTAINING GENERAL LEDGER SUPPORTING WORKPAPERS
PREPARING JOURNAL ENTRIES
REVIEWING THE GENERAL LEDGER AND FINANCIAL STATEMENTS
BACKING UP AND STORING GENERAL RECORDS
INTRODUCTION
700.01 Processing and closing out the general ledger at month end is a stressful project in
many small businesses. Management often imposes tight deadlines to ensure financial reports
are received timely after month end. Financial statement deadlines of 10 days to one week or
less are becoming the norm. In addition, last minute problems related to analyzing and
adjusting specific general ledger accounts always seem to come up.
700.02 The tight deadlines and unexpected last minute problems encountered during monthend general ledger closings often frustrate accounting personnel. However, the frustration and
problems can be reduced by following a simple closeout routine and using some basic tools,
such as checklists and workpapers.
700.03 This chapter includes the following key sections to help accounting personnel better
handle general ledger processing and closeouts:
Overview: Controlling the Closing Process. Section 705 provides

accounting personnel with an overview of the closing process and
suggestions, along with a closing checklist, to help control the
monthly closing process.
Maintaining General Ledger Supporting Workpapers. Section 710

discusses five types of workpapers that accounting personnel should
maintain to support monthly general ledger balances.
Preparing Journal Entries. Section 715 discusses standard and

adjusting journal entries and how to better control them using a basic
checklist.
Reviewing the General Ledger and Financial Statements. Section

720 recommends certain approaches that accounting personnel
should use for reviewing the general ledger and financial statements.
Backing Up and Storing General Ledger Records. Section 725

provides guidance on general ledger backup and storing hard copies
and computer records.
7-1

705
OVERVIEW: CONTROLLING THE MONTHLY CLOSING PROCESS

705.01 General ledger processing is an ongoing activity in most small businesses. It consists
of various phases that are repeated each month. If the phases are performed in a routine and
systematic manner, the closing process becomes much more predictable and manageable.
705.02 This section discusses the following four phases that are common to a well managed
monthly general ledger closeout:
Phase One: Generating the General Ledger Trial Balance.
Phase Two: Generating the Preliminary Detailed General Ledger.
Phase Three: Generating the Preliminary Financial Statements.
Phase Four: Generating the Final Ledger and Statements.
Accounting personnel generally should be able to limit the close out process to the steps
covered in the four phases. However, if unforeseen problems are encountered, an additional
draft general ledger or financial statement copy could be required in any of the phases.
705.03 Appendix 7A includes a Summary Closing Checklist that accounting personnel may
use to control each phase of the closing process. It presents a brief, high-level summary of the
key general ledger closing steps. Certain steps that lend themselves to a more detailed
checklist, such as preparing supporting workpapers and specific journal entries, are
supplemented by more detailed checklists discussed in subsequent sections of this chapter.
Each phase of the closing process is briefly discussed below.
Phase One: Generating the General Ledger Trial Balance
705.04 The first processing phase involves generating the general ledger trial balance. The
trial balance presents each accounts ending balance and the total of all general ledger debit
and credit balances. In contrast to a complete general ledger, it does not show any entries
posted to the accounts. As discussed in Paragraph 705.07, accounting personnel use the trial
balance to ensure the general ledger is in balance (that is, total debits equal total credits) and to
obtain ending account balances for preparing additional journal entries. If the accounting
system offers this option, some accounting personnel prefer to generate and use a summary
general ledger for this phase instead of the general ledger trial balance.
705.05 Accounting personnel typically perform the following steps to generate the trial
balance:
7-2
Process and post summary journals. Most accounting transactions

are processed by accounting personnel throughout the month. These
transactions, which are covered in Chapters 3 through 5, generally
consist of processing sales and cash receipts, purchasing and cash
disbursements, and payrolls. As transactions are batched and
processed, they are typically summarized on journals for posting to
the general ledger. At month end, accounting personnel must simply
ensure that all summary journals were posted to the general ledger.
Make standard journal entries. Certain standard journal entries

involving fixed amounts, such as prepaid amortization and monthly
accrual entries, can often be made without knowing the preliminary
ending general ledger balance. Before generating the trial balance,
accounting personnel should prepare and post these standard journal
entries. (If reversing entries are needed in the following month,
accounting personnel should also prepare them and file them in the
next months journal entry file. Reversing entries are discussed in
Chapter 6, paragraphs 610.42-.46.)
After completing the above steps, accounting personnel can then instruct the system to
generate the month-end general ledger trial balance. If adjustments were numerous,
accounting personnel may wish to generate a second trial balance or a summary general
ledger before generating the preliminary detailed general ledger.
Phase Two: Generating the Preliminary Detailed General Ledger
705.06 After generating the general ledger trial balance, the next phase involves using the trial
balance to generate a preliminary detailed general ledger. Unlike the trial balance, which just
shows the ending account balance, the detailed general ledger also presents the beginning of
the month balance and entries posted to each account during the month. As discussed in Paragraphs 705.08-.10, accounting personnel use the preliminary detailed general ledger to identify
any additional adjustments that might be needed.
705.07 Accounting personnel typically use the trial balance to perform the following steps
before generating the preliminary detailed general ledger:
Balance the trial balance. Accounting personnel should ensure that

total debits equal total credits per the trial balance. If not, the cause
of the difference must be determined.
Reconcile appropriate accounts to supporting records. Accounting personnel should agree ending asset and liability accounts to
appropriate supporting records, such as subsidiary ledgers, amortization schedules, or workpapers. (Section 710 discusses in more detail
the appropriate workpapers for various accounts.) If differences exist,
accounting personnel must determine the reason for the difference.
Prepare any required journal entries. After performing the above

steps, accounting personnel should prepare any adjusting journal
entries that are needed. In addition, accounting personnel should
prepare any additional standard journal entries for which the ending
account balance was needed before the journal entry could be made.
After performing these procedures, accounting personnel should instruct the system to
generate the preliminary detailed general ledger.
Phase Three: Generating the Preliminary Financial Statements
705.08 After generating the preliminary detailed general ledger, accounting personnel should
perform certain procedures in preparation for generating the preliminary financial statements.
7-3

The preliminary financial statements generally include a summary of the general ledger
accounts grouped into specified balance sheet and income statement captions.
705.09 Before generating the preliminary financial statements, accounting personnel should
scan account balances and monthly activity in the preliminary detailed general ledger to identify
any unusual items. Accounting personnel are typically looking for account coding errors or other
posting errors not detected earlier. However, finding errors at this stage is more difficult and
requires an experienced person who is very familiar with the companys overall accounting
process.
705.10 Accounting personnel should note any unusual items and prepare adjusting journal
entries when needed. After posting the journal entries, accounting personnel should instruct the
system to generate the preliminary financial statements.
Phase Four: Generating the Final Ledger and Statements
705.11 After generating the preliminary financial statements, accounting personnel should
review the balance sheet and income statement amounts for reasonableness. This review
represents a high level analytical review of financial statement amounts to locate unusual items
indicating a possible undetected error.
705.12 The controller or accounting manager sometimes performs this analytical review of the
preliminary financial statements. The reviewer typically notes any unusual items and follows up
on them personally or with the help of other accounting personnel. If an error is detected,
accounting personnel should prepare an adjusting journal entry to correct the accounts. Section
720 discusses the review process in more detail.
705.13 After posting any additional adjusting entries, accounting personnel may wish to
generate a revised set of preliminary financial statements if adjustments were numerous.
Otherwise, accounting personnel should instruct the system to generate the final general ledger
and financial statements for distribution to management.
710 MAINTAINING GENERAL LEDGER SUPPORTING WORKPAPERS
710.01 Closing out the general ledger accurately and in a timely manner is extremely difficult
without supporting workpapers. The workpapers show what makes up the balance sheet
account balances and reduce time spent constantly analyzing account balances. At month end,
the workpapers are updated and agreed to general ledger balances. If the two amounts agree,
accounting personnel have additional assurance that the general ledger balances are accurate.
710.02 Accounting personnel should maintain supporting workpapers for most general ledger
accounts. The types of supporting workpapers and the methods for generating them vary by
account. The various types of supporting workpapers include those generated manually and by
computer spreadsheets, as well as those generated by the accounting system itself, such as
subsidiary ledgers and amortization schedules.
710.03 Accounting personnel should use the most efficient type of workpaper for each
account. Whenever possible, accounting personnel should rely on workpapers and records
generated automatically by the accounting system instead of those that require manual input or
preparation.
7-4
710.04 This section discusses the following five basic types of supporting workpapers
appropriate for most small businesses:
Bank reconciliation workpapers.
Subsidiary ledger reconciliation workpapers.
Amortization schedules.
Continuing workpaper schedules.
Detailed account analysis schedules.
Appendix 7B includes a Supporting Workpapers Closing Checklist that accounting personnel

may use during the monthly closeout process along with the Summary Closing Checklist at
Appendix 7A (see Paragraph 705.03). Exhibit 7-1 presents an overview of the common balance
sheet accounts and the type of supporting workpapers generally used. Accounting personnel
should maintain a monthly closing binder that includes the closing checklists and related
supporting workpapers. In addition to the closing workpapers discussed in this section, Chapter
6 discusses various workpapers used for making monthly journal entries.
Bank Reconciliation Workpapers
710.05 This workpaper category is simply a copy of the bank reconciliation prepared for each of
the companys checking accounts. The basic bank reconciliation generally provides sufficient
supporting documentation for the companys checking accounts since it reconciles the general
ledger balance with actual cash in the bank.
710.06 The reconciliation is frequently manually prepared, but many accounting systems now
include features that automate the reconciliation process. Chapter 3, paragraphs 325.02-.07,
provides guidance on preparing a bank reconciliation, and Appendix 3H presents a bank
reconciliation form that accounting personnel may use.
710.07 Accounting personnel should simply list each checking account on the Supporting
Workpapers Checklist at Appendix 7B. The assigned person should initial and date the spaces
provided on the checklist when the related account has been reconciled and any required
adjustments have been made.
Subsidiary Ledger Reconciliation Workpapers
710.08 Subsidiary ledgers serve as the primary supporting records for many significant balance
sheet accounts, such as trade accounts receivable, inventory, fixed assets, and accounts
payable. The workpaper showing the reconciliation of the subsidiary ledger to the general
ledger represents the supporting workpaper for these accounts.
710.09 The supporting workpaper should simply compare the general ledger balance for the
applicable account to the related subsidiary ledger and identify any reconciling items.
Differences are usually caused by journal entries posted to the general ledger that were not
posted to the subsidiary ledgers. Exhibit 7-2 presents a sample reconciliation of trade accounts
receivable to the general ledger. Appendix 7C-1 includes a blank copy of the workpaper that
accounting personnel may use.
7-5

Exhibit 7-1
Supporting Workpapers for Common General Ledger Accounts

Workpaper Category
Account
Bank
Reconciliation
Copy
Subsidiary
Ledger
Reconciliation
Amortization
Schedule
Continuing
Workpaper
1
Schedule
Detailed
Account
Analysis
1
Schedule
Assets:
Cash
CDs
Securities
Receivables:
Trade
Notes
Other
Prepaids
Inventory
Fixed assets
Suspense
Other
Liabilities:
Trade payables
Accruals
Line of credit
Long-term debt
Suspense
Equity:
Capital stock
Retained earnings
1
If continuing workpapers or detailed account analysis schedules are essentially functioning as

subsidiary ledgers to show the composition of the ending balance, eliminating the workpapers
is sometimes possible by simply using additional general ledger subaccounts.
7-6
Exhibit 7-2
Accounts Receivable Subsidiary Ledger Reconciliation Workpaper
Company Name: ABC Electronics, Inc.
Month End: October 31, 2009
Prepared by: D. Jones
Date Prepared: November 4, 2009
G/L Account Name: Accounts Receivable
G/L Account Number: 115
PART A: RECONCILIATION
Preliminary
Balance
Description
Correction
Needed
Adjusted
Balance
Balance per general ledger
$ 350,000
$ 10,000
$ 360,000
Balance per subsidiary ledger
$ 377,000
$ (17,000)
$ 360,000
$ (27,000)
$ 27,000
Difference: G/L over (under) sub. Ledger
(From Part B)
PART B: DETAIL OF DIFFERENCES
Description
Date
Ref. No.
Amount
10/28/09
JE-1043
$ (17,000)
10/31/09
S-102
$ 10,000
Items in general ledger, not in subsidiary ledger:

Account write-offs (not posted to sub ledger)
Items in subsidiary ledger, not in general ledger:

Sales (batch not posted to G/L)
Total Difference
To Part A:
$ (27,000)
7-7

710.10 Part A of Exhibit 7-2 reflects a $27,000 net difference between the accounts receivable
general ledger account and its subsidiary ledger. The difference is made up of two errors as
shown in Part B. The first error was caused by a $17,000 general ledger write-off for accounts
considered uncollectible, which were not adjusted off the subsidiary ledger. The second error
resulted from a $10,000 batch of sales invoices that was posted to the subsidiary ledger but not
to the general ledger.
710.11 Accounting personnel should complete the Supporting Workpapers Closing Checklist
at Appendix 7B for each applicable account listed in item No. 2 of the checklist. When the
related account has been reconciled and any required adjustments have been made, the
assigned person should initial and date the checklist in the spaces provided.
Amortization Schedules
710.12 Amortization schedules should serve as the primary supporting workpapers for
accounts whose monthly balances decline by a predictable amount, such as prepaid assets
and long-term debt with fixed principal and interest payments. The schedules generally show
the beginning balance and monthly decreases until the balance reaches zero.
710.13 Accounting personnel simply set up an amortization schedule (either manually or using
the computer) when entering into the original transaction, such as purchasing a one-year
insurance policy. The schedule is then used to record monthly amortization transactions. At
month end, accounting personnel compare the amounts per the schedule to the related general
ledger balances. If the schedule has been prepared accurately and updated when any changes
occur, the schedule provides accounting personnel with monthly check figures for comparison
to the related general ledger balances.
710.14 Chapter 6, Appendix 6H, includes a Prepaid Asset Amortization Worksheet that
accounting personnel may use as the supporting workpaper for prepaid assets. Accounting
personnel can generally obtain amortization schedules for the companys long-term debt by
requesting copies from the companys lenders or by creating them using common commercial
software packages.
710.15 Accounting personnel should list the accounts subject to amortization in item No. 3 of
the Supporting Workpapers Closing Checklist at Appendix 7B. As monthly general ledger
balances are agreed to the amortization schedules, assigned personnel should simply initial
and date the checklist in the spaces provided.
Continuing Workpaper Schedules
710.16 Subsidiary ledgers and amortization schedules are generally not appropriate for
monitoring certain key accounts. For these accounts, continuing workpaper schedules are
usually best. Continuing workpaper schedules, in essence, play a role similar to subsidiary
ledgers, but the schedules are updated manually by accounting personnel instead of
automatically by the accounting system. The schedules are typically updated as each
transaction occurs, instead of waiting until month end. Common continuing workpaper
schedules are discussed in the following paragraphs.
710.17 Certificates of Deposit (CD) Workpaper. Continuing workpaper schedules are often
used to keep track of key information on CDs (for example, financial institutions name, balance
outstanding, date purchased, maturity date, interest rate) and related interest income. Chapter
6, appendix 6F, includes a workpaper that accounting personnel may use for tracking CDs and
other short-term investments. At month end, accounting personnel should agree workpaper
7-8
amounts (CD balance, accrued interest, and interest income) to the corresponding amounts in
the general ledger.
710.18 Notes Receivable Workpaper. Since most companies only have a few notes
receivable outstanding at any time, continuing workpapers work well for monitoring them.
Similar to CD workpapers, the workpaper tracks key information about the notes (debtors
name, original and current outstanding balance, due dates, interest rates, principal and interest
received, and interest due).
710.19 Exhibit 7-3 presents a sample notes receivable continuing workpaper schedule. It
shows activity on a $20,000 note receivable from ABC Supply Co. Principal payments of $2,000
are due at the end of each quarter, and interest at a 10% annual rate is due monthly.
Exhibit 7-3
Sample Notes Receivable Workpaper
Debtor Companys Name: ABC Supply Co.
Contact Person: Dave Thomas, President
Principal Payments: $2,000 at each quarter end
Interest Payments: 10% rate; due monthly
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Interest Activity
Transactions
Description
Beginning Bal.
M/E
calculation
Interest receipt
M/E
calculation
M/E
calculation
P&I receipt
Principal Activity
Date
Increase
(Decrease)
Cumulative
Balance
Beg. Bal +
(c)
Interest Rate
Data
Rate
7/1/09
$20,000
10%
7/31/09
$20,000
10%
Days
O/S
31
Interest Income/Receipts
Diff.
Interest
Interest
(int.
Income
Received
due)
(d)x(e)/36
5x(f)
(g)-(h)
$170
8/5/09
$(170)
$(170)
8/31/09
$(2,000)
$20,000
10%
31
$170
$(170)
$20,000
10%
30
$164
$(334)
$18,000
$(334)
710.20 Exhibit 7-3 shows that ABC Supply Co. made the July 31 interest payment on August
5. The August 31 and September 30 interest payments and the September 30 principal
payment were not made until October 6. At each month end, the schedule calculates interest
income (column g) for that month. Any difference between calculated interest income and
interest received is shown as interest due in the last column. At month end, accounting
personnel would calculate and record accrued interest income due (see Chapter 6, paragraphs
610.34-.35) and agree the ending note balance, interest income, and accrued interest
receivable to the general ledger. Appendix 7C-2 includes a blank copy of the workpaper
accounting personnel may use to track notes receivable and related interest income.
7-9

