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Which standard deals with P&L classification?

Looking for backup to P&L classification of expenses

Hi,

I'm currently re-organising the purchase ledger of the company that I work for.

The Accounts Manager (who isn't qualified) has some bizaar thoughts on expense classification (eg, job vacency adverts posted to Marketing, Temp costs posted to Employee Salaries, taking staff to the pub at lunchtime posted to Entertaining, the cost of the staff coffee machine to Subsistance....that sort of thing(I could go on!)).

I'm just wondering if there's a particular standard or guidance anywhere that deals with expense classification that I can use as backup when I put these right (I am qualified, but I can't remember if there's a particular standard that deals with classification of expenses on a Management Accounts level as opposed to Financial Statements).

 

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16th Feb 2018 12:00

No. Just use your common sense - a resource apparently overlooked by your colleague.

Much depends on what information management require.

Personally, I'm in favour of erring on overdoing the analysis. It's easier to add numbers together than sift through to take numbers out of a nominal account.

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to lionofludesch
16th Feb 2018 12:29

Quote:

No. Just use your common sense - a resource apparently overlooked by your colleague.

Much depends on what information management require.

Personally, I'm in favour of erring on overdoing the analysis. It's easier to add numbers together than sift through to take numbers out of a nominal account.

I didn't think so.

I totally agree!
I've been an accountant for 20 years and I've never seen anything like it - the audit adjustments are several pages long each year due to the lack of knowledge.

The directors brought me in to sort out the mess but, at the same time, they don't want me to upset the Accounts Manager...the only way to achieve that is to keep everything the same and do nothing.

I prepare the Management Accounts each month by (pretty much) taking a raw list of transactions out of the system and re-analysing each one to where I know it should go, unfortunately, a lot of transactions slip through the net due to the volume and I get department heads and directors complaining each month that they're taking costs that don't belong to them.

Previous attempts to confront the accounts manager have just led to a face-off and conversations generally go like this...
"job adverts should go to Recruitment"
"no, it's Marketing"
"Marketing activities are really only things that intend to increase sales"
"Yes, and by having more staff, we can achieve more sales"

It's insane!

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to Numberwang
21st Feb 2018 12:01

As most posters allude to, there isn't a specific standard for management accounts.

I have been in similar situations - don't upset the individual & the individual is stubbornly against changing their system.

The best approach I have found, if you can't negate the issue via nominal coding, is to prove the illogic in their current coding in a non-confrontational manner, letting them think through and change their own opinion.

eg. in your example of job adverts, I would counter that if staff bring more sales wouldn't we therefore charge payroll to marketing and therefore other staff costs (subsistence etc.) and then also open a conversation for them to change their own views with - by using marketing are WE (not you, which is accusatory) looking at a possible indirect effect, would it be more appropriate to consider the direct requirement which is to RECRUIT staff and code it based on direct requirements/impacts?

Give them time to consider this viewpoint and see how they react when you broach it again - don't push for an opinion straight away as they are likely to just dig their heels in.

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to lionofludesch
16th Feb 2018 15:41

I agree. Am I the only one who has clients that put the majority of their business costs to ‘sundry’?

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to andy.partridge
16th Feb 2018 16:04

I actually ask my clients to do this if they are in doubt. The problem is they have become lazy and just use it as a catch-all category.

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to Chipette
16th Feb 2018 16:48

Queries or Suspense might be more appropriate.

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to andy.partridge
19th Feb 2018 15:29

I have one client who (is very good) and says 'Nothing is sundry, if I need an account for it, I'll create it'.

Had (Had being the word) another who viewed 'Sundry' as also a suitable place for anything non-business related, like the Saturday afternoon shop at Asda, and the subscription to various internet dating websites.

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16th Feb 2018 13:08

Well, the short answer is that no standard goes into that level of detail.

FRS 102 has very little detail on the P+L. FRS 105 even less.

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16th Feb 2018 13:28

Whilst the examples provided are a bit... off (I could see a few of them) the fact is, the only guidance given in 'Standards' is the Companies Act itself.

There are only five classifications in the Companies Act.
Turnover, Administration Expenses, Cost of Sales, Interest Payable, Taxation and that's broadly it.

