Are you interested in finding out more about the subtleties of journal entries and finance for non financial managers? Would you benefit from training in finance and accounting concepts and principles?
Have you ever wondered why you can’t understand a word that accountants and financial managers say? Well, speaking in accounting and finance jargon is deliberate of course, because if everyone knew the jargon, then we wouldn’t need specialists.
Now some of this is good, but increasingly it’s not so good, particularly when it means that nonfinancial managers don’t get an even break.
If you are a nonfinancial manager, such as an engineer, scientist or lawyer, who wants to understand more about the principles and concepts of management accounting and finance, here is an example of something that can and does happen that is worthy of a little attention and understanding. It is the use of “journal” entries in the accounting system.
Now firstly, if you thought that a set of accounts was an exact replica of the status of a company at any time, then let me tell you about “journal” entries. Journal entries are used when preparing a set of accounts to accommodate some of the vagaries of the accounting system by, for instance, allowing the distribution of a large payment over the duration of a year. An example would be say a large payment for insurance that it would be unfair to lump into a monthly accounting report because it would distort the result and could result in the declaration of a loss when in fact there was a profit. So the accountant, by the magic of a “journal” entry will artificially defer the full impact of the payment by removing eleven twelfths of the payment from this month’s accounts and deferring it for future entry.
All management accounting systems provide for the use of Journals which are a useful and entirely legal method of “adjusting” the accounts to fairly represent the accounting position. Because they are a powerful tool, they must always be documented and well audited when used.
They have a natural self-correcting nature because provided the accounts are audited by a professional, they will be corrected if they are unfairly affecting the end of year result. It is also possible to track their use between audits because of the magic of “cause and effect” accounting, which requires that for every credit there must be a debit, so the evidence of improper use of journal entries will be evident somewhere in the Balance Sheet.
However, it doesn’t take much of a stretch of the imagination to see that they are a tool that can be used carelessly or recklessly when management is under pressure and the thought of the end of the year seems far away. Understand when this type of adjustment is being made and be aware of the impact and future repercussions.
Ross Bauld is a Principal at Continuing Professional Development with over 30 years of professional experience in infrastructure, asset and resource management including leading private and public sector organizations at Chief Executive level. In October 2103, Continuing Professional Development will be offering online courses developed by Ross Bauld on Finance for Non Financial Managers and Technical Professionals. Part 1 covers Finance Fundamentals, the Big Picture, Company Accounts and Cash Flow.
Are you a non financial manager who wants training in finance and accounting concepts and principles, so that you can upskill and take a more advanced role in the management or leadership of your organisation? To find out more about our online courses visit Finance for Technical Professionals-Part 1
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Other posts in this series: Finance for non financial Managers – Asset accounting finance