710.21 Line of Credit Workpaper. Continuing workpapers also work well for companies with
outstanding lines of credit with a bank or other financial institution. Chapter 6, Appendix 6B
presents a sample worksheet that accounting personnel may use to track principal and interest
activity on a credit line. The worksheet is very similar to the note receivable workpaper
presented in Exhibit 7-3. A line of credit workpaper typically shows more activity than a note
receivable workpaper since the principal balance fluctuates and rates generally vary with the
prime rate. At month end, accounting personnel would calculate and record accrued interest
expense (see Chapter 6, paragraphs 610.13-.17) and agree the ending line of credit balance,
interest expense, and accrued interest payable to the general ledger.
710.22 Equity Accounts Workpaper. The equity accounts workpaper simply lists the
number of shares outstanding and the related par value and paid-in-capital amounts. However,
unless a company has occasional capital activity, such as stock offerings or buybacks, this
workpaper will not require regular updating during monthly closeouts. Exhibit 7-4 presents a
sample equity accounts workpaper.
Exhibit 7-4
(a)
Description
Sample Equity Accounts Workpaper

(b)
(c)
Date
No. of
Shares
(d)
(e)
(f)
Par
Pref.
Stock
Comm.
Stock
(g)
(h)
(i)
General Ledger Amounts

Paid-in
Retained Treasury
Capital
Earnings
Stock
$50,000
(j)
Total
Equity
Original issue
1/1/08
10,000
$5
$ 50,000
Original issue
2008
earnings
1/1/08
20,000
$1
EOY balance
12/31/08
Buy back C/S
6/30/09
Pay dividend
2009
earnings
12/30/09
$(20,000)
$(20,000)
12/31/09
$ 75,000
$ 75,000
EOY balance
12/31/09
$20,000
$130,000
12/31/08
$50,000
$20,000
$130,000
$150,000
$ 45,000
$ 45,000
$ 45,000
$ 45,000
(5,000)
$(70,000)
$50,000
$20,000
$130,000
$100,000
$(70,000)
$(70,000)
$230,000
710.23 Exhibit 7-4 lists activity in each of the equity accounts. It begins by showing the
number of shares, par value, and the paid-in-capital amounts for both the preferred and
common stock issues. The workpaper was updated through 12/31/09 by simply adding 1 9X3
earnings of $45,000. The workpaper was updated through 12/31/08 by reflecting 5,000 shares
of common stock that were bought back by the company for $70,000. (The stock is considered
treasury stock, which is reflected as a negative amount on the workpaper.) The workpaper also
reflects a $20,000 decrease in retained earnings because of a dividend paid to common
stockholders on 12/30/08. Finally, retained earnings was increased to reflect 2009 earnings of
$75,000.
710.24 Appendix 7C-3 includes a blank copy of the workpaper that accounting personnel may
use to keep track of equity activity. Accounting personnel should update the schedule on a
monthly basis when equity activity other than normal monthly earnings or losses occurs.
7-10
Balances should then be agreed to the corresponding general ledger balances. If the retained
earnings account does not agree with the workpaper because it appears to include unusual
entries, accounting personnel should prepare a detailed analysis of the account (as discussed
in the following paragraphs) to isolate the entries.
Detailed Account Analysis Schedules
710.25 Detailed account analysis schedules are generally prepared at month end to determine
the makeup of a general ledger account balance. In contrast to continuing workpaper schedule,
detailed account analysis schedules are prepared after the general ledger has been closed.
710.26 A detailed account analysis can be prepared on an as-needed basis for any account,
but they are often routinely prepared for suspense accounts and miscellaneous assets or
liability accounts. They are also occasionally prepared to analyze nonreversing accrued liability
accounts and retained earnings. After preparing a detailed account analysis, accounting
personnel can then decide what should be in the account balance and make any required
adjusting entries.
710.27 Because of the time required to routinely analyze account balances, accounting
personnel should take steps to reduce the number of accounts for which detailed account
analyses are prepared each month. For example, an account analysis is frequently needed
because a single general ledger account, such as miscellaneous accrued liabilities, is used to
capture several similar, but unlike transactions. The detailed account analysis is prepared to
separate the transactions into like categories. In this situation, it is often preferable to simply set
up separate general ledger accrued liability accounts for capturing each transaction.
710.28 The process for preparing the detailed account analysis workpaper is straightforward.
Accounting personnel start by listing on a four-column worksheet what entries make up the
beginning balance in the account. Accounting personnel then obtain the general ledger detail of
entries posted to the account for that month and cross out those that offset each other. Entries
that do not offset each other make up the ending balance. Once the ending balances
composition is known, accounting personnel should then review each item to decide whether
the overall account balance is proper.
710.29 Exhibit 7-5 illustrates a detailed account analysis for the employee advances general
ledger account. It begins by showing the composition of the $3,785 beginning balance and the
general ledger debit and credit activity for the current period. The last column shows the
makeup of the $2,248 balance remaining after netting out like terms.
7-11

Exhibit 7-5
Detailed Account AnalysisEmployee Advances
Account Name: Employee Advances
Account Number: 165-01
Prepared by: L. Church
Date Prepared: 12/04/09
Date
Journal
General Ledger Activity for the Current Period

Beginning
Description
Balance
Debit Credit
Ending
Balance
Net Ending
Balance
Composition of beginning balance:

9/29/09
D. Kelly advance
10/07/09
T. Wilson due
10/25/09
S. Moody advance
2000
2000
(65)
(65)
1850
1850
550
25
2027
(27)
800
800
800
65
65
1900
(50)
1000
1000
1000
500
500
500
525
525
4452
2248
2248
Current period general ledger activity:

11/01/09
AP-03
B. Thomas advance
11/08/09
PR-01
D. Kelly travel expenses
11/10/09
AP-03
S. Smith advance
11/12/09
AP-08
T. Wilsonbalance due
11/18/09
AP-09
S. Moody travel expenses
11/20/09
AP-12
G. Ramey advance
11/28/09
AP-17
T. Malone
11/29/09
PR-03
B. Thomas travel expense
550
2027
1900
3785
2915
710.30 Accounting personnel may complete the detailed account analysis manually or by
using a computer spreadsheet, such as Microsoft Excel. Appendix 7C-4 includes a sample
workpaper that accounting personnel may use to manually complete an account analysis.
715
PREPARING JOURNAL ENTRIES

715.01 Journal entries generally fall into two categories: standard journal entries and adjusting
journal entries. Standard journal entries are prepared to make regular entries to the general
ledger, such as those discussed in Chapter 6. Adjusting journal entries are made to correct
errors noted in the general ledger. As a general rule, standard journal entries are made earlier
in the monthly closing process and adjusting journal entries are made in the later stages. Also,
as discussed in Chapter 6, paragraphs 610.42-.46, certain standard and adjusting journal
entries also require reversing entries in the following month. Journal entries are typically filed
in a separate three-ring binder for each month.
7-12
Journal Entry Checklist

715.02 Accounting personnel can better control journal entries during the closing process by
using a journal entry checklist. The checklist should be separated into standard entries and
adjusting entries. Each checklist should include the journal entry number, description, person
assigned to the journal entry, and space for the person to sign off each one as it is completed.
In addition, accounting personnel should indicate whether or not the entry should be reversed in
the following month. Appendix 7D includes a journal entry checklist that accounting personnel
may use in conjunction with the summary closing checklist at Appendix 7A (see Paragraph
705.03).
Journal Entry Form
715.03 A standard form is generally used to document both standard and adjusting journal
entries. However, since the account numbers and sometimes the amounts are the same each
month for standard journal entries, accounting personnel typically complete a form for each
standard entry and photocopy it for use in subsequent months. The photocopies are often
placed in the journal entry binders for each month.
715.04 Appendix 7E includes a sample Journal Entry Form that accounting personnel may
use to document journal entries. To distinguish reversing from non-reversing journal entries,
some accounting personnel find it helpful to use different color paper when photocopying the
form. For example, journal entries that do not require reversals could use white paper, those
that require reversals could use blue paper, and the actual reversing entries could use yellow
paper. This color coding allows controllers to determine quickly whether all required reversing
entries have been made.
715.05 After completing a journal entry form, accounting personnel should attach any
supporting documentation and file the journal entry and supporting documentation in the journal
entry binder for that month. Alternatively, some bookkeepers prefer to file the supporting
documentation for journal entries in the monthly closing binder mentioned in Paragraph 710.04.
Chapter 6 provides guidance on the appropriate supporting documentation for specific journal
entries.
720
REVIEWING THE GENERAL LEDGER AND FINANCIAL STATEMENTS

720.01 As the general ledger and related financial statements are generated, accounting
personnel perform various procedures to help ensure their accuracy. Certain procedures, such
as completing the general ledger closing checklists and supporting workpapers, are covered in
earlier sections of this chapter. This section deals primarily with how to perform an effective
review of the general ledger and statements to detect possible errors. The general ledger
review tends to focus more on balance sheet accounts, whereas the financial statement review
focuses more on income statement accounts.
General Ledger Review
720.02 The review process for the general ledger generally consists of scanning the ending
balances and the entries posted to each general ledger account to detect any unusual entries or
unexpected ending balances. This review should be done by an accounting person with an in
depth knowledge of the general ledger accounts. Otherwise, the odds of identifying an entry
that is out of the ordinary or an unreasonable ending balance will be low.
7-13

720.03 Although the reviews effectiveness generally depends on the reviewers abilities and
experience, some common red flags that may indicate a problem in a specific account include
the following:
Debit vs. credit balance. Some accounts naturally carry debit

balances (assets and expenses) and others carry credit balances
(liability, equity, and revenues). If one of these accounts are unexpectedly in a debit or credit position, there may be a potential
problem.
Debit vs. credit postings. Similar to the above, some accounts

normally receive debit entries (expense accounts) and others receive
credit postings (revenues). If credit entries were posted to an expense
account or debit entries were posted to a revenue account, further
investigation may be warranted.
Unusually large or small amounts. Most accounts have a normal

monetary range of transactions. Unusually large or small amounts
may indicate coding or data entry errors.
Unexpected posting source. Some accounts primarily receive

postings from specified journals. For example, entries to accounts
receivable typically come from the sales and cash receipts journals.
Entries to salaries and labor accounts typically come from the payroll
journal. If entries from other journals are noted, the entries may have
been misposted.
Beginning and end of period balances. Balance sheet account

balances are often comparable from one period to the next. If the
ending balance for an account differs significantly from the balance at
the beginning of the period, a potential problem could exist.
Absence of an entry. Most accounts have one or more types of

journal entries that are regularly posted to them each month. If one of
these entries seems to be missing, accounting personnel may need to
follow up.
720.04 Normally, the extent of the general ledger review will depend on the effectiveness of
other procedures. For example, if accounting personnel maintain comprehensive supporting
workpapers (see Section 710) or perform an extensive analytical review of the financial
statements (see Paragraphs 720.07-.14), a less-detailed general ledger review will usually
suffice.
720.05 When performing the general ledger review, accounting personnel should typically
make review notes on a separate sheet of paper. Each review comment should be
sequentially numbered and, if possible, assigned to a specific person to resolve. Each comment
should leave room for a response after the potential problem has been investigated.
720.06 After the review comments have been cleared, they should also be filed for future
reference in the closing binder with other closing checklists and workpapers. Appendix 7F
includes a sample Review Comments Form that accounting personnel may use when reviewing
the general ledger (or the financial statements discussed in the following paragraphs). If several
accounting persons will be answering the review comments, photocopies of the review
comments should be given to all employees to respond to those comments assigned to them.
7-14
Financial Statements Review

720.07 Unlike the detailed, account-by-account approach used when reviewing the general
ledger, the financial statement review uses a high-level analytical review approach. This
approach takes a big picture look at the companys overall financial statements. In other words,
instead of assessing the reasonableness of an amount by looking at it in isolation, the analytical
approach assesses the reasonableness of an amount by comparing it to other amounts and
relationships within the financial statement. The type of review generally varies depending on
whether balance sheet or income statement accounts are being reviewed.
720.08 Income Statement. Analytical procedures are generally very effective when applied
to income statement amounts. Certain income statement amounts are often fairly fixed from one
period to the next, while others tend to fluctuate in relation to sales. Once these relationships
are understood, accounting personnel can use them to identify potential income statement
errors.
720.09 Most general ledger packages generate income statements that show current period
and year-to-date (YTD) amounts. Frequently the statements also show side-by-side
comparisons to the corresponding amounts for the prior year or to the current budget. In
addition, the packages often show each income statement line item as a percentage of sales.
720.10 Accounting personnel should determine each line items general nature (that is,
remains relatively constant or fluctuates with sales) and use the information each month to
review the income statement amounts. Accounting personnel should then review each income
statement line item by performing the following activities:
Comparing the current period amount to the corresponding amount for

the prior year (and/or the current year budgeted amount).
Comparing the current YTD amount to the prior YTD amount.
Reviewing the reasonableness of the current period and current YTD

amounts as a percentage of sales.
Depending on how the amounts are presented in the financial statements, accounting
personnel may wish to focus first on all of the current period amounts and then review the YTD
amounts.
720.11 If any income statement amounts seem out-of-line, the reviewer should use the
Review Comments Form at Appendix 7F to document the situation for resolution. Accounting
personnel can then review specific general ledger entries to determine if errors may have
occurred.
720.12 Balance Sheet. In comparison to income statement amounts, balance sheet amounts
are typically less predictable from one period to the next. Therefore, analytical reviews are
generally less effective on balance sheet amounts. Even though balance sheet analytical
reviews are less precise, they are still an important review technique for ensuring that
accounting personnel step back and look at the overall reasonableness of balance sheet
amounts.
720.13 Similar to income statements, analytical reviews on balance sheets generally include
comparing current period balances with the corresponding balances for the prior year or prior
7-15
month. Percentage comparisons are less useful, but occasionally accounting personnel will
compute the percentage of each balance sheet line item to total assets (or to total liabilities plus
equity) and compare the percentage to the companys historical percentages.
720.14 The reviewer should note any balances that appear out of line on the Review
Comments Form at Appendix 7F. Accounting personnel can then review the accounts
comprising the particular balance sheet line item and the entries posted to the accounts for any
unusual items.
725
BACKING UP AND STORING GENERAL LEDGER RECORDS

725.01 Accounting personnel should regularly back up the general ledger records to allow the
files to be restored in case of a system failure or disaster. Also, to protect the backed up files
from destruction, a backup set should be kept off premises. This section discusses the typical
backup process and traditional backup devices.
Backup Process
725.02 Accounting personnel generally should back up the accounting systems data files daily.
If the company is subject to frequent system failures resulting from electrical or system
problems, more frequent backup may be necessary until the problems are resolved. Typically,
the backup is done either at the end of the day or during evening hours if the backup is time
consuming. As discussed in Paragraphs 725.05-.06, disk files and tape drives are the most
common backup devices for small businesses.
725.03 Accounting personnel should use a daily rotation of disks or tapes (one for each
workday) when backing up data files. In other words, each tape or set of diskettes should be
labeled for each workday and used for data backup on that day. The daily backup disks are
rotated so that each is reused once a week. Since accounting data files sometimes become
damaged for various reasons, this rotational method helps ensure a good backup copy still
exists even if damaged files go undetected for a day or so. If only a two-day rotation is used,
accounting personnel may erroneously back up bad data (say, because of a data-integrity
error) over both copies, which eliminates any possible recovery.
725.04 At least once a week, accounting personnel should store one backup set off-site to
allow recovery from a fire or other disaster. When taking next weeks backup off-site, the
previous weeks backup may be returned to the backup rotation. At the close of the accounting
period, a special backup should be labeled properly and stored off-site. The diskettes or tapes
used for the monthly backup should be different from the daily sets. A similar backup process
should be performed at the fiscal year end with two copies retained (an on-site copy and an offsite copy). A backup copy of the program files should also be made at year end to ensure the
data files can be read after restoring them. Periodically, accounting personnel should restore
the backup diskettes or tapes into a test directory to verify that proper backup procedures were
followed and the backup process is working.
Backup Devices
725.05 As mentioned above, backup copies of data files are usually made either on disk or
tape. When using disks, high density disks are preferable because they reduce the time and
effort required to back up. If the backup process requires several disks, the time required to run
the procedures may be excessive, increasing the chances that the accounting person
responsible for making the backup will neglect to do so. To reduce the number of disks
required, companies frequently purchase backup programs that compress the data before
7-16
copying it to the disk.