You are then (for Medium+) companies supposed to disclose additional items in the notes, like staff costs and depreciation, operating lease payments but nothing further. Everything else, the back pages, is over disclosure.

If you post the telephone bill to the electricity nominal, that is not wrong for the CA2006 as both are an 'Administration expense' (probably), so the auditors *technically* shouldn't care (but I know I would). And for HMRC, they won't care either as both are allowable expenses.

Your management accounts will look like a disaster, but they aren't incorrect from a Statutory point of view unless the Accounts manager starts posting repairs into depreciation, or the legal bill into equipment hire.

Bit of fun that.

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to thevaliant
16th Feb 2018 14:14

Yes, this is what I thought.

The Management Accounts are a disaster before they are altered by myself.

...and there's no danger of anything getting posted to Depreciation as [he or she] doesn't post depreciation as "it isn't real so there's no point".

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to Numberwang
19th Feb 2018 15:32

Ahhh, the good old Corporate Finance view of EBITDA.

Depreciation, Amortisation, Interest and Tax - add them all back - they're not real, so don't consider them in valuation.

Except Depreciation is a cashflow, just accounts defer it; So is interest and tax. So just ignore them.

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By tom123
16th Feb 2018 13:50

My golden rule has always been classify something according to what it is, rather than what it was for or why it was spent.

It should be possible for anyone to objectively look at the information on the face of the invoice and classify it according to what it shows.

Accountancy is an art not a science, but I would always try and pick consistency as one of your watchwords.

If you are looking for a standard to tell you how to do everything you are doing something wrong.

If they need to know special rules that only Janet knows who has been there forever, in order to decide, you have taken the wrong route.

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to tom123
16th Feb 2018 14:26

I'm hoping to bring in a purchase ordering system where each budget holder can specify where each item is to be coded within their own section of the P&L - this should ensure that each cost gets to where it's supposed to be (as every cost has an 'owner').

I'm not looking for a standard to tell me how to do anything - I'm merely looking for some kind of backup to the way that I was taught and the way that everybody that I've encountered does things.

Sure it's an art, but we're talking about things that are actually wrong as opposed to a difference of opinion.

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By tom123
to Numberwang
16th Feb 2018 15:30

If they are wrong they are wrong..

I generally find it helpful to have the same selection of codes within each department - of course that depends on your software and how you can report the data.

The problem with departments (in my experience) is often the number of cross departmental invoices - for example photocopying, or IT support.

I tend to avoid departmental allocations, and try to have a central admin department for what you could call shared costs.

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By DJKL
16th Feb 2018 14:31

Must admit these days it can be trickier with some items.

I tend to sometimes say use composite heads e.g Telecoms, Internet and Communications is now a favourite, there are so many bits and bobs that might be x, y or z re these that it is so much simpler to group them rather than split them. Then again with vehicles I do like to split by say RFL/Insurance /Mot(fixed) , repairs (semi variable) and fuel (variable).

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21st Feb 2018 10:15

Google Chart of Accounts. Plenty of templates. If you are using a proprietary system such as Sage they provide excellent recommended Chart of Accounts.
The fact that the person running the accounts is not qualified is not valid. I once audited a major pharmaceutical company whose FD was one of the most talented accountants I ever met. He was not qualified. I have also met some qualified I would not trust to post ledgers. It is all down to the individual.

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to Golfemmo
21st Feb 2018 10:25

It's not really a 'chart of accounts' problem (it's my thread by the way - I started it anonymously but then realised that you can't respond anonymously!).
I'm sure each CoA template will have similar headings but if the guy driving the accounts department does't know what 'Entertaining' means, it's not going to work.

I take your point on the 'qualified' thing...this IS all down to the individual :-D

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to Numberwang
21st Feb 2018 10:30

For Numberwang. Ahh all is clear now. If someone does not even understand what entertaining is the problem is, in my opinion, the person.

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to Golfemmo
21st Feb 2018 12:05

The solution is to get a new person.

The one they have is past its Best Before date.

