Auditors generally frown upon the concept of a manual journal in accounting systems.
A manual journal is viewed as one of those items that speaks to a lack of integration among ones’ systems, or perhaps a failure in the good and proper accounting bookkeeping and accounting process. But, while one or more of these statements may be true, the reality is that there are certain circumstances under which the creation of a manual journal is simply a necessity.
What is probably more important is exposing the entire business and business partners, as well as the audit team, to the events that drive the creation of the manual journals and what systems and processes you can put in place to either constrain their use or minimize their application. Some of the kinds of manual journals that get created in the normal course of business include suspense, recurring, allocation, budget, standard, reversal, statistical, formula, encumbrance and tax journals.
A few of the more significant ones are described below and you may have others of your own, or ones that you describe differently.
Recurring, non-recurrent and ad-hoc journals
Recurring, standing or standard journals are manual journal entries that are made on a regular basis. Such entries may be made on a periodic (monthly, quarterly, annual) basis. These journals are typically judgment-based entries or adjustments due to systems or integration limitations.
Some examples of standing journals might be made around lump sum payments/ receipts/ amounts that are allocated periodically, or reallocation of reserves or revenue recognition adjustments. Volumes can be high and sometimes the individual amounts immaterial, but in aggregate these can be significant.
Cross-currency exposures for example, can result in high volumes and high values. Further, there may be the desire to trace entries to original source transactions – this may be particularly significant when engaging in cross-company entries that have significant balancing requirements. Such entries may be for getting management reporting correct for inter-unit charges, such as shared expenses or allocations.
Non recurrent entries are those that are generally well defined at the outset of a period, but will not be repeated in future periods. These entries are often transaction-related and may arise out of mergers, acquisitions and disposals.
Ad hoc entries would typically be those that are not anticipated at all so this is a bit of an umbrella term. Ad hoc entries arise due to mistakes that are identified post period, issues, errors or omissions of entries. Ad hoc entries often include reconciliation adjustments, or corrections due to bookkeeping or clerical errors.
Managing the process is hard
Manual entries of any sort are often a source of concern, error and inefficiency, and certainly my conversations with auditors in particular drive toward the notion that they should be eliminated if possible.
The issues related to these entries vary from company to company and depend on their general ledger systems and tolerance levels. One customer for example told me that he does not want to consider inter company reallocations of less than $100,000, but he has a tough time teaching people in some divisions that in the end lesser amounts are more expensive to process than to simply let slide.
Some of the issues that are particularly problematic around manual journals are the following:
- Documenting the manual journaling process
- Large journal handling
- Ensuring compliance in the manual journaling process
- Providing audit, approval and evidential support.
For organizations using systems like SAP the ways to resolve these kinds of challenges ‘out-of-the-box’ are somewhat limited. Automating the actual journal process only solves a part of the problem and as a consequence one needs to consider more than just journal automation, irrespective of whether you choose to continue with manual entry of manual journals, build a solution, or buy a ready-made product that does the job.
Find out how Winshuttle helps with this core accounting process activity with the Winshuttle Journal Entry product.
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