725.06 When using a tape backup system, all data files can be backed up with the push of a
button. Often, one tape can back up all of the necessary data files with minimal staff
involvement. A tape backup system not only saves accounting personnel time (when compared
to a disk backup), but it also reduces the likelihood that improper backup procedures will be
performed. When using tape backups, accounting personnel should change the tapes
periodically because they can become worn or stretched with frequent use.
730
SUMMARY
730.01 General ledger processing is often a time-consuming and stressful period for many
small business accounting departments. The process can become less stressful for accounting
personnel if a standard routine is followed and certain basic tools, such as closing checklists
and supporting work papers, are used.
730.02 A general ledger closing checklist is used to ensure each key aspect of the closing
process is completed in a timely manner. Certain aspects of the closing process that lend
themselves to a more detailed approach are supplemented by more detailed checklists. Those
supplemental checklists encompass controlling the supporting work papers and journal entries.
730.03 General ledger supporting work papers are prepared to ensure key general ledger
balance sheet accounts are properly reflected in the general ledger. The work papers generally
fall into five basic categories: bank reconciliation work papers, subsidiary ledger reconciliation
work papers, amortization schedules, continuing work paper schedules, and detailed account
analysis schedules. The supporting work papers closing checklist helps ensure that supporting
work papers are prepared on a timely basis at month end.
730.04 Accounting personnel prepare two basic types of journal entries at month end:
standard journal entries and adjusting journal entries. Standard journal entries are entries that
accounting personnel know must be prepared during each closing; the entrys amounts may or
may not be known beforehand. Adjusting journal entries are generally made to correct errors
that accounting personnel discover after the preliminary general ledger has been prepared.
Adjusting journal entries are not routinely prepared, and the amounts are not known
beforehand. The journal entry closing checklist separates standard entries and adjusting
entries and assigns accounting personnel to ensure their completion.
730.05 After generating the preliminary general ledger and financial statements, accounting
personnel must review them to ensure their accuracy. The review techniques differ between
the general ledger and the financial statements. Basically, general ledger review techniques
consist of scanning the general ledger postings and balances to detect unusual items. In
contrast to this detailed review, the financial statement review consists of an analytical review
of financial statement line items. The analytical review compares financial statement amounts
to current amounts, prior-year amounts, and budget amounts to detect unusual items. If the
general ledger or financial statement reviews reveal possible problems, the reviewer typically
documents the concern on a review note form for follow-up before completing the closing.
730.06 Accounting personnel should back up general ledger files on a daily basis. The most
common devices used by small businesses for backup are disk files and tape drives. In either
case, accounting personnel should use a five-day daily rotation of disks or tapes (one set for
each workday) when backing up the files. At least once a week, accounting personnel should
store a backup set off-site in case of a disaster. Additional backup procedures should be
performed at month end and year end.
7-17
7-18
Appendixes
7
Table of Contents
Appendix
Description
Page
Overview: Controlling the Monthly Closing Process

7A
Summary closing Checklist ........................................................................
7-21
Maintaining General Ledger Supporting Workpapers

7B
Supporting Workpapers Closing Checklist................................................
7-23
7C
Supporting Workpapers .............................................................................
7-27
7C-1
Subsidiary Ledger Reconciliation Workpaper ..........................
7-27
7C-2
Note Receivable Workpaper ........................................................
7-29
7C-3
Equity Accounts Workpaper .......................................................
7-31
7C-4
Detailed Account Analysis Workpaper .......................................
7-33
Preparing Journal Entries

7D
Journal Entry Checklist .............................................................................
7-35
7E
Journal Entry Form ....................................................................................
7-37
Reviewing the General Ledger and Financial Statements

7F
Review Comments Form ...........................................................................
7-39
7-19
7-20
Appendix 7A
Summary Closing Checklist
Company Name:
Prepared by:
Date Completed:
Instructions: Accounting personnel may use this checklist to monitor and control the monthly general
ledger closing process. Staff should be assigned due dates for each task. Staff with responsibility for
specific tasks should initial and date tasks as completed.
Key Step
Assigned to
Name
Date
Completed by
Name
Date
Generating the Trial Balance

1.
Process month-end accounting system module

transactions:
a. Process detailed transactions for the following modules (if not processed daily):
1) Accounts receivablesales
2) Accounts receivablecash receipts
3) Accounts payablepurchases
4) Accounts payabledisbursements
5) Payroll
6) Inventory
7) Fixed assets
8)
9)
b.
c.
2.
3.
10)
Post summary journals for each module to the
general ledger (assuming postings were not done
when transactions were processed in 1a above).
Print and file the resulting audit trail reports.
Process any standard month-end journal entries:

a. Prepare standard entries (see checklist at Appendix
7D) and post them to the general ledger.
b. Print and file the related audit trail reports.
Print out the general ledger trial balance (or summary
general ledger).
Generating the Preliminary Detailed General Ledger
4. Check trial balance totals to ensure debits equal credits.

5. Update supporting workpaper schedules and print out
computer generated subsidiary ledgers (see workpapers
check list at Appendix7B).
7-21
Appendix 7A
Summary Closing Checklist

(Continued)
Key Step
6.
7.
Reconcile general ledger balances per the trial balance to

supporting workpapers and subsidiary ledgers (see
workpapers checklist at Appendix 7B).
Prepare any necessary adjusting journal entries (list any
entries on the checklist at Appendix 7D).
8.
Print and file the related audit trail reports.
9.
Print out the preliminary detailed general ledger.
Generating the Preliminary Financial Statements

10. Agree preliminary detailed general ledger balances to
supporting workpapers.
11. Review reasonableness of the detailed general ledgers
ending balances and journal entries.
12. Prepare any necessary adjusting journal entries (list any
entries on the checklist at Appendix 7D).
13. Print and file the related audit trail reports.
14. Print out the preliminary financial statements.
Generating the Final Ledger and Statements
15. Review the reasonableness of the preliminary balance
sheet and income statement amounts.
16. Investigate any unusual amounts and prepare adjusting
journal entries where needed (list any entries on the
checklist at Appendix 7D).
17. Print and file the related audit trail reports.
18. Print out the final general ledger and financial statements.
19. Distribute the ledger and statements to the appropriate
personnel.
20. Back up the system. (If the closeout process deletes
detailed data in the general ledger accounts, consider
keeping the backup copy permanently.)
7-22
Assigned to
Name
Date
Completed by
Name
Date
Appendix 7B
Supporting Workpapers Closing Checklist
Company Name:
Prepared by:
Date Completed:
Instructions: Accounting personnel may use this worksheet to monitor the status of supporting
workpapers used during the closing process. Simply list the general ledger (G/L) account number and
name under the appropriate type of workpaper on the checklist. Assigned personnel should indicate
completion of the worksheet for each account by signing and dating in the space provided.
Supporting Documentation
Assigned to
Name
Date
Completed by
Name
Date
Bank Reconciliations
1. Prepare bank reconciliations for eth following cash
accounts:
G/L Account No.
G/L Account Name
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
a. Accounts receivable
________
________
________
________
b. Inventory
________
________
________
________
c.
________
________
________
________
d. Fixed assets
________
________
________
________
e. ____________________________________________
________
________
________
________
f.
____________________________________________
________
________
________
________
g. ____________________________________________
________
________
________
________
Subsidiary Ledgers
2. Reconcile the following general ledger accounts to the
computer-generated subsidiary ledgers using the workpaper
at Appendix 7C-1. Correct the subsidiary ledger and prepare
any necessary adjusting journal entries (add any journal
entries to the checklist at Appendix7D):
Accounts payable
7-23
Appendix 7B

(Continued)
Assigned to
Name
Date
Completed by
Name
Date
Amortization Schedules
3. Reconcile notes receivable, notes payable, capital lease
obligations, and other accounts having predetermined
amortizations (prepaid assets, deferred revenues, intangible assets, etc.) to existing amortization schedules,
and prepare any necessary adjusting journal entries
(add entries to checklist at Appendix 70).
G/L Account No.
G/L Account Name
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
7-24
Appendix 7B

(Continued)
Assigned to
Name
Date
Completed by
Name
Date
Continuing Workpaper Schedules

4. Based on current period transactions, update any continuing workpaper schedules needed to support the composition or reasonableness of month-end general ledger
balances, such as certificates of deposit, notes receivable,
and bank credit lines. Prepare any necessary adjusting
journal entries (add entries to checklist at Appendix 7D).
G/L Account No.
G/L Account Name
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
7-25
Appendix 7B

(Continued)
Assigned to
Name
Date
Completed by
Name
Date
Detailed Account Analyses

5. Analyze general ledger activity for the period in suspense
accounts and other miscellaneous accounts to determine
the composition or reasonableness of the ending balances, and prepare any necessary adjusting journal
entries (add entries to checklist at Appendix 7D).
G/L Account No.
G/L Account Name
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
______________________
______________________
________
________
________
________
7-26
Appendix 7C-1
Subsidiary Ledger Reconciliation Workpaper
Company Name:
Month End:
Prepared by:
Date Prepared:
G/L Account Name:
G/L Account Number:
Instructions: Accounting personnel may use this form at month end to reconcile general ledger
balances to subsidiary ledgers for applicable accounts (accounts receivable, accounts payable,
inventory, fixed assets, etc.).
In Part A, simply enter the preliminary balance per the general ledger and subsidiary ledger. If there is a
difference, list the individual differences in Part B. Enter the total of the differences in the correction
column in Part A to arrive at the proper adjusted balances for the general ledger and subsidiary ledger.
Description
Balance per general ledger
PART A: RECONCILIATION
Preliminary
Balance
Correction
Needed
Adjusted
Balance
Balance per subsidiary ledger

Difference: G/L over (under) sub. ledger
(From Part B)
PART B: DETAIL OF DIFFERENCES

Description
Date
Ref. No.
Items in general ledger, not in subsidiary ledger:
Amount
Items in subsidiary ledger, not in general ledger:
Total difference
To Part A:
7-27
7-28
Appendix 7C-2
Note Receivable Workpaper
Debtor Companys Name:
Contact Person:
Principal Payment Amount and Due Dates:

Interest Payment Amount and Due Dates:
Instructions: Accounting personnel may use this worksheet to monitor note receivable principal and
interest activity and to accrue interest income at month end. Simply enter the date and amount of each
principal or interest receipt. At month end, calculate accrued interest income through the end of the
month. Totals should be calculated at each month end.
Additional guidance: See Paragraphs 710.18-.20.
(a)
(b)
Transactions
Description
Date
(c)
(d)
Principal Activity
Amounts
Increase
Cumulative
(Decrease)
Balance
Beg. Bal +
(c)
$
(e)
(f)
(g)
(h)
(i)
Interest Activity
Interest Rate Data
Rate
Days O/S
Interest
Income
(d)x(e)
365x(f)
$
Interest Income/Receipts
Interest
Received
Diff. (int. due)
(g) - (h)
$
7-29
7-30
Appendix 7C-3
Equity Accounts Workpaper
Company Name:
Prepared by:
Instructions: Accounting personnel may use this workpaper to keep track of equity account activity
and balances. Transactions other than net earnings should be entered as they occur. Net earnings (or
losses) for the year should be entered at year end. Totals should be calculated and balances agreed to
the general ledger at month end.
(a)
Description
(b)
Date
(c)
No. of
Shares
(d)
Par
(e)
Pref.
Stock
(f)
Comm.
Stock
(g)
(h)
(i)
General Ledger Amounts

Paid-in
Retained Treasury
Capital
Earnings
Stock
(j)
Total
Equity
7-31
7-32
Appendix 7C-4
Detailed Account Analysis Workpaper
Account Name:
Account Number:
Prepared by:
Date Prepared:
Instructions: Accounting personnel may use this workpaper to perform a detailed account analysis of
select general ledger accounts to determine the makeup of the ending balance. List the makeup of the
beginning balance and then enter the general ledger debits and credits for the current period. Cross out
amounts that offset each other, and enter the net remaining amounts in the last column.
Date
Journal
General Ledger Activity for the Current Period

Beginning
Description
Balance
Debit
Credit
Ending
Balance
Net Ending
Balance
7-33
7-34
Appendix 7D
Company Name:
Period:
Prepared by:
Date Completed:
Instructions: Accounting personnel may use this checklist (along with the summary closing checklist
Appendix 7A) to monitor standard and adjusting journal entries made each month. Use the last column
to indicate whether the entry should be reversed in the following month.
J.E. No.
Standard Journal Entries

Assigned to
J.E. Description
Name
Date
Completed by
Name
Date
Reverse?
(Y or N)
7-35
Appendix 7D
J.E. No.
7-36

(Continued)
Adjusting (Nonstandard) Journal Entries
Assigned to
Completed by
J.E. Description
Name
Date
Name
Date
Reverse?
(Y or N)
Appendix 7E
Journal Entry Form
Company Name:
Period:
Completed by:
Reviewed by:
Instructions: Accounting personnel may use this form to document journal entries. Complete each column,
include a brief description of each journal entrys purpose, and initial the entry at the top of the workpaper.
Place a checkmark in the next to last column when the entry has been posted and indicate in the last
column whether the entry should be reversed in the following month. Total debits should equal total
credits.
Entry
No.
Date
General Ledger Account

Name
No.
Debit
Credit
Posted
Reverse
(Y or N)
Totals
7-37
7-38
Appendix 7F
Prepared by:
Review Comments Form

Date Prepared:
Page No.
of
Instructions: Accounting personnel may use this form to document review comments when reviewing the general ledger and financial
statements during month-end closings. The reviewer should document the review comment and assign a person to respond to the comment.
The last column is used for documenting the response.
No.
G/L
Account
Inquiry
Person
Assigned
Response
7-39
7-40
Preparing Financial Reports
8
Table of Contents
Section
Description
Page
800
INTRODUCTION .................................................................................................... 8-1
805
GENERATING THE BASIC MONTHLY FINANCIAL STATEMENTS ....................... 8-2

.02
.04
.10
810
8-2
8-3
8-3
8-4
8-5
8-5
8-8
MODIFYING FINANCIAL STATEMENT PRESENTATION ...................................... 8-9

.02
.34
815
Types of Financial Statements ........................................................................

General Preparation Considerations ...............................................................
.05 Choosing the Basis of Accounting ..........................................................
.08 Enhancing Financial Statement Usefulness ...........................................
Linking the Chart of Accounts to the Financial Statements .............................
.12 Balance Sheet and Income Statement ...................................................
.15 Cash Flow Statement .............................................................................
Balance Sheet ................................................................................................ 8-10

.03 Cash ...................................................................................................... 8-10
.06 Marketable Securities............................................................................. 8-11
.09 Receivables ........................................................................................... 8-11
.13 Inventories ............................................................................................. 8-12
.16 Prepaid Expenses .................................................................................. 8-13
.18 Long-term Investments ..........................................................................8-14
.20 Property and Equipment ........................................................................ 8-15
.23 Intangibles and Other Deferred Costs .................................................... 8-16
.25 Accounts Payable .................................................................................. 8-16
.26 Accrued Liabilities .................................................................................. 8-17
.28 Notes Payable and Long-term Debt ....................................................... 8-18
.30 Other Long-term Liabilities ..................................................................... 8-18
.31 Stockholders Equity............................................................................... 8-18
Income Statement........................................................................................... 8-19
.35 Revenues ............................................................................................... 8-19
.37 Cost of Sales.......................................................................................... 8-19
.38 Operating Expenses............................................................................... 8-19
.40 Other Income and Expenses .................................................................. 8-20
PREPARING OTHER FINANCIAL MANAGEMENT REPORTS .............................. 8-20

.03
.07
.15
Owners Weekly Flash Report......................................................................... 8-21

Weekly Cash Flow Report .............................................................................. 8-22
.09 Basic Steps in Preparing a Weekly Cash Forecast................................. 8-22
.11 Estimating Customer Collections............................................................ 8-24
Account Receivable Monthly Management Report.......................................... 8-27
.17 Accounts Receivable Aging Analysis ..................................................... 8-28
.18 Accounts Receivable Turnover Analysis ................................................ 8-28
TOC 8-1
8
Section
Description
815
.20
820
Page
.19 Bad Debt Analysis .................................................................................. 8-28

