Run your accounting while you run your business
Batch posting, provision, reconciliation, these are some the words we hear finance managers and accountants throw around when dealing with their accounting software.
It's nothing out of the ordinary, in fact, it's common practice to have your business operations generate data and have your accounting team record every event. Believe it or not, most Fortune 500 companies use software in this fashion, for all the complexity big vendors like Oracle, Microsoft, SAP, Netsuite offer, there's still an element of parallel work to be done (business events occur and accounting transactions are recorded)
The answer to this outdated operation practice is a term called 'Continuous Accounting'. It refers to the "automation, control, and period-end tasks within day-to-day activities, allowing the rigid accounting calendar to more closely mirror the broader business" (As quoted by BLACKLINE, an early pioneer in Continuous Accounting). Here's a breakdown of the term, why it came to light, how it helps finance departments operate efficiently and it's use in Sparta Enterprise.
The Accounting Cycle
Accounting by itself is a form of record keeping, designed to monitor the events that are linked with the increase or decrease of cash, equity, liability, assets, expenses. costs and revenue. It's function is to paint a picture of what is owned, what is owed and the different events that make your business tick.
The cornerstone of accounting are transactions: events that are recorded on a specific date inside what's called a cycle. An accounting cycle is set of processes that an organization uses to record and process financial transactions.
In general there are 8 steps in the accounting cycle:
Identifying Transactions
Recording Transactions in a journal
Posting
Unadjusted Trial Balance
Worksheet (Identifying adjusting entries)
Adjusted Journal Entries Entries
Financial Statements
Closing the books
This ordered list helps accountants mitigate any accounting error. If done right, the accounting cycle will be used as a foundation for financial analysis, a major part of determining the health of a business.
The Accounting Cycle (Source: excel-pmt.com)
If this accounting practice has been applied properly with all the transactions being identified, classified and recorded on a timely basis, then the accounting department will have done a great job of matching the business activities to financial output. But that's easier said then done.
2. Event to Transaction
Businesses vary in different aspects. They can operate in different industries, use different business models, they can be big, small, have a physical office or not, regardless, they all follow common accounting processes.
In general, a business activity triggers an accounting process. That accounting process is recognized but not yet recorded when the following business activity occurs. Picture this: a Purchase Request is converted to a Purchase Order: so far, no financial output is made. The Purchase Order is then APPROVED where the vendor is formally contacted for shipment of the goods.
Purchase Orders can be manually filled out or directly inserted into software
The vendor sends out a Proforma Invoice and based on that, the business decides to dispense funds. A payout has been identified and the business' bank account will show a withdrawal of some sum. Up to this point, it's business as usual, but the accountant has prioritized the release of funds so that no hiccups occur. The recording of the transaction will be made in accordance to the event.
From a distance, this procedure doesn't seem inefficient. But this example showcased only one transaction. Imagine a business with thousands of transactions in a day. Events like purchase payment settlements, credit sales settlements, expense recognition, salary payouts, inventory adjustments, prepayments, accruals and more will come up left and right, constantly.
Accounting is relentless and with the slightest miscue, the accumulation of transactions can tilt towards a disaster scenario. Accountants will have a hard time figuring out the best course of action let alone identifying the source of the issue.
In comes => Continuous Accounting
3. Continuous Accounting
Accounting software vendors have been focusing on usability for years now. Businesses moved from book ledgers, to typed up paper record keeping, to databases and now to full blown software.
While technology evolved, most of the innovation on accounting software has remained slightly stagnant. One theory could be that accountants are still abundant and they know how to do their job, software is merely a helping hand. That's unfair to the users but a fair judgment if you asked any of them.
The continuous accounting framework can weigh in on this: while the objectives of software is still to speed up operations and reduce human error, we can go a step forward into the accountants process of closing the book by applying this framework.
For instance, with step 5 of the accounting cycle (Worksheet: Identifying the adjusting entries), since all the transactions have been recorded as they occurred, the user can identify any debit/credit discrepancies, point out abnormal account balances and flag of place transactions.
Thus, corrections can be made instantly as all users have one source of truth and each business activity will be in line with their respective financial outputs.
BlackLine offers instant Ad Hoc analysis using posted GL transactions (Source: BlackLine)
The process of automating accounting processes isn't new, many enterprise software have bits and pieces of functionalities that help users create transactions as the event occurs.
But the problem comes with complexity, efficient process recording can be done so long as multiple scenarios and use cases can be accommodated. This requires a robust setup management, a nuanced approach to development while still maintaining the integrity of the accounting cycle.
4. Sparta Enterprise
To accommodate the different accounting scenarios, our team came up with a matching principle concept:
Let's say you have a spare part maintenance business. Your main focus is providing preventive and curative up-keeping but you own stock and occasionally sell parts to distributors and end customers. Your items and services will be registered on the 'Item Master Data' page. Now three fields are important to identify here:
Stock/Non-stock
Warehouse
Inventory Posting Group
The Item Master Data page (Source: Sparta Enterprise)
These selections play a big role in the generation of accounting entries. In this example, the item 'J-bolt' is a Stock item (Generates inventory transactions and movement is tracked) located in the Spare Part Store with an inventory posting group of SPARE PART RESALE.
If we dive into the setups, these fields are inter connected through the Inventory Posting Setup, a collection of accounts that are hit in specific accounting events once the right set of combinations are met.
Inventory Posting Setup (Source: Sparta Enterprise)
As previewed above, J-bolt carries the 'SPARE PART FOR RESALE' inventory posting group. Add to that the Warehouse location 'Spare Part Store', both of which are fields on the item master data. With this combination, we can choose the accounts that will be triggered through different events.
Let's say the company decides to sell this part to a regular customer that is allocated a line of credit. The Sales Order is