Avoiding the Potholes of Manual Journal Entry
Without accurate journal entries, your general ledger (GL) can have errors that prevent you from getting a clear picture of your company’s financial performance. Ultimately, journal errors can result in inaccurate financial statements and reports, as GL balances will contain either over- or understated revenue, expenses, assets, liabilities, equity or a combination of all. Skewed financial balances in the GL can initiate poor financial decisions that could negatively impact your company’s bottom line.
In this blog, we’ll look at some of the most common journal errors, as well as how ERP systems like Oracle E-Business Suite (EBS) help or hinder the journal entry process. We’ll also offer some tips for making journal entries easier.
Common Manual Journal Entry Potholes
Here are some examples of how those pesky – and critical – journal errors can occur:
- Account coding errors. These are the most common journal entry errors, especially in large journals with a high number of entry lines. They happen when journal postings destined for a certain account code combination end up being allocated against a totally different and incorrect account code combination.
- Reversal period not appropriately flagged. This occurs for reversing type journals aimed at accounting for temporary balance adjustments, such as month-end expense accruals. Without being suitably flagged, the temporary financial adjustments could be omitted from reversal altogether and, in practice, double accounted for when the actual invoice is processed via the subledger.
- Accounting period misallocation. These errors transpire at the onset of a new financial period while the previous financial period is in the process of being closed, as two financial periods are now simultaneously open in the GL. The inevitable result is a journal posted to the wrong financial period.
- Use of incorrect foreign exchange rate. This occurs with accounting entries involving foreign currency journal postings. For example, if an incorrect foreign exchange conversion date is selected, then it could result in the use of the wrong rate of exchange for the journal posting and possibly account for an incorrect foreign exchange gain or loss. If the transaction relates to a more volatile currency, such as the South African Rand, the error could assume the risk of being material.
- Capture of ambiguous journal information. Such ambiguous information might include a cryptic journal name and journal line description narratives, in which case the purpose of the journal posting becomes vague and introduces audit risk.
- Incorrect capture of journal amounts. In particular, these errors can result from omission of zeroes on significantly large journal amounts, as is the case with millions where 120,000,000 is captured as 12,000,000 and the error is lost in a sea of adjustment entry lines. The slip of a single digit on an amount without a proper journal review process in place could introduce financial risk.
The “ERP Factor” and Manual Journal Entries
To reduce errors, ERP systems generally provide a systematic framework to capture journal entries via the application user interface. They guide you through a step-by-step process for capturing journal-pertinent data, starting with batch detail then progressing to journal header detail and the individual journal lines.
Oracle EBS, in particular, also includes mandatory data fields that you must capture to ensure journal validity. In addition, the system offers in-form list-of-values for specific journal attributes to enhance data capture accuracy.
Systems like Oracle EBS do offer web-based journal capture solutions that use an Excel template-based interface, and like their application user interface counterparts, the templates are subjected to validation as part of the upload process into the GL. However, not all data elements are validated prior to the journal upload process, resulting in journal errors getting stuck in the interface table on their way to the GL, which in some cases requires a helping hand from IT.
What About the Journal Verification “Bottleneck”?
A typical journal entry process involves both capture and verification steps. It is not uncommon for some recurring, or even ad hoc, journals to run thousands of lines, with the accuracy of each posting line on the journal being paramount due to plausible material impact to the financials. As journal capturer, you must closely apply due diligence to ensure correct financial allocation.
Whether due to line volume or materiality, it’s common practice to subject the captured journal to a second set of eyes for review to ensure the correct financial allocation. It’s true that ERP systems can assist with the automating this step via approval workflow capabilities. However, in some business scenarios, the journal verification steps call for an approval complexity beyond the capabilities of the ERP system and a manual verification process is introduced. No matter the verification “tool” applied, this step could cost you precious time and extend the close cycle if journal entries are error prone, banishing the journal to an abyss of revision-review cycles.
Tips for Streamlining Manual Journal Entries
Whatever your process, these tips can make your journal entry life easier and more efficient:
- Establish a set of manual journal entry standards. Standards need to clearly articulate the data capture requirements that comprise an accurate journal. They can drive the capture of identifiable, accurate, complete and relevant journal entries along with appropriate supporting documentation. When you specify the standard, be prescriptive with the data elements that should form part of an acceptable journal header and line format, as well as the descriptive level of detail expected in the narrative that will be captured.
- Define reusable manual journal capture templates. Use templates for your monthly recurring journals, whether they are expense accruals, interfund transfers, a trial balance upload from a legacy accounting system or even your regular intercompany journal entries. Make sure your templates are prepopulated with valid account code combinations so they are reusable to minimize copy/paste or code combination capture errors during the crazy hours of your close cycle. Also, your templates should provide for ancillary data requirements demanded by the type of journal transaction being processed. Match the template to the data and not the data to the template.
- Use a predefined list of values wherever possible when capturing manual journal elements. These are available in Oracle, for example, and help reduce the risk of data validation issues when you import or post journals. You can apply this principle whether you use spreadsheet integrated journal capture solutions like Oracle Web ADI, Excel4apps Journal Wand or even when directly capturing journals via the Oracle GL forms user interface.
Driving Toward Manual Journal Entry Efficiency
If you want to gain efficiency by introducing standardization to the journal capture and post process, consider small, incremental tweaks. They will likely shorten the time needed for the monthly GL close and reduce the effort spent on rework to correct erroneous journal entries. Overall, an increase in journal processing efficiency leaves more time available for financial data analysis and interpretation ̶ and drives improved, more accurate financial reporting.
Author: Jacques Blignaut
Solution Engineer, Excel4apps