Inventory Monthly Management Report .......................................................... 8-30
.22 Importance of Exception Reporting for Inventories ................................. 8-31
.24 Importance of Using Comparative Figures ............................................. 8-31
SUMMARY .............................................................................................................. 8-33
Appendix
8A
Sample Monthly Financial Statements..................................................................... 8-37
8B
Owners Weekly Flash Report ................................................................................. 8-43
8C
Cash Flow Reports .................................................................................................. 8-45
8D
Accounts Receivable Monthly Management Report ................................................ 8-49
8E
Inventory Monthly Management Report ................................................................... 8-51
TOC 8-2

o
GENERATING THE BASIC MONTHLY FINANCIAL STATEMENTS
MODIFYING FINANCIAL STATEMENT PRESENTATION
PREPARING OTHER FINANCIAL MANAGEMENT REPORTS
800
INTRODUCTION
800.01 This chapter covers key aspects of the small business financial reporting process with
which accounting personnel typically have some degree of involvement. This process often
includes generating the basic monthly financial statements, modifying the financial statements,
and preparing other selected management reports.
800.02 The extent of accounting personnel involvement in the financial report preparation
process varies greatly from one small business to the next. On one extreme, the controller or
outside CPA handles most of this process with little help from other accounting personnel. On the
other extreme, an accounting manager and other accounting personnel are primarily responsible
for the entire financial report preparation process. Many small businesses fall somewhere in
between these two extremes.
800.03 This chapter separates the small business financial reporting process into three general
categories and discusses each one separately. Accounting personnel may review the entire
chapter or only those areas for which they are responsible. The three categories are covered in
the following sections:
Generating the Basic Monthly Financial Statements. Section 805

provides an overview of accounting personnels involvement with
generating the monthly financial statements. It discusses the types of
financial statements, some general presentation considerations, and
linking the chart of accounts to the financial statements.
Modifying Financial Statement Presentation. Section 810 addresses

specific content and presentation considerations relating to the Balance
Sheet and Income Statement. This section provides a more detailed
financial statement discussion that should be read by those with broader
financial reporting responsibilities.
Preparing Other Financial Management Reports. Section 815 provides

guidance on preparing four other common management reports: owners
weekly flash report, weekly cash flow report, accounts receivable
monthly management report, and inventory monthly management report.
This section is helpful for accounting personnel having financial reporting
responsibilities that extend beyond the basic financial statements.
8-1

805
GENERATING THE BASIC MONTHLY FINANCIAL STATEMENTS

805.01 Of all the financial reporting areas, generating the basic monthly financial statements is
typically the most common area of involvement for accounting personnel. This involvement
primarily consists of generating the Balance Sheet and Income Statement, and occasionally, the
Statement of Cash Flows, through the companys accounting software package. Once the general
ledger chart of accounts has been linked to the financial statements, generating the financial
statements is automatic for the most part. This section covers the following topics:
Types of financial statements.
General presentation considerations.
Linking the chart of accounts to the financial statements.
Types of Financial Statements

805.02 There are four types of financial statements required by Generally Accepted Accounting
Principles (GAAP): Balance Sheet, Income Statement, Statement of Retained Earnings or
Changes In Stockholders Equity, and Statement of Cash Flows. Most small businesses prepare a
Balance Sheet and an Income Statement on a monthly basis, but fewer businesses routinely
prepare a Statement of Retained Earnings (or Changes In Stockholders Equity) and a Cash Flow
Statement. This practice occurs partially because accounting software packages have traditionally
had a Balance Sheet and Income Statement focus, with less emphasis on the other statements.
The complexity of the Cash Flow Statement also contributes to the tendency of small businesses
to forgo preparing it on a monthly basis.
805.03 The following briefly discusses each of the statements.
8-2
Balance Sheet. The Balance Sheet presents a companys assets,

liabilities, and equity balances at the end of a companys accounting
period, such as the end of the calendar month. Generally, the assets are
presented on one page and the liabilities and equity balances are
presented on the following page. The total assets must equal the
combined total of the liabilities and equity balances. The traditional
Balance Sheet presents a summary version of the numerous general
ledger account balances, but it may also present each account balance
individually.
Income Statement. The Income Statement presents a companys

operating results (that is, revenues, expenses, and other income and
expense) for a specified financial reporting period, such as the current
month or current year. (The net income or loss for the period is carried
forward to the retained earnings caption in the Balance Sheet.) The
Income Statement amounts are typically presented under the general
captions: Operating Revenues, Cost of Sales, Operating Expenses, and
Other Income and Expenses.
Statement of Retained Earnings (or Changes in Stockholders

Equity). This statement simply shows the changes in retained earnings
or stockholders equity that have occurred during the period. This
statement is not commonly presented on a monthly basis since the only
change that affects these balances in most companies is net earnings or
loss. Moreover, most accounting software packages show the retained
earnings change caused by the current year earnings or loss as a

separate line item on the Balance Sheet. However, if a company has
other equity transactions, such as dividend payments or company stock
sales, a separate statement should be presented.
Statement of Cash Flows. The Statement of Cash Flows shows the

companys cash transactions during the period. Using Balance Sheet
and Income Statement amounts, the Cash Flow Statement reconciles
the companys beginning and ending cash balances by showing all cash
receipts and disbursements during the period. The statement classifies
the receipts and disbursements into three broad categories: operating,
investing, and financing activities. Although many software packages
now include a Statement of Cash Flows, some older packages still
include its predecessor, the Statement of Changes in Financial Position.
In both cases, however, adjustments are usually needed to make the
statements fully conform to Generally Accepted Accounting Principles.
Appendix 8A includes a sample set of monthly financial statements. It includes a Balance Sheet,
Income Statement, and Statement of Cash Flows. A Statement of Retained Earnings is not
separately presented since the current periods net income is the only equity transaction. Instead,
net income is clearly shown on the Balance Sheet.
General Preparation Considerations
805.04 Before generating monthly financial statements, accounting personnel typically must
make some general financial statement presentation decisions. These decisions include deciding
on an appropriate basis of accounting, whether prior-year comparative financial statements will be
presented, and whether budgeted figures will be shown alongside the actual figures each month.
Each of these decisions are discussed below.
805.05 Choosing the Basis of Accounting. Small businesses typically maintain their
accounting records throughout the month on a modified cash (or pure cash) basis of accounting.
At month end, accounting personnel often make certain journal entries to convert the records to
an accrual accounting basis for monthly financial statement purposes. Although the basis of
accounting decision has already been made in most small businesses, accounting personnel
should understand the differences between the common accounting bases. Each basis is briefly
discussed below:
Cash basis. The pure cash basis of accounting simply records only cash
receipts and disbursements. The financial statement reflects beginning
and ending cash balances along with receipts and disbursements.
Generally, only very small businesses present financial statements on
the pure cash basis.
Modified cash basis. The modified cash basis is a variation of the pure
cash basis. Substantially all transactions recognized are cash receipts
and disbursements, but some noncash transactions are also recognized.
For example, fixed assets are normally capitalized and depreciated over
their estimated useful lives.
8-3
Accrual basis. The accrual basis presents financial statements in

accordance with Generally Accepted Accounting Principles. Under the
accrual method, revenues and expenses are recorded when they are
earned or incurred, which may or may not coincide with the time cash is
actually received or paid. This method is generally the only one that
reasonably shows the companys financial position (Balance Sheet) at a
point in time and its results of operations (Income Statement) for a given
period.
Records and financial statements maintained on the cash basis are the simplest to maintain and
prepare, but for many businesses, cash-basis financial statements present misleading financial
information for the company since they only show cash transactions. On the other hand, accrual
basis records and financial statements are more difficult to maintain, but they present a much
more accurate financial picture of the company.
805.06 Companies that are preparing cash or modified cash basis financial statements should
carefully assess their financial information needs and accounting personnel capabilities. If the
company has the accounting manpower to account for most day-to-day transactions (recording
sales, expenses, and inventory purchases) on an accrual basis, making the additional noncash
adjustments (see Chapter 6) at month end should not be too difficult.
805.07 If the company is accounting for day-to-day transactions primarily on a modified cash
basis, it may or may not have the manpower to begin recording those daily transactions on an
accrual basis, as described in Chapters 2 through 5. In that case, accrual financial statements can
still be obtained by making a few additional month-end entries to record trade accounts
receivable, trade accounts payable, and inventory. Usually, accounting personnel will either
reverse these entries at the start of the following month or adjust the balance at the end of the
following month to the new balance.
805.08 Enhancing Financial Statement Usefulness. Most accounting software packages allow
companies to take advantage of various features that will make the current years financial
statements more meaningful. These features include showing Income Statement line-item
percentages, prior-year comparative financial statement amounts, and budgeted amounts.
8-4
Percentages. Most accounting systems allow each Income Statement

line item to be presented as a percent of sales. The percentages may be
shown for both the current year and the prior year. These percentages
allow accounting personnel and management to detect unusual
fluctuations or potential problems.
Prior-year comparative financial statements. Including prior-year

comparative financial statement amounts helps accounting personnel
and management better understand and analyze current-year financial
statement amounts. Typically, the Income Statement compares the
current-period and year-to-date amounts to the corresponding amounts
of the prior year. Similarly, the Balance Sheet typically compares currentperiod ending balances to the corresponding balances of the prior year.
If comparative amounts will be presented, the accounting system simply
pulls the prior-year information from separate computer files when
generating current period financial statements.
Budgeted amounts. Although some accounting systems allow

budgeted amounts to be presented for both the Balance Sheet and
Income Statement, small businesses that include budgeted amounts in
their financial statements typically show only Income Statement budgets.
Although Balance Sheet budgets can be helpful, presenting budgets for
only the Income Statement is a reasonable compromise for small
businesses. Most accounting systems also include features that expedite
the budget setup process. For example, the features allow preliminary
budgets to be generated using last years actual monthly amounts or the
prior-year budgeted monthly amounts. Alternatively, the systems can be
instructed to arrive at monthly budget amounts by simply dividing last
years full year amounts by 12. Once a preliminary budget is generated,
it gives management a starting point for refining the budget to reflect
current conditions.
805.09 To avoid confusion, accounting systems usually generate different sets of financial
statements for presenting the above information. For example, a standard financial statement
package might include the three Income Statements shown in Exhibits 8-1 and 8-2. The Income
Statement at Exhibit 8-1 shows actual amounts and percentages for the current period and year
to date. The Income Statement at Exhibit 8-2 shows actual, budget, and variance amounts for the
current period amounts.
Linking the Chart of Accounts to the Financial Statements
805.10 Generally, accounting software generates financial statements by linking the numerous
general ledger accounts to specific financial statement line items. This link allows balances in
specified general ledger accounts to be combined into a single amount for the applicable financial
statement caption. Some accounting software packages come with a standard set of financial
statements already linked to the chart of accounts, but usually they allow users to modify the
standard chart of accounts and financial statements or create customized financial statements.
805.11 Standard financial statements will typically include the Balance Sheet and Income
Statement. Many software packages include a Statement of Cash Flows, but they typically are not
offered by the systems as a standard financial statement. Users frequently must perform some
extra steps to link accounts to the Statement of Cash Flows. The following paragraphs provide a
general overview of the process for linking accounts to the financial statements.
805.12 Balance Sheet and Income Statement. Accounting personnel are typically responsible
for ensuring that all general ledger accounts are properly linked to the Balance Sheet and Income
Statement. Since the linking is done only once for each account, this responsibility requires a
minimal amount of accounting personnels time. Accounting personnel must simply ensure that all
new or deleted general ledger accounts are properly linked to a Balance Sheet or Income
Statement line item.
8-5

Exhibit 8-1
Sample Income StatementActual and Percentages

ABC DISTRIBUTION AND SERVICE CORP.
INCOME STATEMENT
FOR THE 5 PERIODS ENDED MAY 31, 2009
PERIOD TO DATE
YEAR TO DATE
ACTUAL
PERCENT ACTUAL PERCENT
REVENUES
Distribution sales
Distribution sales East
Distribution sales West
Service fees East
Service fees West
Freight charges East
Freight charges West
Returns & allowances East
Returns & allowances West
TOTAL REVENUES
1,208.22
260,166.44
136,351.78
14,165.10
5,562.30
5,261.23
3,364.00
(3,775.45)
(1,297.95)
421,005.67
0.0
61.8
32.4
3.4
1.3
1.2
0.8
(0.9)
(0.3)
100.0
1,208.22
1,175,491.73
607,743.81
44,362.23
20,853.80
24,654.81
12,487.93
(19,017.67)
(6,538.02)
1,861,246.84
0.1
63.2
32.7
2.4
1.1
1.3
0.7
(1.0)
(.4)
100.0
COST OF SALES
Purchases East
Purchases West
Freight East
Freight West
Warehouseman payroll East
Warehouseman payroll West
Serviceman payroll East
Serviceman payroll West
TOTAL COST OF SALES
GROSS PROFIT
58,225.37
86,049.75
2,558.49
1,136.63
31,104.65
7,333.75
1,876.47
1,187.82
189,472.93
231,532.74
13.8
20.4
0.6
0.3
7.4
1.7
0.4
0.3
45.0
55.0
308,297.48
294,984.18
12,519.23
5,561.76
150,636.97
5,420.91
9,208.29
5,169.47
821,798.29
1,039,448.55
16.6
15.8
0.7
0.3
8.1
1.9
0.5
0.3
44.2
55.8
1,385.48
1,261.06
0.00
124.38
670.32
1,275.30
490.73
1,306.86
706.20
0.00
0.00
0.00
0.00
1,036.29
939.44
0.00
0.3
0.3
0.0
0.0
0.2
0.3
0.1
0.3
0.2
0.0
0.0
0.0
0.0
0.2
0.2
0.0
6,605.13
6,248.95
195.36
263.58
18,857.51
4,192.68
2,453.65
1,722.88
473.03
568.90
284.36
426.62
640.12
3,406.94
1,154.33
36.34
0.4
0.3
0.0
0.0
1.0
0.2
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.2
0.1
0.1
EXPENSES:
OPERATING EXPENSES CENTRAL
Warehouse payroll
Clerical salaries
Sick pay
Holiday pay
Payroll taxes
Building maintenance
Equipment maintenance
Insurance experience: S&M Central
Insurance experience: Accounting Central
Insurance experience: Service Central
Insurance experience: S&R Central
Warehouse supplies
Telephone expense
Telephone experience: S&M Central
8-6
Exhibit 8-2
Sample Income StatementComparison to Budget and Prior Year

INCOME STATEMENT
ACTUAL
PERIOD TO DATE
BUDGET
VARIANCE
REVENUES
Distribution sales
Service fees East
Service fees West
TOTAL REVENUES
1,208.22
260,166.44
136,351.78
14,165.10
5,562.30
5,261.23
3,364.00
(3,775.45)
(1,297.95)
421,005.67
0.00
220,000.00
120,000.00
10,000.00
55,000.00
3,700.00
1,700.00
(2,900.00)
(1,000.00)
357,000.00
1,208.22
40,166.44
16,351.78
4,165.10
62.30
1,561.23
1,664.00
(875.45)
(297.95)
64,005.67
COST OF SALES
Purchases East
Purchases West
Freight East
Freight West
TOTAL COST OF SALES
GROSS PROFIT
58,225.37
86,049.75
2,558.49
1,136.63
31,104.65
7,333.75
1,876.47
1,187.82
189,472.93
231,532.74
60,000.00
65,000.00
2,400.00
1,000.00
30,700.00
7,400.00
1,800.00
800.00
169,100.00
187,900.00
1,774.63
(21,049.75)
(158.49)
136.63)
(404.65)
66.25
(76.47)
(387.82)
(20,372.93)
43,632.74
8-7

805.13 General ledger accounts are linked to either the Balance Sheet or Income Statement
captions in various ways depending on the software package. Generally, they are either
dependent on or independent of the chart of accounts structure.
Dependent type. Financial statement line items in this type of software

package depend on how the chart of accounts is structured. The location
and name of each general ledger account is important since the financial
statements are generated by pulling captions and amounts directly from
the general ledger accounts. Either detailed or summary financial
statements may typically be generated. Detailed financial statements
generally list all the general ledger account names and balances.
Summary (or traditional) financial statements total various sub general
ledger accounts into master accounts, which are then taken to
specified financial statement line items.
Independent type. Financial statement line items in this type of software

package do not depend on the chart of accounts structure. General
ledger accounts are typically linked to financial statement captions using
codes. For example, each financial statement line item is given a unique
number. Accounting personnel then link each general ledger account to
the appropriate financial statement caption by coding it with the
appropriate financial statement line item number.
805.14 Accounting personnel must understand the approach used by their accounting system to
properly handle this financial statement maintenance role. If accounting personnel use the
dependent type of general ledger software, they must take extra care when setting up and
revising the chart of accounts. If the independent type is used, accounting personnel must ensure
that each new account is properly coded to the appropriate financial statement line item.
805.15 Cash Flow Statement. Cash Flow Statements generated by most software packages fall
short of providing the appropriate detail of cash transactions required by GAAP. For example,
receipts and disbursements related to specific accounts, such as notes payable and fixed assets,
are shown as a single net amount. Under GAAP, the proceeds of a loan and the repayment
amounts should be shown separately. Although these and other deficiencies make the statements
less meaningful, they are still usually better than no statement at all. The following paragraphs
briefly describe the process for linking accounts to the Cash Flow Statement.
805.16 Software packages generally preformat the Cash Flow Statements. The packages
classify the receipts and disbursements into three broad categories as prescribed by GAAP:
operating, investing, and financing activities. Accounting personnel typically only have to assign
each account to the proper activity category:
8-8
Operating. Operating activity accounts generally include all Income

Statement accounts and most Balance Sheet accounts (that is, all
Balance Sheet accounts except those specifically classified as investing
and financing activities).
Investing. Investing activity accounts generally include selected Balance

Sheet asset accounts, such as fixed assets, stocks and bonds, and
nontrade notes receivable. Activity includes both increases and
decreases in the accounts.
Financing. Financial activity accounts generally include selected

