Accounting Best Practices, Fifth Edition

12–7. Automate the Cutoff

The single most difficult issue at the time of each financial statement closing is the cutoff. This involves matching the invoices from suppliers with receipts to ensure that all expenses carry with them a corresponding benefit within the same period. The main problem in this area is the cost of goods sold, where large quantities of goods are received every day, usually comprising the bulk of all expenditures. If even a single high-value delivery is recorded in the wrong period, the cost of goods sold can be off significantly, either too high, because an expense is recorded without the corresponding receipt, or vice versa. To exacerbate the problem, the incorrect entry will reverse itself in the following accounting period, resulting in a continual fluctuation in the cost of goods sold, one period being too high and the next too low. This can be very embarrassing for a controller and is a grave matter for publicly held companies, which can be sued by shareholders for incorrectly reporting financial results. To avoid this problem, most controllers allocate an inordinate amount of staffpower to the comparison of accounts payable and inventory records.

To avoid the entire cutoff problem, it is absolutely mandatory that a company strictly adhere to a policy of turning away from the receiving dock any deliveries that do not have an accompanying purchase order number. By closely following this policy, it is possible to entirely automate the period-end cutoff. ...