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How to produce monthly management accounts – part 2

5th Oct 2015
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In this second part of this entry-level guide to management accounts, Mazhar Mahmood outlines the production process.

The sequence of activities and the importance attached to each activity can be very different, depending on the line of business that you are in. In time, you are likely to develop a more vivid and succinct picture of the production process, which you can then integrate into your own particular circumstances. Most of the information contained is from the point of view of working in a service-based industry.

Part one – what are we trying to produce and what you should know before starting production – can be found here or on this blog’s homepage.

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Part two: The production process

Broadly speaking, the finance department of almost all businesses - ranging from small and medium to publicly listed companies - have the following sub-departments, either separately or combined, within the main finance function:

  • Sales order processing – SOP
  • Sales ledger
  • Credit control
  • Purchase ledger
  • Management accountancy
  • Financial accountancy

On a day-to-day basis, orders are processed on the sales ledger system. The sales ledger system can exist within a company’s main accounting software, or it could be a separate system altogether. The result of sales order processing is the production of sales invoices.

These sales invoices are then chased by the credit control department for collection of monies due. Once monies are receipted at the bank, such receipts are recorded by the sales ledger department on to the main accounting system.

Alongside this, on a daily basis the purchase ledger department will process ‘purchase invoices’ i.e. bills that the business has to pay. For most businesses, the recording of purchase invoices involves:

  • Categorising or classifying each bill to a cost type(s).
  • Assigning the cost to a specific product, department or business unit.

For example, if a business spent £5,000 on the printing and binding of a magazine (assuming a magazine is a ‘product’ generating revenue stream for the business), the purchase ledger manager would record this cost as a direct cost (giving it a direct cost nominal ledger code from the chart of accounts – see part 1 for sample chart), and assign the cost incurred to the ‘production department’ and the ‘print publications’ business unit of that organisation.

The bill is settled in due course by the purchase ledger manager.

The bottom line is that on a day-to-day basis, sales invoices are being raised and monies received, alongside bills being recorded and settled. At the end of each month (or at a cut-off date just before the end of a month), you will request all relevant departments to make no further entries in the period for which management accounts are to be prepared. Your management accounts start here!

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Mazhar Mahmood (MBA/ACMA/CGMA) is the author of ‘How to produce management accounts’.

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