Balance Sheet liability and equity accounts, such as notes payable, longterm debt, dividends paid, and the companys stock. Activity generally
includes increases and decreases in the accounts.
Exhibit 8-3 includes a more detailed listing of the types of transactions that generally fall in the
three categories.
Exhibit 8-3
Types of Cash Flows
STATEMENT OF CASH FLOWS

OPERATING
Cash Receipts from:
Sale of goods and services
Short- and long-term notes receivable from
customers arising from sales of goods or
services
Interest and dividends
Other cash receipts not arising from investing
or financing activities, such as amounts
received to settle lawsuits or refunds from
suppliers
INVESTING
Cash Receipts from:
Sale of property and
equipment
Sale of investment
securities
Collections on loans
Insurance proceeds related
to transactions classified as
investing
Cash Payments for:
Cash Payments for:

Inventory
Short- and long-term notes payable to
suppliers for materials or goods
Wages
Other operating expenses
General and administrative expenses
Interest (excluding amounts capitalized)
Taxes
Other cash payments not related to investing
or financing activities, such as cash
contributions and cash refunds to customers
Property and equipment

(including capitalized
interest)
Investment securities
Loans
FINANCING
Cash Receipts
from:
Short-term
borrowings
Long-term
borrowings
Issuance of stock
Cash Payments
for:
Dividends
Repayment of
amounts
borrowed, e.g.,
short-term debt,
long-term debt,
and capital lease
obligations
Treasury stock
805.17 As mentioned above, if a Statement of Cash Flows is being prepared, accounting

personnel typically must classify any new general ledger accounts as an operating, investing, or
financing activity account. Because of the Cash Flow Statements complexity, accounting
personnel should consult with their controller or outside CPA if questions arise.
810
MODIFYING FINANCIAL STATEMENT PRESENTATION

810.01 Accounting personnel may occasionally wish to revise or customize the standard financial
statement formats included with most accounting software packages. This section provides
specific guidance for presenting various Balance Sheet and Income Statement captions. This
8-9

section does not discuss the Statement of Retained Earnings or the Cash Flow Statement. The
Statement of Retained Earnings is typically presented within the equity section of the Balance
Sheet (see Paragraphs 810.31-.33). Section 805 briefly discusses the Statement of Cash Flows
and how to link the general ledger accounts to the statement; most small business accounting
personnel do not have further involvement with the statement.
Balance Sheet
810.02 Accounting personnel may occasionally have questions about specific Balance Sheet
captions or may wish to modify or customize the standard Balance Sheet generated by the
accounting software package. The following paragraphs specifically discuss the common Balance
Sheet captions.
810.03 Cash. The cash Balance Sheet caption should ordinarily include cash on deposit with
banks and other institutions and cash on hand (for example, petty cash funds). Usually, it is
presented as a single line item, but it occasionally is combined with short-term investments
considered to be cash equivalents. (In that case, a more descriptive title, such as Cash and Cash
Equivalents, is often used.) The following types of deposits are generally considered cash and
cash equivalents:
a. Deposits in checking accounts.
b. Held checks (i.e., checks written but not released).
c. Immaterial bank overdrafts. (Material overdrafts are normally presented
as a current liability.)
d. Time deposits.
e. Certificates of deposit.
f. Money market accounts.
The authors recommend, however, that small businesses show cash separately from other
interest-bearing short-term deposits, such as time deposits, certificates of deposit, and money
market accounts.
810.04 Cash restricted for special purposes should be segregated from cash available for
general operations and, normally, should be excluded from the current assets heading in the
financial statements.
810.05 Some companies have cash escrow accounts. Escrow accounts generally fall under one
of the following types:
a. Amounts on deposit that will be used to pay expenses (for example, the
portion of debt service accumulated for payment of real estate taxes and
insurance).
b. Agency accounts (for example, accounts maintained by realtors for
deposits on real estate contracts).
8-10
Typically, the company has no control over the first type of escrow accounts and cannot convert
them into cash. Therefore, significant amounts should be excluded from cash and included with
prepaid expenses (or charged to expense if not material). The company has custody of, but does
not have legal right to, the second type of escrow accounts. Preferably, those funds should be
excluded from the companys Balance Sheet. (If the amounts are material, however, the amount
and nature of the companys agency obligation under the arrangement should be disclosed in a
footnote to the financial statements.)
810.06 Marketable Securities. The Balance Sheet caption Marketable securities includes the
following types of securities:
Equity securities (such as common stock, preferred stock, warrants,

calls, and puts).
Debt securities (such as bonds, bankers acceptances, and U.S.

Treasury notes).
Hybrid securities (such as convertible debt and preferred stock that must
be redeemed).
Money market accounts and certificates of deposit are considered cash equivalents, not
marketable securities (see Paragraph 810.03).
810.07 The accounting for marketable securities is complex because Generally Accepted
Accounting Principles (GAAP) require that they be recorded at the lower of cost or market. Thus,
if the market value of the securities declines, the company may need to write down the securities
on the general ledger and record a corresponding loss (referred to as an unrealized loss). Instead
of writing down the securities directly, however, a contra account (similar to the allowance for
doubtful accounts, see Chapter 6, paragraphs 615.02-.07) called an allowance for unrealized
losses is normally used. Because of its complexity, the accounting for marketable securities is
normally handled by the controller or outside CPA.
810.08 Marketable securities are normally presented in the Balance Sheet as a single caption. In
addition, the required disclosures of aggregate cost and aggregate market value are often
included in the Balance Sheet presentation. A common example is as follows:
Marketable equity securities at aggregate cost
Less allowance for unrealized losses
300,000
50,000
250,000
810.09 Receivables. Receivables is a broad term that includes amounts due from others as a
result of sales of merchandise, services, or other assets, or as a result of a loan. Receivables may
be divided into three categories: trade, nontrade, and related party.
810.10 Trade receivables include open accounts, notes, and installment contracts representing
claims for goods and services sold in the ordinary course of business. Frequently, open accounts
and current notes are combined under the caption Trade accounts and notes receivable.
However, it is generally good practice to separately show the amounts in the financial statements,
particularly when the notes or installment contracts significantly extend the normal collection
period. For example:
8-11

Trade receivables
Installment notes
Accounts receivable
Less allowance for doubtful accounts
500,000
300,000
800,000
50,000
750,000
810.11 Generally, nontrade receivables also should be separately shown to make financial
statements more informative and useful. Nontrade receivables include:
a. Tax refund claims.

b. Receivables from sales that are not part of the operating cycle, such as
sales of plant or equipment.
c. Dividends receivable.
If nontrade receivables are not individually material, they may be classified together, for example,
Accounts receivableother or Other receivables. If immaterial in the aggregate, they may be
included with trade accounts or notes.
810.12 Material amounts of notes and accounts receivable from related parties (for example,
stockholders, officers, management, or affiliates) should be separately shown in the financial
statements or disclosed in a footnote. They may be separately shown in the Balance Sheet as
follows:
Cash
10,000
Accounts receivable
Trade
65,000
Related parties
35,000
or
Cash
Marketable securities
Accounts receivable
Due from related parties
Tax refund claim
10,000
105,000
65,000
35,000
20,000
The caption Due from related parties is useful when several types of related party receivables
are present. When only one type of receivable is present, a more descriptive caption is often used
(e.g., Officer notes receivable, Due from affiliates, or Due from stockholders).
810.13 Inventories. Inventories include the following items:
a. Items held for sale in the ordinary course of business.
b. Items in the process of production for sale (say, raw materials or work-inprocess for a manufacturer).
c. Items to be consumed when producing goods or services for resale.
8-12
Operating supplies not directly entering into the production of the product should be treated as
prepaid expenses rather than inventories.
810.14 There is no requirement to disclose the components or types of inventory, but, in practice,
disclosure is almost universal when a company has one of the following:
a. Manufacturing inventories in various stages of completion.
b. Inventories of distinct product lines.
810.15 Examples of financial statement disclosure of inventory components are as follows:
Inventories
Raw materials
Work in process
Finished goods
75,000
25,000
50,000
or
Inventories
New vehicles
Used vehicles
Parts and accessories
200,000
150,000
150,000
or
Inventories
Gasoline
Groceries
Other
15,000
60,000
10,000
810.16 Prepaid Expenses. Current prepaid expenses are advance payments for products or
services that will be used in operations during the next 12 months. Readers of financial
statements generally are not interested in the details of the asset because it cannot be converted
to cash and usually is not material to the financial statements. Therefore, the authors
recommendations in this area are intended to simplify presentation and recordkeeping for prepaid
expenses as much as possible.
810.17 The simplest approach is to present all prepaid expenses as a single line item as follows:
Prepaid expenses
18,000
However, if one component of prepaid expenses is dominant, it may be highlighted by expanding

the caption as follows:
Prepaid insurance and other expenses
18,000
8-13

Finally, the individual components may be presented (usually in the order of significance) as
follows:
Prepaid expenses
Insurance
Rent
Other
15,000
2,000
1,000
810.18 Long-term Investments. The Long-term investments caption of the Balance Sheet may
include the following types of holdings:
a. Noncurrent marketable equity and debt securities.
b. Nonmarketable equity and debt securities.
c. Property and equipment held for investment purposes.
d. Cash value of life insurance.
810.19 The Balance Sheet presentation of marketable securities is discussed in Paragraphs
810.06-.08. Other long-term investments may be presented individually, as part of the investment
caption, or included in other assets as follows:
MARKETABLE EQUITY SECURITIES, at lower of
aggregate cost or market, less allowance
for unrealized losses of $50,000
250,000
LAND HELD FOR INVESTMENT
150,000
CASH VALUE OF LIFE INSURANCE, net of policy

loans of $7,500
2,500
or
INVESTMENTS
Marketable equity securities at lower of
Land held for investment
Cash value of life insurance, net of policy
loans of $7,500
250,000
150,000
2,500
or
OTHER ASSETS
Marketable equity securities at lower of
Land held for investment
Cash value of life insurance, net of policy
loans of $7,500
8-14
250,000
150,000
2,500
810.20 Property and Equipment. Property and equipment includes all tangible assets used in a
companys operations that have an estimated useful life longer than one year. The following is a
listing of items commonly included:
Land on which operating facilities are located.
Buildings used as operating facilities.
Machinery and other production equipment.
Office furniture and other administrative equipment.
Items leased from others under capital leases.
Items leased to others under operating leases.
Buildings being constructed for use as operating facilities.
Idle facilities.
Leasehold improvements.
Computer hardware and software.
Items originally acquired as property and equipment but later used for other purposes, for
example, items retired and held for resale, should be removed from the property and equipment
caption.
810.21 Historically, the term Fixed assets has been used to refer to these assets. The term is
still acceptable, but many preparers now use more descriptive terms. Some preparers use the term
Property, plant, and equipment. Although that term is acceptable, it will not fit all situations and
the terms Property and plant are redundant. The authors offer the following recommendations:
Property and equipmentappropriate when the company has both real and
personal property.
Equipmentappropriate when the company has only personal property.
Equipment and leasehold improvementsappropriate when the company

has only personal property and leasehold improvements.
Land and Buildings are normally sufficient captions for the components of real property. There
is no need to expand the captions when improvements are made (for example, landscaping,
paving, building additions, etc.) because readers of financial statements generally have no need
to distinguish improvements.
810.22 Presentation in the Balance Sheet may be limited to a primary caption (with major
classes of depreciable assets disclosed in footnotes to the financial statements), or secondary
captions may be presented. For example, the following Balance Sheet presentations are
acceptable:
8-15

Property and equipment
Net property and equipment
370,000
(75,000)
295,000
or
PROPERTY AND EQUIPMENT

Land
Building
Production equipment
Vehicles and other equipment
50,000
250,000
40,000
30,000
370,000
(75,000)
295,000
810.23 Intangibles and Other Deferred Costs. This Balance Sheet caption includes noncurrent
assets that are not covered by other sections of the Balance Sheet. Normally, it includes the costs
paid by the company to acquire any of the following:
Goodwill.
Patents.
Trademarks.
Customer lists.
Company name.
Franchise fees.
Covenants not to compete.
Organization costs.
810.24 Although there is a conceptual difference between intangibles and deferred costs, most
readers are not particularly interested in them because they are not a source of cash. Instead,
they are viewed as a cost of business that is frozen in the Balance Sheet and amortized over
future periods. Accordingly, bookkeepers often combine intangible assets and other deferred
costs in a single category as follows:
INTANGIBLE ASSETS AND DEFERRED COSTS
220,000
Alternatively, the components may be presented as follows if they are significant:

OTHER ASSETS
Goodwill
Noncompete agreement
Trademark
100,000
70,000
50,000
810.25 Accounts Payable. The Balance Sheet caption Accounts payable or Trade accounts
payable includes costs and expenses that are billed to the company by a vendor or service
provider. They are usually the first caption under the current liabilities heading in the financial
statements. Significant debit balances in accounts payable generally should be shown in the
8-16
financial statement separately as accounts receivable if they will be collected in cash. If they will
be offset against other invoices owed to the vendor, the accounts payable amount in the financial
statement should simply be shown net of the debit balances.
810.26 Accrued Liabilities. Accrued liabilities are estimates of unpaid expenses that the
company has incurred for which an invoice has not yet been received. In some cases, the specific
person to whom payment will be made cannot presently be determined (for example, product
warranties). Examples of accrued liabilities include:
a
Payroll.
b. Income taxes.
c. Interest.
d. Payroll taxes (employer and employee portions).
e. Retirement plan contributions.
f.
Royalties.
g. Damage claims under lawsuits (if liability is probable and can be

reasonably estimated).
h. Vacation pay.
I.
Warranty claims.
810.27 The following are three basic ways of presenting accrued liabilities in the Balance Sheet:
CURRENT LIABILITIES
Accounts payable
Accrued expenses
Compensation
Retirement plan contributions
Other
Short-term notes
TOTAL CURRENT LIABILITIES
$ 90,000
10,000
7,000
3,000
50,000
160,000
or
CURRENT LIABILITIES
Accounts payable
Short-term notes
Compensation
Retirement plan contributions
Other
$ 90,000
50,000
10,000
7,000
3,000
160,000
or
CURRENT LIABILITIES
Accounts payable
Short-term notes
$ 90,000
50,000
8-17

Accrued expenses
20,000
160,000
810.28 Notes Payable and Long-term Debt. Notes payable consist of loans due in one year or
less. Long-term debt consists of the following:
a. Notes that provide for repayment over a term longer than one year.
b. Obligations under capital leases due over a term longer than one year.
810.29 Notes payable are shown as Short-term notes or Notes payable under the current
liability heading in the Balance Sheet. Long-term debt is divided into current and noncurrent
portions. Principal reductions of long-term debt scheduled to be paid during the next 12 months
should be classified as a current liability. The current portion of long-term debt normally is
presented immediately after short-term notes and loans, and the noncurrent portion is presented
immediately after total current liabilities as follows:
CURRENT LIABILITIES
Accounts payable
Accrued expenses
Short-term notes
Current portion of long-term debt
LONG-TERM DEBT, less current portion
$ 90,000
15,000
50,000
10,000
165,000
500,000
810.30 Other Long-term Liabilities. This Balance Sheet caption includes items that are not
covered under other liability captions (for example, noncurrent deferred income tax liability).
Generally, significant other long-term liabilities are presented as separate line items on the
Balance Sheet following Long-term debt.
810.31 Stockholders Equity. The stockholders equity section of the Balance Sheet includes
the companys common stock, paid-in-capital, and retained earnings balances. The common
stock and paid-in-capital captions show the amount paid by stockholders for the companys stock.
The retained earnings caption generally shows the companys earnings less any dividends paid
since inception.
810.32 Most accounting software packages break the retained earnings amount into a beginning
of the year retained earnings caption and a current year net income caption as follows:
STOCKHOLDERS EQUITY
Common stock
Beginning retained earnings
Net income
TOTAL STOCKHOLDERS EQUITY
8-18
1,000
155,000
40,500
$196,500
810.33 The preceding presentation sufficiently discloses the changes in retained earnings when
net income is the only change in retained earnings. Other changes in stockholders equity can
also be disclosed on the Balance Sheet by presenting them in a similar manner.
Income Statement
810.34 Captions within the Income Statement will vary based on the complexity of the companys
operations, the way revenues and expenses are recognized, and the details presented. The
following paragraphs provide some practical guidelines.
810.35 Revenues. Generally, the revenue caption represents a businesss gross income from
operations (that is, the gross income obtained by selling goods or performing services). Thus,
revenue may consist of sales (for a company that sells products), professional fees or
commissions (for a company that provides services), or interest income (for a company whose
primary source of income is from lending activities).
810.36 If the Income Statement includes more than one revenue account, the revenue accounts
are usually listed under a heading such as Operating revenues. Amounts deducted in arriving at
revenues presented in the Income Statement (for example, sales returns and allowances or
discounts) generally should be disclosed on the face of the Income Statement, if material. The
following are acceptable presentations:
NET SALES
350,000
or
OPERATING REVENUES
Sales
Returns and allowances
365,000
(15,000)
350,000
810.37 Cost of Sales. The cost of sales caption represents the cost of merchandise or products
sold. Therefore, the costs that should be included in cost of sales are the same as those that
would be included in inventory if the merchandise had not been sold. Cost of sales is usually
presented either as (a) a separate line item, or (b) a heading below which are listed elements of
costs. The following are acceptable presentations:
COST OF SALES
455,000
or
COST OF SALES
New vehicles
Used vehicles
Service
Parts and other
275,000
125,000
35,000
20,000
455,000
810.38 Operating Expenses. Operating expenses generally include the expenses incurred to
produce operating revenue. Therefore, they include selling expenses (i.e., the costs incurred to
make a sale and deliver the merchandise to the customer, such as sales commissions,
advertising, and delivery costs) and general and administrative expenses (e.g., administrative
salaries, office rent, insurance on office equipment, etc.).
8-19

