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).
Replies (27)
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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.
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.
I agree. Am I the only one who has clients that put the majority of their business costs to ‘sundry’?
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.
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.
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.
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.
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.
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.
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.
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).
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.
For Numberwang. Ahh all is clear now. If someone does not even understand what entertaining is the problem is, in my opinion, the person.
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.
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.
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
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.
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.