Accounting Best Practices, Fifth Edition

12–11. Eliminate Small Accruals

In some companies, there is a focus on achieving perfectly accurate financial statements, no matter how many extra accruals are needed. Though there is a certain degree of professional satisfaction in issuing a set of absolutely accurate financial statements, this can use up a considerable amount of accounting resources, which could be better used elsewhere. For example, it may require 20 extra accruals, along with the attendant analysis, review, and approval effort, to yield financial statements that now have a profit altered by one or two percentage points. Realistically, such a slight change in the financial results will not have a noticeable impact on the decision making of the managers, stock analysts, or creditors who review the financial statements. So, despite an inordinate amount of extra effort, no one really cares about the slightly more accurate results.

The answer is to review all existing accruals and throw out all of the ones resulting in only very small accrual amounts. By doing so, less time is needed to produce the financial statements, opening up resources for other uses. However, when conducting the accrual review, it is important to check on a number of past journal entries to ensure that each accrual is always a small one—if there is even a slight chance of an accrual occasionally being a large one, it is best to keep it in place on the grounds that financial statement accuracy could be severely impacted by its absence at some ...