810.39 Operating expenses are generally listed under a heading such as Operating expenses
or may be classified by principal types (for example, selling or general and administrative) and
presented as separate line items without a heading. The following presentations are acceptable:
OPERATING EXPENSES
Compensation
Advertising
Depreciation
Rent
Utilities
Insurance
Retirement plan
225,000
16,000
30,000
15,000
8,000
7,000
13,000
314,000
or
SELLING EXPENSES
175,000
GENERAL AND ADMINISTRATIVE EXPENSES
465,000
810.40 Other Income and Expenses. Other income and expenses generally include incidental
sources of revenue and expense from nonoperating activities. Examples include dividend income,
interest income, and interest expense. If material, other income and expenses should be
separately identified on the face of the Income Statement. Material income and expense items
should not be obscured by classifying them under captions such as Other incomenet or Other
expensenet. Other income and expenses are generally listed under a heading such as Other
income (expense) as shown below:
OTHER INCOME (EXPENSE)
Interest income
Dividends
Interest expense
815
25,000
15,500
(8,500)
32,000
PREPARING OTHER FINANCIAL MANAGEMENT REPORTS

815.01 In addition to the monthly financial statements, small businesses often rely on a variety of
other financial management reports. Although some of the reports, such as the aged accounts
receivable summary report, are routinely generated by accounting software, others are tailored to
the companys particular needs. Ensuring that the reports focus on the companys critical aspects
is crucial.
815.02 Although controllers and top management often decide on the type and content of the
reports, accounting personnel in smaller companies are often asked to provide input and prepare
the reports. This section provides guidance on preparing the following four key financial
management reports that apply to many small businesses:
8-20
Owners weekly flash report. This report recaps key financial

information for the business owner or top management. It is typically
prepared weekly.
Weekly cash flow report. Most small businesses operate on a tight

cash budget, with minimal access to outside credit lines. This weekly
report helps small businesses forecast and monitor their future cash
flows.
Accounts receivable monthly management report. Tying up excess

cash in accounts receivable can cripple small businesses that routinely
offer trade credit to their customers. This monthly report helps
management monitor credit and collection activities.
Inventory monthly management report. Similar to accounts

receivable, inventories can consume a large part of a small businesses
available cash. This monthly report helps management monitor and
assess inventory levels.
Owners Weekly Flash Report

815.03 Most small business owners have an entrepreneurial or sales background, but not
necessarily strong business management, financial, or accounting skills. Thus, monthly financial
statements and other detailed financial reports often leave them dissatisfied and confused. The
reports tend to provide a wealth of information, but do not highlight or focus on the companys
critical financial information. Also, the typical monthly report preparation time frame is too
infrequent to address business problems, such as sales declines or cash flow shortages, in a
timely manner.
815.04 Instead, owners are often better served if presented with a concise report that
summarizes only the companys key financial and management information on a weekly basis.
Although some information considered critical will vary from one company to the next, much will
be the same. The information that top management is interested in on a weekly basis generally
falls into the following broad categories:
Sales activities. Information includes total sales dollars and units, the
dollar amount of orders received, outstanding customer backorders,
sales returns, etc.
Cash flow activities. Information includes cash balance, accounts

receivable amounts that are over 60 days old, past due accounts
payable, the outstanding balance on the companys line of credit, the
available line of credit balance if it changes regularly, etc.
Production activities. Information includes units produced, rejected

units, overtime hours worked, total hours worked (if they fluctuate
weekly), idle time (both machine time and employee time), scrap
amount, raw material and finished goods inventory levels, etc.
The specific information that management tracks weekly has two characteristics, It is usually
critical to the company and volatile. Information that is important to the companys success, but
not subject to constant change, is normally monitored monthly or on some other less frequent
basis.
8-21

815.05 Management typically also has a few additional areas that they wish to monitor on a
weekly basis. These areas usually vary from industry to industry and company to company
depending on their volatility and importance to the company.
815.06 Exhibit 8-4 presents an example of a flash report that presents key information to owners
through the third week of a four-week period. It includes the three broad categories previously
mentioned, plus a fourth category that may be used for tracking any other key financial data. In
addition, it includes blank lines after each category to add any additional areas management
wishes to track weekly. Before adding any areas, however, management should ensure the new
areas are both important and volatile (see Paragraph 815.04). Finally, the last column of the
report allows targeted (planned or budgeted) amounts for the month to be entered to allow the
company to better monitor its progress. Appendix 8B includes a blank copy of the report form that
accounting personnel may use to prepare a weekly flash report.
Weekly Cash Flow Report
815.07 Maintaining adequate cash is vital to the success of any small business. For many small
businesses, cash flows must be closely monitored to ensure that adequate cash is on hand to pay
bills. In these situations, a weekly cash flow forecast report is often necessary. In situations where
cash flows are not so tight, a monthly cash flow forecast report is generally sufficient. Monthly
cash flow forecasts are typically prepared by the controller, whereas the accounting staff often
assists in preparing the weekly cash flow forecasts.
815.08 Weekly cash forecasts are essentially a refinement of monthly forecasts. In contrast to
monthly forecasts, which often cover a 12-month period, weekly forecasts typically cover four
weeks. Because the covered period is brief, a weekly forecast often uses existing or known data,
such as actual accounts receivable and accounts payable. Thus, weekly forecasts are more
precise than monthly forecasts. However, obtaining the added precision and timeliness (typically
updating every week) is more time consuming. Thus, accounting personnel should generally
prepare weekly forecasts only when the companys cash situation requires tighter monitoring.
Since staff accounting personnel are more involved with weekly forecasts, the following
paragraphs focus on preparing a weekly cash flow forecast report.
815.09 Basic Steps in Preparing a Weekly Cash Forecast. In contrast to monthly cash flow
reports, fewer assumptions usually are required when preparing weekly cash forecasts, since both
the amount and the timing of cash receipts and disbursements are more determinable. Preparing
a weekly cash forecast involves estimating the following amounts for each week that the forecast
covers:
a. Collections of existing trade receivables.
b. Collections of forecasted new credit sales and any cash sales.
c. Collections of other scheduled amounts, such as notes receivable and
interest income.
d. Payments of amounts other than existing accounts payable, such as
payroll, debt payments, equipment purchases, and taxes.
e. Payments of existing accounts payable.
f.
8-22
Payments or draws made on the companys line of credit, if any.
Exhibit 8-4
Period Ending: February 22, 2009 (Week 3)
Description
Sales:
Total sales
Total sales units
Orders received
Open backorders
Cash Flows:
Cash balance
A/R over 60 days
Past due A/P
Credit line balance
Production:
Units produced
Rejected units
Overtime hours
Idle time (hours):
Machine
Employees
Prepared by: D. Johnson
Week 3
Week 2
Week 1
Monthto-Date
Total
X
X
X
X
$ 6,500
26
$10,200
$10,500
$ 9,700
40
$ 7,500
$ 6,200
$ 4,800
20
$ 4,200
$ 8,500
$21,000
86
$21,900
N/A
$30,000
120
$31,000
$ 4,500
X
X
X
X
$28,200
$18,100
$ 7,500
$55,000
$12,800
$22,000
$14,700
$50,000
$(1,500)
$47,000
$ 3,500
$50,000
N/A
N/A
N/A
N/A
N/A
$15,000
$10,000
$40,000
X
X
X
32
0
12
42
3
45
28
0
0
102
3
57
130
1
10
X
X
2
4
6
7
1
1
9
12
2
4
Week 5
Week 4
Target
Monthly
Total
Other:
8-23

The weekly cash forecast preparation process is relatively straightforward, with fewer unknowns
than the monthly forecast. Because the weekly forecast uses actual data, accounting personnel
must dig into the detailed records and thoroughly understand collection and payment practices.
The most subjective and difficult taskestimating credit sales collectionsis discussed in more
depth in Paragraphs 815.11-.14.
815.10 Exhibit 8-5 presents a sample weekly cash forecast. Since the weekly cash forecast is
primarily used by companies in a tight cash situation, the forecast segregates estimated vendor
payments from other payments, such as payroll and taxes, that may require more discretion
regarding timing. Thus, if available cash is insufficient to cover vendor payables, the companys
controller can decide whether to draw down the companys line of credit or delay certain vendor
payments. The last line of the forecast shows the expected ending weekly balance of the
companys line of credit. Appendix 8C-1 includes a blank copy of the weekly cash forecast
worksheet. The following paragraphs provide guidance on estimating collections from customers.
815.11 Estimating Customer Collections. Typically, the most subjective issue encountered
when preparing a weekly cash forecast is estimating cash receipts from customers. The process
involves estimating weekly collections of existing accounts receivable amounts, as well as new
credit and cash sales. If customers typically pay according to terms, weekly cash collections of
existing unpaid receivables can sometimes be estimated by using the accounts receivable
software module to print out an expected collection schedule based on invoice due dates. Since
most customers do not pay according to terms, however, a more detailed analysis is usually
needed, as discussed in the following paragraphs.
815.12 Accounting personnel generally combine past collection experience and an analysis of
major unpaid accounts to estimate collections of existing accounts receivable. Forecasted new
sales and related collections during the forecasted period often can be taken from the companys
monthly forecast prepared by the controller.
815.13 Exhibit 8-6 presents a sample weekly schedule of estimated collections. The schedule
has been divided into three major sections: major unpaid accounts, other unpaid accounts, and
the next four weeks forecasted sales. The first three columns indicate how much will be collected
during the four-week period, and the remaining columns allocate the collections by week. The
cash receipt totals for each week can then be carried to the weekly cash forecast. The schedule
would typically be updated each week by adding the new week and deleting the past week.
815.14 The following items discuss each major section of the exhibit.
8-24
Section I: Major Unpaid Accounts. This section analyzes any

individually significant past due accounts to estimate how much will be
collected by week. Monthly estimated collection amounts and weekly
allocations usually can be obtained by discussing account details with
the person responsible for credit. In some cases, the customer may have
to be called.
Exhibit 8-5
Weekly Cash Forecast

Week 1
Beginning cash
Cash receipts:
Receivable collections
New sales collections
Interest income
Other:
Note receivable collection
Total cash receipts
Cash disbursements:
Emergency purchases
Net payroll
Taxes:
Payroll deposits
Income tax deposits
Sates tax deposits
Debt payments:
Principal
Interest
Other:
Rent
Property taxes
Insurance
Cash disbursements before payables
Cash available to pay vendors
A/P payments due to vendors
Cash surplus (shortage)
Line of credit draws (payments)
Week 2
25,000 $
724,000
140,000
Week 3
25,000 $
306,000
100,000
Week 4
25,000 $
406,000
100,000
Total
25,000 $
25,000
288,000 1,724,000
60,000
400,000
35,000
35,000
________ _________ _________ _________ _________
864,000
406,000
506,000
383,000 2,159,000
15,000
102,000
15,000
76,000
15,000
104,000
15,000
76,000
60,000
358,000
20,400
15,200
20,800
125,000
15,200
75,700
71,600
125,000
75,700
75,000
12,500
75,000
12,500
_________ _________ _________

137,400
106,200
264,800
_________ _________ _________
751,600
324,800
266,200
60,000
146,100
89,500
_________
565,000
_________
(157,000)
60,000
146,100
89,500
_________
1,073,400
_________
1,110,600
771,300
453,300
1,224,600
_________ _________ _________ _________ _________
(19,700) 324,800
(187,100) (157,000) (114,000)
Ending cash balance
44,700 (299,800) 212,100

93,000
50,000
_________ _________ _________ _________ _________
$ 25,000 $ 25,000 $ 25,000 $ (64,000) $ (64,000)
Ending line of credit balance
$ 494,700 $ 194,900 $ 407,000 $ 500,000 $ 500,000
8-25

Exhibit 8-6
Weekly Schedule of Estimated Collections

(in thousands)
Description
Monthly Estimated Collections

A/R
Est. %
Est. $
Balance
Collection
Collections
Collection Allocation by Week

Week 1
Week 2
Week 3
Week 4
Total
l. Major Unpaid Accounts

Customer Name:
1. Kinro, Inc.
155
84
2. Mitchell Industries
202
195
3. Graham Plastics
138
45
4. Famous, Inc.
333
250
78
25
906
599
5. Davis Enterprises
10
74
195
84
195
45
$25
125
45
250
25
25
6.
7.
8.
9.
10.
Major A/C Totals
$330
25
125
119
599
ll. Other Unpaid Accounts

Estimated Weekly Collection %
Aging Categories:
35%
030 days
1170
3160 days
287
6190 days
118
78%
25%
25%
15%
100%
913
320
228
228
137
913
33%
95
33
24
24
14
95
100%
118
41
30
30
17
118
91120 days
Over 120 days
Total Other A/R
1575
1126
394
282
282
168
1126
Total A/R
2481
1725
724
307
407
287
1725
80
100
200
400
487
$2125
lll. Next Four Weeks Forecasted Sales

Next four weeks sales
Total A/R and Sales
8-26
1600
$
4081
25%
400
$
2125
20
$
744
387
507
Section II: Other Unpaid Accounts. This section lists remaining trade
receivables by aging category. The estimated collection percentage for
each aging category typically reflects historical collection patterns.
Typically, the controller provides accounting personnel with the
appropriate percentages determined by analyzing past collection
experience. The percentages estimate how much will be collected in the
four-week period. To compute the percentages, the controller simply
tracks the aging categories from one month to the next to determine the
percentage of each category that is historically collected in the following
month (i.e., four-week period). The percentages can then be applied to
each aging category to determine total expected collections for that
month.
After determining the estimated collection amounts for each aging
category, accounting personnel should allocate them to each week using
historical weekly collection patterns. For example, the company may find
that a greater percentage of cash is collected in the first week than in the
last week of the month because customers frequently mail payments
around month end. Collection patterns are typically determined by
scheduling out weekly collections of accounts receivable for at least
three months and computing the percentage of each months collections
by week.
Section Ill: Next Four Weeks Forecasted Sales. Accounting

personnel typically obtain the next four weeks forecasted sales and
expected collections from the companys monthly cash forecast. The
allocation of monthly collections to each week is usually based on
historical collection patterns (expected collections will often concentrate
in the latter weeks of the month).
Appendix 8C-2 includes a blank worksheet that accounting personnel may use to estimate weekly
collections.
Accounts Receivable Monthly Management Report
815.15 Most small businesses regularly monitor the accounts receivable function to help ensure
that policies and procedures are being followed and are achieving the desired results, and that
the system is operating as expected. This section discusses the following key information that
accounting personnel often assemble when assisting the controller in preparing an accounts
receivable monthly management report. Key aspects of the report include:
Accounts receivable aging analysis.
Accounts receivable turnover analysis.
Bad debt analysis.
8-27

815.16 Exhibit 8-7 presents a sample report that presents key data for the current month, the
corresponding month of the preceding year, and the moving average for the preceding 12
months. The report also includes a column for illustrating targeted or budgeted amounts, or
percentages for comparison to actual results. Finally, a section for any comments or explanations
appears at the end of the report. Appendix 8D includes a blank copy of the report.
815.17 Accounts Receivable Aging Analysis. Accounts receivable aging schedules are often
the key measure of accounts receivable performance. Aging schedules typically show the
amounts and percentages of outstanding accounts receivable in each aging category. The
monthly report includes both the amounts and percentages in each aging category for the current
month, the corresponding month of the preceding year, and the moving monthly average for the
preceding year.
815.18 Accounts Receivable Turnover Analysis. Accounts receivable turnover analysis is a
method bookkeepers use to measure how effectively accounts receivable are being managed.
The two most commonly used turnover methods are the turnover ratio and days sales
outstanding ratio.
a. Turnover ratio. The turnover ratio indicates how many times accounts
receivable turns over during a period compared to sales. This ratio is typically
computed by dividing sales (monthly, quarterly, etc.) by ending or average
accounts receivable. For example, monthly credit sales of $50,000 and a
receivable balance of $75,000 produce a turnover ratio of .667. On an
annualized basis, the ratio would equal 8 (.667 x 360/30).
b. Days sales outstanding ratio. The days sales outstanding (DSO) ratio
converts the turnover ratio into days. For example, an annual turnover ratio of
8 would convert to approximately 45 days sales outstanding (360/8).
Alternatively, the same DSO figure can be obtained by dividing accounts
receivable by average daily sales ($75,000/$1,667).
Bookkeeper personnel may use either turnover method to measure monthly performance,
although the DSO method is probably used most commonly. Whichever method bookkeepers
choose, setting a targeted or budgeted turnover or DSO ratio for comparison to the current
periods actual ratio is often helpful. (If monthly sales fluctuate significantly, accounting personnel
should consult with their controller or outside CPA to decide whether an alternative method
should be used.)
815.19 Bad Debt Analysis. Besides monitoring past-due accounts and turnover statistics,
companies also need to monitor bad debt statistics. Bad debts are generally compared to sales
using the bad debt ratio. The bad debt ratio merely computes bad debt expense for a given
period as a percentage of credit sales for the same period. Bad debts are also typically evaluated
by comparing the allowance for doubtful accounts (bad debt reserve) as a percentage of
accounts receivable for a given period. The monthly management report should include both
percentages. If available, it should also include targeted percentages for comparison to actual
percentages for the current period.
8-28
Exhibit 8-7
Company Name: ABC Company
Period Ended: 7/31/09
Prepared by: Judy Smith, Accounting
Date Prepared: 8/5/09