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to lionofludesch
21st Feb 2018 12:20

...that made me laugh!
I totally agree - I was originally brought in as a consultant to make that happen, unfortunately (as is the case with most consultant assignments), I presented the board with the solution that they were looking for and they decided that it would be best not to change a thing!

I'm now employed by the company and my job basically consists of correcting things on the face of an excel spreadsheet before it goes out to the board - I wait for the numbers to be ready each month and extract a TB and spend a lot of time trawling through transactions and adjusting everything into it's correct place.
This is obviously completely inefficient and means that the monthly management accounts aren't ready until around the third or fourth week in the month following.

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By trecar
21st Feb 2018 12:34

My guess is that the company is not particularly large as the accountant s doing the posting to the purchase ledger. My experience has been that expenses are classified in a central system such that anybody responsible for invoice posting refers to a standard classification system and has to defend any variance from that system.
My suggestion would be to sit down with the accountant and jointly devise such a system pointing out along the way that where people may be confused explanations for treatment are required. This would have the advantage of forcing the accountant to consider the thinking process of others who are less experienced. It would also make the accountant defend a viewpoint against inconsistencies and poor logic.

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21st Feb 2018 13:51

There are broadly two approaches
- have as many account codes as possible (Paralysis by Analysis) ; and
- have as few account codes as possible (Keep It Simple).

We accountants are used to having a plethora of account codes and then spending hours recoding things posted to the "wrong" account.

I would challenge that. Most of the time, no-one cares whether those expenses are gross pay, overtime, NI pension - they're still employment costs. So post them all to one account.

If once in a while you do need to understand the detail, there are plenty of other ways of doing it within most systems, such analysing spend by supplier, running payroll reports. and so on.

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22nd Feb 2018 10:28

Hi
Could you not set up additional accounts for the regular items, eg:-
* you already have "Marketing" so create another account "Marketing - Job Vacancies";
* you already have "Employee Salaries" so create another account "Employee Salaries - Temps"; and
* you already have "Entertaining" so create another account "Entertaining - Staff Lunches".
The Accounts Manager can post the entries in these new accounts and you can simply journal the totals to wherever you want them to go. As far as the Accounts Manager is concerned, he/she is still posting them in the type of account that they would like (so no real change for them) but you don't have to trawl through every entry to identify those that should be entered elsewhere.
Cheers

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to The Tax Factory Ltd
22nd Feb 2018 10:59

I think one or two people here are not getting the point (... and I mean that totally respectfully, perhaps I was too vague in my description...I've been deliberately vague in case anyone recognises the company or people involved).

The accounts manager is in charge of the accounting system and it took me a long time to convince him that I even needed a login and I accessed the numbers via SQL.

As far as chart-of-accounts and accounting entries go, he thinks he is running the perfect system and there's nothing that can be done to improve it - he thinks my role is a waste of resources (despite the board thinking that my analysis is the best they've ever had and is key to running the business), and anything that I suggest (more nominal codes, posting things to the correct place etc) is disregarded as he's never heard anything like it in all his years.

So...each month I take the TB and re-analyse it....he (or she lol) spends a day creating and posting the payroll journal - I spend a day re-analysing it my 'system' etc etc.

What I'm trying to avoid is my argument being taken as one person's opinion...my word against his. So I'm looking for any kind of documentation to say that, 'generally', this is how it should be.

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to Numberwang
22nd Feb 2018 11:13

Quote:

What I'm trying to avoid is my argument being taken as one person's opinion...my word against his. So I'm looking for any kind of documentation to say that, 'generally', this is how it should be.

You won't find it.

Your best plan is to win the support of your Board and get them to tell the numpty to do as he's told. Quantify how much time you waste and what it costs.

Include NI, pension costs, holiday pay and smoke breaks.

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to lionofludesch
22nd Feb 2018 11:24

Yep - I think that's the best route....I'm already part-way to achieving this, I've already been giving a huge chunk of the accounting responsibilities - I'm just at the uncomfortable stage of trying to make it work.

Chatting about this on here has put my mind straight though!

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By Arcadia
24th Feb 2018 12:27

How about a chart of accounts with 5 codes, Sundry, Miscellaneous, Other, General and of course, Suspense for where you can't decide. That should simplify things.

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