Accounting Principles - RFC

Accounting Principles - Request For Comments

Status of This Memo

This draft document specifies Accounting Best Current Practices, and requests discussion and suggestions for improvements. Distribution of this memo is currently restricted to employees of the Company.

This is not an exhaustive list, but addresses Actual Current Practices that presently block achieving the primary purpose of Accounting.

The key words “MUST”, “MUST NOT”, “REQUIRED”, “SHALL”, “SHALL NOT”, “SHOULD”, “SHOULD NOT”, “RECOMMENDED”, “MAY”, and “OPTIONAL” in this document are to be interpreted as described in RFC 2119.

I. Overview

These best practices SHOULD apply to any particular system, whether software or paper, used to implement accounting. However, capitalized words such as “Invoice” and “Payment” refer to documents supported by Adempiere. There will be similar documents on any electronic system, and paper copies on a paper system.

Four purposes of an accounting system

1. As its primary purpose, an accounting system MUST record as accurately as possible the transactions between the Company and external entities such as banks, customers, vendors, and employees.

2. The accounting system SHOULD also be able to create reports showing desired views and summaries of the transactions.

3. The accounting system SHOULD automate generation of accounting transactions whenever this is practical. For example, EDI orders are created automatically from incoming messages, and invoices are created from completed shipments.

4. The accounting system MAY be able to project future transactions.
   For example projecting demand for products and recommending inventory levels.

II. Obstacles to Purpose 1

Except where transactions have been automated, the system is dependent on humans to enter the transaction data. It is absolutely critical that each and every record entered for a real life external entity be an actual transaction with the real life external entity.

1. Payments recorded for a particular bank account MUST consist ONLY of payments actually made or received for that bank account. This is verified by entering official statements from that bank. There MUST NOT be any Payment transactions for the bank account that do not appear on any official bank statement and are not expected to appear on any future bank statement.

   i. ALL lines on an official Bank Statement MUST be recorded. In general, all lines MUST be matched with the corresponding Payment record. Exceptions MAY include interest payments, and bank fees, which can be entered as Bank Statement lines that directly charge an appropriate G/L account.

   ii. Payments that have been marked reconciled because they have appeared on an official Bank Statement MUST NOT be Voided. If the payment was recorded to or from the wrong business partner, then it may be Reverse Corrected. The reversal and replacement MUST be added to a special “errata” Bankstatement with a total balance change of 0.00, clearly named to be associated with the official bank statement. The replacement Payment MUST match the original in every other aspect. (Editor’s NOTE: I am not aware of any other circumstances requiring Reverse Correct of a reconciled Payment.)

   iii. Payments MUST NOT be entered for a bank account unless they have appeared or are expected to appear on an official Bank Statement for the account. It is not sufficient for the ending balance to match. The purpose of the Bank Statement document is to list the actual payments, and only the actual payments.

2. Invoices recorded for a particular Customer or Vendor MUST consist ONLY of invoices actually sent to or received from that Customer or Vendor. Vendors may provide a statement of account periodically that details such invoices. The Company also periodically sends out such statements to customers.

   i. Vendor Invoices MUST NOT be entered unless the vendor actually sent such an invoice in real life.

   ii. All Invoices sent by a vendor MUST be entered - even if they are disputed. When a dispute is settled, the Invoice may be paid, partially paid, or Voided with documentation of the settlement.

   iii. All goods and services rendered to a customer MUST apear on an invoice. If the goods and services are provided free of charge, then the amount of the invoice or invoice line may be 0.00. (Editor’s NOTE: this may be changed by company policy.)

3. A bank Deposit Batch for an actual real life bank account MUST list ONLY deposits actually made to that bank account.

   i. It is not sufficient for the total to match. The purpose of the batch is to list the actual Payments, and only the actual Payments making up the deposit.

III. Closing Periods

1. A period MUST NOT be closed until the Bank Statements for that period have been reconciled.