The general ledger software market is changing rapidly. For business owners, these enhancements mean the ideal opportunity to upgrade or change general ledger programs.
If you are in the midst of a switch, consider revamping the format of your financial statements. Your objective should be a format that is accurate and enables you to easily find information. Let’s start with some basics:
Schedules – One of the easiest ways to modify and simplify your financial statement is with schedules. For instance, you presently keep 6 different savings and checking accounts. Instead of listing all 6 accounts on the front page of your balance sheet, show only one line (Cash) with a note to see the cash schedule (see Schedule 1). By using schedules, your balance sheet will fit on one page where you can easily identify your financial condition and any positive or negative trends.
Schedules can be used for any balance sheet account: cash, accounts receivable, inventory, fixed assets, long term debt, etc. The objective is to have only one line for each major category on the front page.
Use schedules for income statement items as well. Your entire income statement can fit on one page if you use supporting schedules on subsequent pages.
For instance, all sales should show up on only one line with a reference to the sales schedule (eg: See Schedule 12). In the sales schedule, list sales by general product category. Sales discounts given to customers should be accounted for in this schedule. If your company has hauling income, include this income in sales only if it is a regular daily revenue source for your company.
Expense Categories – When it comes to expenses, all expenses should fit into one of four categories:
1) Cost of Goods Sold – This category is for direct product costs. Trade supplier product discounts should be listed in the cost of goods sold schedule. Rebates and image income should not be in cost of goods sold but listed in non-operating income.
2) Operating Expenses – This includes all selling, overhead, delivery and administrative costs of the company including depreciation. Do not include bad debt expense or interest expense in operating expenses.
3) Other Expenses – These expenses fall below the operating profit line and normally include asset losses, interest expense, law suit settlements and bad debt expense.
4) Extraordinary Expenses – Think of these expenses as ones that could not happen again to your company. Typical examples include restructuring or spin-off expenses and accounting changes.
Meaningful Operating Expenses – Rather than having only one line item on your profit statement for all operating expenses, you may find it useful to segregate operating expenses into a few subtotals on the front page of your statement. Typical categories are:
Personnel (salary & benefits)
Delivery
Occupancy
Depreciation
Other General
It’s also helpful to list expenses in alphabetical order within these subcategories.
Degree of Detail in Expenses – Your expense schedules should not get overly complicated and lengthy. For instance, let’s say you want to account for organization dues. Instead of separate lines for Chamber of Commerce dues, business club dues, etc., use only one line. Try to be inclusive with expenses. If you find you have too many items going into one account code, you can always split them out later.
Depreciation – Be sure to clearly list your company’s total depreciation expense in one category on the front page of your income statement. This way, bankers won’t have to search for this very important non-cash item that impacts many profitability and debt coverage ratios.
Accounting for Debt – The front page of the balance sheet should contain a maximum of five lines for debt:
1) Bank Lines Payable – The amount outstanding on working capital lines that have expiration dates within 12 months should be listed in the current liabilities section. If you borrow from more than one bank, use a schedule. Don’t list your bank line in long term debt schedules or include it in the “current portion of debt” line. Doing so will cause major damage to debt coverage ratios.
2) Equipment Line Payable – If you have a separate line of credit for new fixed asset purchases throughout the year, list it separately from your working line of capital in current liabilities.
3) Current Portion of Long Term Debt – One line in current liabilities should be the total amount of principal (no interest) due on all long term notes during the next 12 months. Adjust this amount at least semi-annually or any time new debt is added or an old debt is retired.
4) Long Term Debt – The total amount of principal owed more than 12 months in the future should be listed as one line item. Individual notes should be detailed in a schedule.
5) Subordinated Debt – Subordinating a debt means you agree not to pay off that loan until all other loans have been paid. It is important to list this debt separately since creditors will treat this debt as equity in their ratio calculations.
Taxes – Clearly identify excise taxes payable and receivable on the front page of your balance sheet. Excise taxes receivable should not be mixed in the trade accounts receivable schedule. Clearly label all other taxes (such as: income tax, payroll tax, truck tax, etc.). Make sure all payroll taxes get included in personnel expense, all truck taxes in delivery and so forth.
Other Income – Income received from sources other than direct sales should be listed after operating profit in a category called “Other Income”. Include rents, finance charge fees collected, interest earnings and asset gains. Supplier commissions and rebates should also be listed here unless they are an immediate offset to the product price (in which case they belong in cost of goods sold).
In summary, if you are presently making software changes, take time out to review your financial statement set-up.