12 Month
Same P/Y Month
Average
Current Month
Target
Credit Sales
Accounts Receivable Aging
Analysis:
Actual
135000
Current030 days
Actual
1175000
Actual
1275000
1264000
75%
1130000
73%
1220000
77%
3160 days
219000
13%
180000
12%
185000
12%
6190 days
101000
6%
120000
8%
80000
5%
91120 days
68000
4%
75000
5%
50000
3%
Over 120 days
34000
2%
30000
2%
40000
3%
1686000
100%
1535000
100%
1575000
100%
Total unpaid
Turnover Analysis:
Days sales outstanding
38
Bad debt expense

Percent of sales
1.6%
Reserve for bad debts

% of A/R over 60 days
60%
35
40
37
22000
21000
20000
1.5%
1.8%
1.6%
140000
119000
120000
60%
53%
71%
Comments:
Days sales outstanding in the current period is below target by 3 days (38 35).
The reduction has freed up cash of approximately $135,000 (average daily sales of approximately
$45,000 x 3) during the current month. Assuming an 8% interest rate, the savings produces an annual
imputed interest expense reduction of $10,800.
Bad debt expense and the reserve are in line with target.
8-29
Bad debt expense. A companys bad debt expense and related ratio (as
a percentage of sales) will generally vary depending on its industry and
the nature of its credit policies. The companys management should
establish an acceptable bad debt percentage that is consistent with its
credit policy. Once management determines an appropriate bad debt
percentage, that percentage should be compared monthly to the actual
percentage. However, unless the company analyzes and expenses bad
debts throughout the year, monthly calculations of bad debt ratios can be
misleading. In those situations, bad debt ratios based on annual data
may be more meaningful. In any event, significant judgment and
estimates are inherent when estimating bad debt expense in any given
period.
Bad debt reserve. When the reserve for bad debts as a percentage of
total accounts receivable is compared to historical percentages, it can
roughly indicate the reserves overall adequacy. Management can obtain
a more useful evaluation of the reserves reasonableness, however, by
computing the reserve as a percentage of delinquent accounts
receivable, such as those that are 60 days or more past due. A
significant change in the current period as compared to the
corresponding month of the preceding year, or the moving average for
the preceding 12 months, requires explanation. In some cases, however,
comparing the current period percentage to one based on adjusted prioryear actual balances may be more meaningful.
Inventory Monthly Management Report

815.20 Accounting personnel may also assist the controller with preparing a monthly report that
monitors key inventory and related purchasing department activities. Various methods are
available for monitoring inventories, and each company must select appropriate methods and
reports for acquiring the needed information. Todays powerful personal computer and
commercial inventory management software often reduce the need for printed reports. Instead,
the report or information is available immediately on the computer screen. Infinite possibilities of
reports might be useful in an inventory system; however, most companies would cover at least
the following in their inventory management reports:
8-30
Summary of inventory by category, generally with comparative amounts

for the prior period or year, and the amount or percentage of increase or
decrease.
Comparison of actual inventory to forecasted inventory by category, and

the amount or percentage that actual is over or under forecast.
Turnover analysis (or days, weeks, or months on hand) by category and

in total.
Summary of inventory activity, including requirements, usage, balances

by part, category, and classification.
Summary of inventory movement, such as aging, slow-moving, obsolete,

and excess.
Reports on physical inventory overages and shortages.
Summary of receipts and shipments.
Inventory on hand and on order as compared to production or shipping

requirements.
Summary of physical counts and adjustments.
Summary of purchasing activity, including amounts and number of

orders written.
Special reports, as required by senior management.
815.21 Exhibit 8-8 presents a report that summarizes inventories for the month and provides
information about purchasing activities. The report presents inventory balances (current month
end, prior month end, and preceding year end) and turnover information. This summary report
would usually be supported by other reports providing increasingly lower levels of details. For
example, each individual line item may be supported by a detailed report showing individual part
numbers comprising the total. The supporting detail usually would show the source of the
information needed to calculate the year-to-date turnover. Appendix 8E includes a blank copy of
the report form.
815.22 Importance of Exception Reporting for Inventories. Another technique for making the
report more useful is to highlight exception conditions requiring managements attention. For
example, in Exhibit 8-8, certain dollar amounts and turnover ratios are highlighted to indicate their
greater significance for managements review. In many cases, preparers would explain the
highlighted amounts in notes to the presentation. In the Exhibit, inventory categories whose
balances exceed prior year by more than $100 or where the year-to-date turnovers differ from
prior year by 0.5 or more are highlighted.
815.23 Most companies that have inventories as a normal part of operations must pull together
voluminous detailed information about those inventories. Emphasizing exceptions or
extraordinary occurrences when reporting on inventories is important for facilitating
managements review. An executive can rarely oversee, check, or follow up on every detail.
Reports should therefore distinguish between satisfactory inventory items and those that need the
attention of the executive who is receiving the report.
815.24 Importance of Using Comparative Figures. Data for a single month or period is
usually of little significance. Actual data is most useful when compared to budget, plan,
standards, past performance, or some other measure. Generally, particular inventory data is less
significant than the trend the data portrays. For example, a current turnover ratio of two times may
be significant only if it represents a change from a prior period turnover ratio of four times. In
many cases, using comparative figures will help a controller apply exception reporting. Exhibit 8-8
compares actual balances and turnover rates with prior periods. This technique can be effective
when identifying the direction of any changes.
8-31

Exhibit 8-8
Illustration of Summary Inventory Reports

ABC Manufacturing Co., Inc.
Inventory Balances Inc. (Dec.)
Current
Month
Inventory Category
Compressors
Prior
Month
This
Month
Prior
Year
This
Year
Last
Year
Target
369
2.4
3.4
3.0
$7,911
$7,952
($41)
$7,542
Speed controls
662
732
(70)
639
23
3.8
4.1
4.0
Sound units
345
317
28
418
(73)
1.9
1.8
1.8
3,113
3,062
51
3,254
(141)
1.3
1.4
1.3
966
908
58
794
172
0.4
1.0
1.0
Total raw materials
12,997
12,971
26
12,647
350
3.2
3.8
3.5
Air conditioners
12,991
13,041
(50)
13,100
(109)
4.5
4.7
4.7
Custom sound units
4,866
4,793
73
4,815
51
2.2
2.5
2.5
Retail sound units
1,015
1,359
(344)
1,233
(218)
2.4
2.5
2.3
Speed control units
1,590
1,767
(177)
1,625
(350
6.0
5.9
7.0
828
823
815
13
2.4
2.1
2.8
Travel accessories
2,653
2,403
250
2,515
138
2.6
2.8
2.8
Other
1,281
1,278
1,306
(25)
6.0
5.8
7.0
Total finished goods
25,224
25,464
(240)
25,409
(185)
4.3
4.8
4.5
Total all inventories
$38,221
$38,435
($214)
$38,056
$165
4.0
4.1
4.0
Parts
Accessories
Accessories
Purchasing Activity
---Current Month---
---Year to Date---
Purchase orders issued
Purchase orders issued
#292
287
1,769
1,776
Average per order
$1,730
1,683
1,504
1,444
Merchandise received
$482,75
3
483,042
2,516,17
1
2,358,28
1
Merchandise rejected
$5,634
3,054
12,517
4,956
1.17%
0.63%
0.50%
0.21%
$7,118
6,762
42,494
39,761
1,068
1,014
6,374
5,964
309
281
1,857
1,675
48
47
301
279
12
11
$8,547
8,106
51,038
47,690
1.69%
1.68%
1.92%
1.86%
29
28
29
27
Rejected as % of received
Last
Year
Overall Comments
This
Year
$505,12
2
Purchasing Item
483,046
This
Year
2,659,92
5
Last
Year
2,565,40
5
Purchasing department
expenses
Salaries and wages
Other payroll costs

Travel and
entertainment
Occupancy costs
Other
Total
$ Dept Exp/$ Purchases

$ Dept Exp/# Purchases
8-32
Year-to-date turnover
Inc.
(Dec)
YTD
820
SUMMARY
820.01 The basic financial statements prescribed by Generally Accepted Accounting Principles
(GAAP) include a Balance Sheet, Income Statement, Statement of Cash Flows, and a Statement
of Retained Earnings (or changes in stockholders equity). Most small businesses routinely
prepare a Balance Sheet and an Income Statement, but many do not prepare a Statement of
Cash Flows or a Statement of Retained Earnings primarily because of software limitations.
820.02 Small businesses typically maintain their accounting records on a modified cash basis
throughout the month and convert to accrual basis for month-end financial reporting. Financial
statements are often enhanced by showing line item percentages, prior year comparisons, and
budgeted amounts. Most accounting software packages accommodate these financial statement
enhancements.
820.03 Accounting packages typically generate monthly financial statements by linking the
general ledger accounts to specific financial statement line items. In some software packages, the
linking depends on how the chart of accounts is set up. In other packages, accounting personnel
must specifically link each general ledger account to a financial statement line item.
820.04 Accounting personnel may wish to occasionally modify the standard financial statement
formats provided with most accounting software packages. GAAP provides various rules and
guidelines for presenting specific financial statement line items that accounting personnel should
generally follow when revising the monthly financial statements.
820.05 Some accounting personnels financial reporting responsibilities extend beyond
preparing the basic monthly financial statements. These additional responsibilities might include
assisting the controller or working directly with management in designing other financial
management reports. Four common areas that might require accounting personnels involvement
include preparing a weekly flash report and weekly cash flow report and preparing monthly
accounts receivable and inventory reports.
8-33
8-34
Appendixes
8
Table of Contents
Appendix
Description
Page
Generating the Basic Monthly Financial Statements

8A
Sample Monthly Financial Statements .......................................................
8-37
Preparing Other Financial Management Reports

8B
Owners Weekly Flash Report .....................................................................
8-43
8C
Cash Flow Reports .....................................................................................
8-45
8C-1
Weekly Cash Flow Report .............................................................
8-45
8C-2
Weekly Schedule of Estimated Collections ..................................
8-47
8D
Accounts Receivable Monthly Management Report ...............................
8-49
8E
Inventory Monthly Management Report ....................................................
8-51
8-35
8-36
Appendix 8A
Sample Monthly Financial Statements

BALANCE SHEET
MAY 31, 2005
ASSETS
CURRENT ASSETS
Cash on hand
Cash in bank Reg. checking
Cash in bank savings
Accounts receivable East Warehouse
Accounts receivable West Warehouse
Note receivable
Inventory East Warehouse
Inventory West Warehouse
Inventory Central Warehouse
Prepaid insurance
Prepaid advertising
Prepaid income taxes
$ 12,598.98
41,703.85
400,775.03
285,931.65
162,150.05
10,401.59
24,885.67
58,247.93
151,745.38
1,225.00
3,050.50
27,750.00
TOTAL CURRENT ASSETS

PROPERTY, PLANT AND EQUIPMENT
Land
Buildings
Accumulated depreciation buildings
Furniture
Accumulated depreciation furniture
Office and computer equipment
Accumulated depreciation furniture & equipment
Warehouse equipment
Accumulated depreciation warehouse equipment
Trucks
Accumulated depreciation trucks
1,180,465.63
95,000.00
275,000.00
(44,305.59)
23,680.75
(7,456.32)
42,500.00
(20,541.61)
17,530.85
(5,959.67)
45,600.90
(36,734.03)
TOTAL PROPERTY, PLANT AND EQUIPMENT

OTHER ASSETS
Rent deposits
Workmans compensation deposit
Software costs (net)
TOTAL OTHER ASSETS
TOTAL ASSETS
384,315.28
2,000.00
500.00
1,844.50
4,344.50
$1,569,125.41
8-37
Appendix 8A

(Continued)
BALANCE SHEET (CONTINUED)
MAY 31, 2005
LIABILITIES AND EQUITY

CURRENT LIABILITIES
Accounts payable trade
Accounts payable other
Purchases clearing
Notes payable
F.I.C.A. taxes payable
Federal taxes withheld
State tax withheld
City tax withheld
Accrued federal employment
Accrued state unemployment
Accrued workmans compensation
Sales tax payable East County
Sales tax payable West County
Withheld credit union
Current portion of long term debt
Income taxes payable
$ 99,567.07
11,377.54
5,669.25
13,226.52
46,833.06
34,184.30
12,329.71
1,198.71
7,860.32
5,562.91
1,067.29
32,863.32
20,084.60
750.00
20,000.00
67,050.00

LONG TERM DEBT
Loan payable to bank 1
Loan payable to bank 2
Loan payable to shareholders
379,624.60
36,666.72
58,666.72
90,000.00
TOTAL LONG TERM DEBT

TOTAL LIABILITIES
EQUITY
Common stock
Paid In capital
Retained earnings
Retained earnings current year
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
8-38
185,333.44
564,958.04
2,000.00
8,000.00
842,314.86
151,852.51
1,004,167.37
$1,569,125.41
Appendix 8A

(Continued)
INCOME STATEMENT
PERIOD TO DATE
YEAR TO DATE
ACTUAL
REVENUES
Distribution sales
Service fees East
Service fees West
TOTAL REVENUES
1,208.22
260,166.44
136,351.78
14,165.10
5,562.30
5,261.23
3,364.00
(3,775.45)
(1,297.95)
421,005.67
0.0
61.8
32.4
3.4
1.3
1.2
0.8
(0.9)
(0.3)
100.0
1,208.22
1,175,491.73
607,743.81
44,362.23
20,853.80
24,654.81
12,487.93
(19,017.67)
(6,538.02)
1,861,246.84
0.1
63.2
32.7
2.4
1.1
1.3
0.7
(1.0)
(.4)
100.0
COST OF SALES
Purchases East
Purchases West
Freight East
Freight West
TOTAL COST OF SALES
GROSS PROFIT
58,225.37
86,049.75
2,558.49
1,136.63
31,104.65
7,333.75
1,876.47
1,187.82
189,472.93
231,532.74
13.8
20.4
0.6
0.3
7.4
1.7
0.4
0.3
45.0
55.0
308,297.48
294,984.18
12,519.23
5,561.76
150,636.97
5,420.91
9,208.29
5,169.47
821,798.29
1,039,448.55
16.6
15.8
0.7
0.3
8.1
1.9
0.5
0.3
44.2
55.8
1,385.48
1,261.06
0.00
124.38
670.32
1,275.30
490.73
1,306.86
706.20
0.00
0.00
0.00
0.00
1,036.29
939.44
0.00
0.3
0.3
0.0
0.0
0.2
0.3
0.1
0.3
0.2
0.0
0.0
0.0
0.0
0.2
0.2
0.0
6,605.13
6,248.95
195.36
263.58
18,857.51
4,192.68
2,453.65
1,722.88
473.03
568.90
284.36
426.62
640.12
3,406.94
1,154.33
36.34
0.4
0.3
0.0
0.0
1.0
0.2
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.2
0.1
0.1
EXPENSES:
Warehouse payroll
Clerical salaries
Sick pay
Holiday pay
Payroll taxes
Building maintenance
Equipment maintenance
Insurance experience: Accounting Central
Insurance experience: Service Central
Insurance experience: S&R Central
Warehouse supplies
Telephone expense
Telephone experience: S&M Central
8-39
Appendix 8A

