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Accounting Policies and Procedures

Accounting policies and procedures are one part of an overall accounting system. Policies provide broad conceptual guidance while procedures tell how the policies are implemented. We recommend keeping policies and procedures short and simple. Remember, you’ll be tested on these as part of an audit. The easier they are to understand, the easier they are to practice. Most policies can be adequately addressed in one page. Procedures can often be addressed in two t0 three pages. Best practices for policies and procedures include maintaining version control and storing them on a shared drive easily accessed by the appropriate personnel. Work instructions are the documents with screenshots and detailed instructions for specific fields. Policies and procedures should never have the level of detail found in work instructions which do not require version control.

The list below identifies the most common accounting policies and procedures for companies of all sizes. Larger, more complex organizations often have additional accounting policies and procedures to address items such as foreign currencies and accounting for contingencies.

System Description – overview of the system; identify the software used; include a flowchart of data and functional responsibilities.

Delegation of Authority – most organizations define who can approve certain transactions and at what dollar value. For example, new hires may need executive level approval. Small dollar transactions or budgeted expenses can often be approved by front-line managers while larger amounts or unbudgeted items require director-level approval.

Segregation of Duties – Larger companies usually have enough staff or departments involved in processes to adequately separate duties. In small businesses where employees often wear multiple hats, division of duties can be critical. If formal segregation is not possible, ensure critical transactions have another layer of review/approval.

Chart of Accounts – Establishes the basic structure of the accounting system. It is essential that the chart of accounts be in the government format.

Costs – Must be grouped in the government format, specifically: direct, indirect, and unallowable costs. Accounts and cost pools must be homogeneous – containing only the same types of costs such as labor, travel, materials, etc.; and fringe, overhead, and G&A.

Budgeting – Budgets are the foundation of indirect rates. You need to know projected costs so you can accurately invoice customers and track actual performance. Budgets and billing rates need updated to reflect significant changes such as winning or losing a large contract that would have a material impact on incurred costs.

Accounting for Revenue – Define revenue recognition practices based on job/contract type and/or dollar value.

Delegation of Authority: who can approve pricing and orders, and to what dollar amount.

Segregation of Duties: who can create customers, orders, invoices, and receive cash. You need checks and balances so someone cannot create fake customers and invoices to artificially inflate sales.

Accounting for Assets
Cash control
Accounts Receivable – Valuation, probability of collection, discounts.
Inventories – Cost determination.
Property, plant, and equipment – Acquisition costs, valuation.
Capitalization – Types of assets and dollar thresholds. Have a clearly defined policy regarding types of expenses and dollar amounts.
Depreciation – Asset cost, service life, residual value, and method of cost allocation.

Accounting for Liabilities – Recording, payment, valuation.

Purchasing – requisition process and approvals.

Delegation of Authority: who can create and approve requisitions and orders, and at what dollar amounts.

Segregation of duties: who can create vendors, orders, and cut checks. You need checks and balances so someone cannot create fake vendors to divert cash.

Timekeeping – System should be able to track labor costs from time cards to jobs/contracts. Define employee and supervisor roles, including daily entry of time and how corrections are handled.

Payroll – Validity and accuracy of transactions are critical. Related to payroll are employee hiring and new employee orientation, job descriptions, salary adjustments, performance appraisals, and disciplinary actions. Define who can approve new hires and rate changes.

Bank Reconciliations – Who has responsibility for reconciliations and what is the frequency of the reconciliations?

Segregation of Duties: bank reconciliation should be performed by someone other than the person responsible for posting payments and cash receipts.

Records Retention – Procedures to manage records should be clearly defined. Be sure to address different types of records and different media such as paper files, emails, network files, etc.

Financial Statements – Types and uses of statements should be primary focus.