Invoice Adjustments, Adjusting Entries and Year-End Close

There are a variety of adjustments that can impact financial bookkeeping and financial statement reporting. When these adjustments are not made on a monthly basis, it can be a nightmare at year-end, but more importantly the business does not have an accurate picture of revenue and liabilities. Without an accurate picture, the business can’t plan ahead for cash flow issues or untapped opportunities. Learn the difference between available invoice adjustments and various entry adjustments to improve your month-end processes.

Invoice Adjustments

Invoice adjustments generally fall under two categories, invoice adjustment and invoice item adjustment. While both adjustment types affect the invoice balance, the adjustment you use will depend on the intent for the change and how you need to record it for financial statement reporting purposes.

An invoice adjustment changes the distribution or amount of the invoice. This could be used to apply a late fee to the invoice balance or to apply an overall discount.

Invoice item adjustments affect an individual charge on an invoice, allowing you to modify at line item level. These are automatically tied to the accounting and revenue codes within your system. The invoice item adjustment helps to ensure greater accuracy of reports and accounting integration.

Adjusting Entries at Month-end Close

Both invoice and invoice item adjustments are performed within the accounting period and will tie directly into your accounting reports. These are not to be confused with adjusting entries, which are made on the last day of an accounting period after a trial balance is prepared and before financial statements are done. Adjusting entries are made directly to the revenue and expenses and used within the accrual method of accounting. Every adjusting entry will affect at least one income statement and one balance sheet, which impacts the accuracy of financial statements.

Under the accrual method of accounting, revenue is recorded when the invoice is created, not when the client pays. Likewise, expenses are recorded at the point they are incurred, even if the bill is not yet paid. Further, when accounting for a contract that spans over a period end (either a month-end or a year-end) the revenue billed may not be matched in the same period as the costs associated with generating the revenue. This is true for both government contractors and construction contractors. A calculation should be made to match the level of effort (costs) reported in the period with the revenue (invoices).

Examples of some month-end adjustments are:

  • At the end of each period, a calculation to match the level of effort (usually calculated by costs incurred) with the revenue reported (not just billed or invoiced) on all contacts spanning over a period end.
  • Allocations of indirect costs into the direct production costs for manufacturing or construction processes.
  • Adjustments for prepaid or accrual of expenses such as insurance, payroll, vacation and PTO.
  • Depreciation and amortization charges on fixed assets

Adjusting Entries at Year-end Close

Many businesses project a sense of foreboding when year-end approaches, but it doesn’t have to be a difficult process if monthly closes are done correctly and thoroughly. If making entries and adjustments on a monthly basis, year-end simply becomes another monthly close involving the same process.  The year-end adjustments are essentially the same as what are made on a monthly basis as shown above.

The major difference in a year-end close is that all income and expense accounts will get closed out to retained earnings so once the year-end closing process is completed, no further adjustments can be made. If you find an error in last year’s books after year-end closing, there are a few ways to fix it, but it will need to be adjusted and accounted for in the current year.

The decision on the number and timing of period close depends on the level of confidence and assurance that management places in the financial information. That is, if management is going to review company performance based on the financial statements on a monthly basis then it is critical to make the monthly adjustments as exampled above. If not made, performance can vary widely simply due to the timing of accounting entries and processes such as invoicing dates for revenue, or payroll check dates for payroll expenses. If management is only looking at these performance metrics on a quarterly basis, then quarterly adjustment could be sufficient.

When it comes to bookkeeping and accounting, it’s more efficient and cost effective to do it right from the beginning, but it’s never too late to fix less than stellar reporting procedures. Our Solutions Services group was formed to help companies with everything from bookkeeping services to providing outsourced CFO services. Contact Ryan Campbell, CPA at 256-533-1040 for information or to schedule a time to discuss your outsourced accounting service needs.