(Continued)
INCOME STATEMENT (CONTINUED)
PERIOD TO DATE
YEAR TO DATE
ACTUAL
PERCENT
Telephone experience: Accounting Central
Telephone experience: Service Central
Telephone experience: S&R Central
Utilities
Utilities: S&M Central
Utilities: Accounting Central
Utilities: Service Central
Utilities: S&R Central
Rent
Rent: S&M Central
Rent: Accounting Central
Rent: Service Central
Rent: S&R Central
Truck expenses
Miscellaneous expense
TOTAL OPERATING EXPENSES CENTRAL
0.00
0.00
0.00
571.78
0.00
0.00
0.00
0.00
8,686.57
0.00
0.00
0.00
0.00
1,645.77
189.73
20,289.91
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.0
2.1
0.0
0.0
0.0
0.0
0.4
0.0
4.8
312.11
936.33
624.22
139.29
288.55
96.19
288.55
192.37
5,827.94
9,186.25
1,941.38
5,824.13
5,320.64
5,181.86
623.74
85,213.93
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.3
0.5
0.1
0.3
0.3
0.3
0.0
4.6
OPERATING EXPENSES
Driver payroll East
Driver payroll West
Clerical salaries East
Clerical salaries West
Sick pay East
Holiday pay East
Holiday pay West
Vacation pay East
Vacation pay West
Payroll taxes East
Payroll taxes West
Depreciation expense East
Depreciation expense West
Equipment maintenance East
Equipment maintenance West
Insurance East
Insurance West
Warehouse supplies East
Warehouse supplies West
Telephone expense East
Telephone expense West
Utilities East
Utilities West
Truck expenses
25,824.84
9,721.25
5,427.95
4,283.46
614.39
2,884.39
1,154.40
0.00
0.00
13,801.71
412.71
912.96
68.50
1,458.76
1,363.47
5,194.03
2,029.51
3,853.07
1,710.49
5,289.89
3,967.96
4,477.70
1,834.23
375.00
6.1
2.3
1.3
1.0
0.1
0.7
0.3
0.0
0.0
3.3
0.1
0.2
0.0
0.3
0.3
1.2
0.5
0.9
0.4
1.3
0.9
1.1
0.4
0.1
126,497.01
47,662.20
27,017.33
24,549.75
1,008.06
5,884.73
2,214.90
854.23
540.00
65,172.46
17,610.89
4,564.80
34,250.00
7,138.04
6,671.76
15,926.16
6,502.13
18,853.89
8,369.79
25,884.57
19,416.08
21,910.33
8,975.26
375.00
6.8
2.6
1.5
1.3
0.1
0.3
0.1
0.0
0.0
3.5
0.9
0.2
0.0
0.4
0.4
0.9
0.3
1.0
0.4
1.4
1.0
1.2
0.5
0.0
8-40
Appendix 8A

(Continued)
INCOME STATEMENT (CONTINUED)
PERIOD TO DATE
YEAR TO DATE
ACTUAL
OPERATING EXPENSES CONTINUED

Truck expenses East
Truck expenses West
Miscellaneous expense East
Miscellaneous expense West
TOTAL OPERATING EXPENSES
3,555.93
1,568.45
1,264.33
549.06
103,598.44
0.8
0.4
0.3
0.1
24.6
17,399.93
7,674.77
6,186.65
2,686.66
497,889.88
0.9
0.4
0.3
0.1
26.8
GENERAL & ADMINISTRATIVE

Officer salaries
Clerical salaries
Sick pay
Holiday pay
Vacation pay
Payroll taxes
Hospitalization
Depreciation
Amortization
Professional fees
Insurance expense
Advertising expenses
Telephone expenses
Utilities
Interest expense
Travel and entertainment
Office supplies
Miscellaneous expense
Postage & other freight
TOTAL GENERAL & ADMINISTRATIVE
TOTAL EXPENSES
NET INCOME FROM OPERATIONS
12,000.00
10,873.87
0.00
468.45
.00
6,712.47
6,694.57
2,396.12
59.50
2,424.73
3,598.36
2,424.73
3,116.20
1,933.62
1,037.49
6,669.78
1,933.51
106.86
1,375.87
63,826.13
187,714.48
43,818.26
2.9
2.6
0.0
0.1
0.0
1.6
0.2
0.6
0.0
0.6
0.9
0.6
0.7
0.5
0.2
1.6
0.5
0.0
0.3
15.2
44.6
10.4
71,562.38
52,049.52
184.63
909.80
854.00
42,902.37
16,272.66
11,980.60
297.50
7,971.49
12,081.95
7,971.49
9,638.57
6,356.97
3,410.88
21,927.44
6,356.54
522.88
4,523.27
277,774.94
860,878.75
178,569.80
3.8
2.8
0.0
0.0
0.0
2.3
0.9
0.6
0.0
0.4
0.6
0.4
0.5
0.3
0.2
1.2
0.3
0.0
0.2
14.9
46.3
9.6
0.6
(0.5)
1.8
0.0
1.8
12.2
8,188.68
2,207.29
35,242.68
(891.36)
40,332.71
218,902.51
0.4
(0.1)
1.9
0.0
2.2
11.8
OTHER INCOME & EXPENSE

Discounts earned
Discounts allowed
Interest income
Miscellaneous
TOTAL OTHER INCOME & EXPENSE
EARNINGS BEFORE INCOME TAX
PROVISION FOR INCOME TAXES
Provision for income taxes
TOTAL PROVISION FOR INCOME TAX
NET INCOME (LOSS)
2,504.09
2,207.29
7,514.92
(182.16)
7,629.56
51,447.82
.00
.00
$51,447.82
0.0
0.0
12.2
67,050.00
67,050.00
$151,852.51
3.6
3.6
8.2
8-41
Appendix 8A

(Continued)
STATEMENT OF CASH FLOWS
Operating Activities:
Retained earnings current year
Adjustments
Account receivable East Warehouse
Account receivable West Warehouse
Note receivable
Inventory East Warehouse
Inventory West Warehouse
Inventory Central Warehouse
Prepaid income taxes
Accumulated depreciation furniture
Accumulated depreciation furniture & equipment
Warehouse equipment
Accumulated depreciation warehouse equipment
Accumulated depreciation trucks
Software costs (net)
Accounts payable trade
Accounts payable other
Purchases clearing account
Motes payable
F.I.C.A. taxes payable
Federal taxes withheld
State tax withheld
City tax withheld
Accrued federal employment
Accrued state unemployment
Accrued workmans compensation
Sales tax payable - East County
Sales tax payable - West County
Withheld credit union
Income taxes payable
Total Adjustments
Net Cash Provided Operating Activities
Investing Activities
Accumulated depreciation buildings
Loan payable to Bank 1
Loan payable to Bank 2
Net Cash Used Investing Activities
Financing Activities
Net Cash Provided Financing Activities
Net Increase in Cash
Cash & Equivalents at Beginning of Year
Cash & Equivalents at End of Year
8-42
$151,852.51
34,163.36
6,708.49
(401.59)
(20,454.45)
(51,678.39)
(6,344.23)
(27,750.00)
800.05
3,541.65
(5,200.00)
1,027.50
6,333.45
297.50
(75,377.84)
(12,785.65)
5,669.25
3,675.63
46,833.06
34,184.30
12,329.71
1,198.71
7,860.32
5,562.91
1,067.29
32,863.32
20,084.60
750.00
67,050.00
92,008.95
243,861.46
7,638.90
(4,166.65)
(6,666.65)
(3,194.40)
.00
240,667.06
214,410.80
$455,077.86
Appendix 8B
Instructions
Accounting personnel may use this form to present the owner and other top management with key
financial information on a weekly basis. The information presented on this form warrants weekly
presentation because it is generally volatile, as well as important to the companys success.
The form has been divided into three broad categories: sales, cash flows, and production. It also
includes a fourth other category for any additional key information management wishes to track each
week. Also, each category includes blank lines if management wishes to add additional items to
monitor.
Accounting personnel should simply enter the appropriate weeks information at the end of the week (or
at the start of the following week). The cumulative total of each line item (if applicable) should be
entered in the month-to-date total column.
In the last column, accounting personnel should enter the targeted figures, if any, for the month. The
targeted figures could be based on a budget, prior year actual, or managements best guess.
Accounting personnel should simply mark out any items that do not apply to their companys line of
business.
8-43
Appendix 8B
Month End:
Description
Sales:
Total sales $
Total sales units
Orders received $
Open backorders $
Prepared by:
Week 5
Week 4
Week 3
Week 2
Week 1
Monthto-date
Total
N/A
Cash Flows:
Cash balance
A/R over 60 days
Past due A/P
Credit line balance
Production:
Units produced
Rejected units
Overtime hours
Idle time (hours):
Machine
Employees
Other:
8-44
N/A
N/A
N/A
N/A
Target
Monthly
Total
Appendix 8C-1 Weekly Cash Flow Report

Instructions
Accounting personnel may use this worksheet to forecast weekly cash flows. This worksheet should
typically be used when cash flows are tight.
The worksheet allows the company to determine each week how much cash is available to pay vendors
after covering less discretionary payments, such as payroll, taxes, and debt. After the company decides
how much to pay vendors each week, accounting personnel can then enter payments or draws on the
companys credit line (if any) to determine the ending cash balance. The last line of the form allows the
company to monitor the ending credit line balance for each week.
The worksheet at Appendix 8C-2 will help accounting personnel estimate weekly sales collections. Both
worksheets should be updated weekly as needed.
8-45
Appendix 8C-1 Weekly Cash Flow Report
Week 1
Beginning cash
Week 2
Week 3
Week 4
Total
Ending cash balance
Ending line of credit balance
Cash receipts:
Receivable collections
New sales collections
Interest income
Other:
Total cash receipts

Cash disbursements:
Emergency purchases
Net payroll
Taxes:
Payroll deposits
Income tax deposits
Sales tax deposits
Debt payments:
Principal
Interest
Other:
Cash disbursements before payables

Cash available to pay vendors
A/P payments due to vendors
Cash surplus (shortage)
Line of credit draws (payments)
8-46
Appendix 8C-2

Instructions
Accounting personnel may use this form to estimate weekly collections from customers. Total
collections of existing accounts receivable and forecasted sales for each week should be taken to
Appendix 8C-1, Weekly Cash Flow Report.
Existing accounts receivable have been divided between major unpaid accounts and all other unpaid
accounts. The bottom section of the schedule computes estimated collections of the next four weeks
forecasted sales.
Major Unpaid Accounts
Use this section to separately estimate collections of major unpaid accounts. This information should be
readily available from credit managers or persons responsible for managing collections.
Enter each major customers unpaid balance in the first column. The amount the company expects to
collect during the four-week period should be entered in the third column. Based on invoice due dates
and other factors, allocate among the four weeks the expected collection amount for the month.
Other Unpaid Accounts
List remaining unpaid balances in column 1 by each aging category. Using historical collection
percentages for each aging category (generally supplied by the controller), enter an estimated
collection percentage for each category in column 2. Compute the estimated monthly collection amount
(column 3) by multiplying column 1 by column 2. Then allocate among the four weeks the estimated
collection amount in column 3.
Next Four Weeks Forecasted Sales
This section represents an estimate of collections of the next four weeks forecasted sales. Enter
forecasted sales in column 1, and enter in column 2 the percentage the company expects to collect in
the next four weeks. Compute the estimated collection amount for the four-week period (column 3) by
multiplying column 1 by column 2. Then allocate among the four weeks the estimated collection
amount.
Additional Guidance: See Paragraphs 815.11-14.
8-47
Appendix 8C-2
Company Name:
Prepared by:
Date Completed:
(in thousands)
Monthly Estimated Collections

Description
Customer Name:
1
A/R
Balance
Est. %
Collection
Collection Allocation by Week

Est. $
Collection Week 1 Week 2 Week 3 Week 4
Major Unpaid Accounts
Total
2
3
4
5
6
7
8
9
10
Major A/C Totals
Other Unpaid Accounts
Estimate Weekly Collection %s
Aging Categories:
100%
0 30 days
31 60 days
61 90 days
91 120 days
Over 120 days
Total other A/R
Total A/R
Next Four Weeks Forecasted Sales
Next four weeks
sales
Total A/R and Sales
8-48
Appendix 8D

Instructions
Accounting personnel may use this report form to help management monitor accounts receivable
performance. The form should be completed at the end of each month.
In the first three columns, accounting personnel should enter target (if available), actual, and
percentage data for the current month. The fourth and fifth columns should reflect actual amounts and
percentages for the same month of the preceding year. The last two columns should reflect averages
for the preceding 12 months and the related percentages.
The report is divided into four key categories as follows:
Credit sales. Enter the credit sales amounts per the general ledger in each column.
Aging analysis. Enter the unpaid balances in each aging category per the aged accounts
receivable report.
Turnover analysis. Enter the days sales outstanding by dividing the ending monthly accounts
receivable balance by the average daily credit sales (monthly sales divided by the number of
days in the month).
Bad debt expense. Enter the monthly bad debt expense amounts and the ending reserve for
bad debts (also called the allowance for doubtful accounts) per the general ledger and the
related percentages.
The comments section at the end of the form may be used to explain any unusual items.
8-49
Appendix 8D
Company Name:
Period Ended:
Prepared by:
Date Prepared:
Current Month
Target
Actual
Same Month in
Prior Year
Actual
%
12 Month
Average
Actual
%
Credit Sales
Accounts Receivable
Aging Analysis:
Current 0 30 days
31 60 days
61 90 days
91 120 days
Total unpaid
Turnover Analysis:
Days sales outstanding
Bad Debt Analysis:
Bad debt expense
Percent of sales
Reserve for bad debts
% of A/R over 60 days
Comments:
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
8-50
Appendix 8E
Inventory Monthly Management Report
Company Name:
Prepared by:
Date Completed:
Instructions: Use this form monthly to monitor the overall inventory function (including purchasing).
Current
Month
Inventory Category
Inventory Balances
Inc.
(Dec.)
Prior
This
Beginning
Month
Month
Of Year
Year-to-date Turnover
Inc.
(Dec.)
YTD
This
Year
Last
Year
Target
Total Raw Materials
Total Finished Goods

Total All Inventories
Purchasing Activity
Current Month
This
Last
Year
Year
Purchase orders
issued
Purchase orders
issued
Average per order
Merchandise
received
Merchandise
rejected
Rejected as % of
received
Overall Comments
Year to Date
This
Year
Last Year
$
#
$
$
$
%
Purchasing Department Expenses:

Salaries and
wages
Other payroll
costs
Travel and
entertainment
Occupancy costs
Other
Total
$ Dept Exp/$
Purchases
$ Dept Exp/#
Purchases
8-51
8-52

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Accounting Policies and Procedures Guide

Copyright 2012 Bybee & Company, CPAs, PLLC

Accounting Policies and Procedures Guide

INTRODUCTION TO SMALL BUSINESS ACCOUNTING.................................................. 1-1

OVERVIEW OF THE ACCOUNTING PROCESS ............................................................... 2-1

PROCESSING SALES AND RECEIPTS............................................................................ 3-1

PROCESSING PURCHASES AND PAYMENTS ............................................................... 4-1

PROCESSING PAYROLLS ............................................................................................... 5-1

MAKING ACCOUNTING ADJUSTMENTS ......................................................................... 6-1

MAINTAINING THE GENERAL LEDGER .......................................................................... 7-1

PREPARING FINANCIAL REPORTS ................................................................................ 8-1

Introduction to Small Business Accounting

INTRODUCTION .................................................................................................... 1-1

WHO ARE THE ACCOUNTING STAFF? ............................................................. 1-1

WHAT DOES THE GUIDE COVER? ....................................................................... 1-2

HOW SHOULD THE GUIDE BE USED? ................................................................. 1-3

Introduction to Small Business Accounting

Introduction to Small Business Accounting

WHO ARE THE ACCOUNTING STAFF?

WHAT DOES THE GUIDE COVER?

HOW SHOULD THE GUIDE BE USED?

Who Are the Accounting Staff?

What Does the Guide Cover?

How Should the Guide Be Used?

105 WHO ARE THE ACCOUNTING STAFF?

110 WHAT DOES THE GUIDE COVER?

Introduction to Small Business Accounting

Chapter 2: Overview of the Accounting Process. This chapter summarizes the

Chapter 4: Processing Purchases and Payments. This chapter provides

Chapter 5: Processing Payrolls. This chapter begins by providing guidance on

Chapter 6: Making Accounting Adjustments. The previous three chapters cover

Chapter 8: Preparing Financial Reports. This chapter provides guidance on

115 HOW SHOULD THE GUIDE BE USED?

Addressing day-to-day questions. The Guide will frequently be used as a

Introduction to Small Business Accounting

Overview of the Accounting Process

INTRODUCTION ................................................................................................... 2-1

TYPES OF FINANCIAL RECORDS........................................................................ 2-1

Segregation of Duties ....................................................................................

BOOKKEEPING SKILLS EVALUATION ................................................................. 2-13

Sales, Accounts Receivable, and Cash Receipts ...........................................

BASIC INTERNAL ACCOUNTING CONTROLS ..................................................... 2-11

PRIMARY ACCOUNTING PROCESSES ............................................................... 2-5

Source Documents ........................................................................................

Reference Checking ...................................................................................... 2-13

SUMMARY ............................................................................................................. 2-14

Overview of the Accounting Process

Overview of the Accounting Process

TYPES OF FINANCIAL RECORDS

PRIMARY ACCOUNTING PROCESSES

BASIC INTERNAL ACCOUNTING CONTROLS

BOOKKEEPING SKILLS EVALUATION

Types of Financial Records. Section 205 briefly discusses the five

Primary Accounting Processes.

Basic Internal Accounting Controls. Section 215 provides a brief

Bookkeeping Skills Evaluation. Section 220 provides guidance to help

TYPES OF FINANCIAL RECORDS

Overview of the Accounting Process

Flow of Basic Accounting Records

Purchases. Vendor invoices and supporting documentation, such as

Sales. Customer sales invoices and supporting documentation, such as

Cash disbursements. Company checks (accompanied by previously

Payroll. Time cards, time reports, or other documents showing time