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Money Matters: How the Board Spends Our Money

By Don Knight, WEG member

I thought I would give everyone a brief introduction to the main two different accounting forms, cash and accrual.

The first is Cash Accounting. This is what most of us use in our daily lives. A bill comes in, it gets paid and we don’t really worry about trying to tie it to a particular month. Anyone who charged Christmas presents in December, most likely paid for those presents in January. Now, that is actually a December’s expense, but we don’t really worry about that detail. I get my PGE bill around the 3rd of the month for last month, and it is paid on the 22nd. Again, it doesn’t make a lot of difference.

The other method of accounting is Accrual Accounting and is used by most businesses including WEG. Businesses want to know what the actual profit or loss is for that month (and eventually for the year) based on trying to get the revenue and expense recorded into the correct month. In this type of accounting, you try to match the expense to the month that the expense relates to from a business perspective.

A couple of examples:

In the instance of a PGE bill received the 3rd of the month, a business would enter that bill dating it the 30th of the previous month in the accounting system so the charges for electricity used during that month are expensed in that month.

Where I used to work, we operated on an accrual accounting basis with a fiscal year starting in July. We had two pay-periods each month, with the second pay period ending on the last day of the month. Now, it wasn’t possible to create a payroll for 180 people on the last day of the month and pay them. So, we created the payroll and paid them on the 5th of the following month. We created journal entries dated the end of the pay period charging the different departments for salaries, taxes, and 401k expenses, and offset those with Payroll Payable, Taxes Payable and 401k Payable, listing both the employee payroll, along with the employee and employer portions of Federal and State Taxes, and employee and employer match for the 401k. When we paid the employees, paid the taxes and 401k expenses, we created another journal entry and charged those to the bank account as cash going out. Now the expense was in the correct month, even though the actual cash outlay was in the following month. Think of it as writing a check on the fifth of the month, but dating it the 30th of the preceding month.

Because at some point you need to close the fiscal month, we chose the 5th business day to close the previous month. By that time we had most of the expenses for the previous month and looked over our reports to see if anything was missing. For us, most of the time it was the garbage bill. We then created a journal entry dated the last date of the month to allocate the estimated bill to the various departments. We also would set it up to automatically reverse on the first of the following month. Then when the garbage bill did arrive, it was entered as any other bill.

We would do this every month except for June, which was the end of our fiscal year. There we would keep June open until July 20 to make sure we got as close as we could to include all expenses into the correct fiscal year. We would then do our month end and year end closes, and begin to prepare for our annual audit.

We had two major audits during the year, a 401k audit and our annual audit, along with four to six smaller, shorter audits. Because our two major audits totaled about $48,000, we accrued one twelfth of the expense each month, creating a charge in Accounts Payable. This way we spread the expense out over the year and did not get hit with a major expense in any one month. When we finally received the bill for the audit, we would pay it and the Accounts Payable balance would be reduced. Because the expense is divided and recorded into each month, it does not matter in which fiscal year the bill is actually paid, except for its effect on cash flow.