This article is relevant if you are running a NetSuite based accounting department and you are seeking the best practice to help close the books earlier to account for accounts payable accruals.

Background

As I work with our clients’ accounting departments, I often learn their offline spreadsheet systems to keep accounting under control.  Naturally, I am suspect of most spreadsheet based systems because they provide clues that NetSuite’s power has not be realized. A common spreadsheet practice is the accounts payable related accrual.

The point about accounts payable based accruals is as follows:

1. Unbooked Liabilities: we are searching for obligations for which third parties have not yet made claim. Meaning, we are waiting for the vendor bill.
2. Matching Principle: we are seeking to line up all related costs that match earned revenue.
3. Wrong Period Bookings: complementary to the matching principle, we have vendor bills entered but they are not in the accounting period for which they were incurred.

I have written about accrual practices before. Consider these articles for reference to help optimize your accounting practices:

1. Best Practices: NetSuite Vendor Bill Approvals
2. Offer: Superior NetSuite Landed Cost Practice with Late Vendor Bills
3. Finally: Capitalize NetSuite Inventory Costs with Item Consumption Landed Costs

Here, we will address conventional vendor bill accruals.

Standardized NetSuite Entry Practices / Search for Accruals

The best practice orientation suggests that we simplify the process to minimize the decision making as we enter our bills.  The goal is to enter bills as soon as we receive them. Remember, this article, Best Practices: NetSuite Vendor Bill Approvals, is designed to not have anything “off to the side waiting” to get vendor bills entered and to have our liabilities recognized.

NetSuite Native Transaction Date and Accounting Period

In this discussion, we are going to look at the way NetSuite uses the Date and Accounting Period fields and innovate.  NetSuite’s native behavior is as follows:

1. Date: this is a transaction date which can mean anything — standby, we will give it meaning.
2. Accounting Period: as you enter the Date, NetSuite will automatically lookup the respective accounting period on your behalf.  This period definition is how NetSuite truly provides financial reports when you run them by period.  Furthermore, when you close your books, you effectively lock transactions stamped with the respective accounting period.

Linking Transaction Date and Accounting Period

NetSuite allows you to enter a Date and have it be in a different accounting period. While this works, it is important to understand the impact of doing so when you run your financial statements. You may get different results if you run reports by accounting period or date as governed by the “Report by Period” switch found under the Preferences, Analytics options page.  Many of my clients want the dates and the periods to line up so to avoid confusion.

Entry Date vs. Transaction Date

We now produce a simple innovation which helps us in our practice. We will add a custom mandatory date field to our vendor bill and call it “Transaction Reference Date”. Knowing that NetSuite will default to today’s date during vendor bill data entry, we can create the following:

1. Date become “Entry Date”: we will let NetSuite’s Date be the entry date which is given to us automatically (no thinking required; we assume we enter bills timely).
2. Accounting Period: the accounting period will be automatically determined by the Entry Date (again, no thinking required, and automatic)
3. Transaction Reference Date: this date will be for the month (accounting period) for which it applies. For example, if a vendor bill is entered today for something that occurred last month, we can enter the last day of the month for last period (click previous image).  This is the one place we ask for some data entry thinking.

I suspect some may now be thinking what I suggest is counter-intuitive. However, consider that most organizations want to close their books quickly and thus they want to lock the accounting periods as fast as possible. In fact, in this practice, we can close Accounts Payable (but not the General Ledger) the first day in the new period.  Thus, our challenge is that NetSuite’s Date and Accounting Periods will behave differently during vendor bill data entry when we are in locked period situations.  Instead, we want our data entry practices to be consistent even when we are closing our books especially so we can use the database search tools to help us analyze information.

The Search for Accruals

Once we have this practice in place, we are now able to produce the search for accruals. Under this practice, we think about finding accruals in two situations:

1. Vendor Bills Entered Late: these situations are common as bills trickle in shortly after the end of an accounting period.  Many organizations nudge their vendors to provide bills .
2. Estimated Accruals: these situations demand estimates but are fairly straight forward for organizations that commit to purchase order practices.  Some organizations ask their vendors to make estimates for anticipated bills.

See related diagram. In our prescribed practice, our accounts payable entry person is simply entering transactions and making one Transaction Reference Date assessment:  “what period does it belong to?”. While the Accounts Payable system is closed, but before we close the General Ledger, we produce a saved search.

Find Vendor Bills Entered Late to Produce Reversing Journal Entry

Now we look for accruals.  Find all transactions with an Entered Date in the current period that are related to a Transaction Reference Date of last period.  The result of this search, at the detail level, can be used to produce a reversing journal entry for our Vendor Bills Entered Late concern. To better illustrate, if we are in the month of November and it takes us seven days to close the general ledger, on the seventh day, we find all transactions with the date of 11/1 to 11/7 where the transaction reference date is on or before 10/31.   By shaping the saved search right, it is easy to export and CSV upload it back to NetSuite as a reversing journal entry (subject for another article).

Note, the reversing journal entry is a fundamental practice used in accrual accounting to take care of transactions coming in late. Basically, the journal entry gives us the accounting treatment we want in the previous period and then we wash it out the following period. When our vendor bills actually come in, we effectively remove the effects of the reversal entry.  Thus, there will be no accounting effect in the current period for the actual transactions that were entered.

Estimated Accruals

This now leads us to the more demanding work: the estimated accrual. Since we isolated out all the late vendor bills, we can focus on what is left. Ideally, there will be fewer of these — however, the sooner you close your General Ledger, the more of these you will find.

Most will agree that the best practice to get in front of this concern is to implement purchase orders with receiving practices.  Most inventory oriented companies seek control over the acquisition of their trade goods and when running a perpetual inventory system, you must be timely with your inventory receipts so that you can indeed ship goods.  Accordingly, purchase orders provide great insight into goods received but not yet billed.  Consider my article, Explaining NetSuite’s Inventory Received Not Billed Account.  Thus, with purchase orders, we can also produce a search that looks for transactions and book a similar reversing accrual journal entry.

Respectfully, if your organization does not implement purchase orders, then there will need to be some basis for making estimates for obligations for which you have yet no specific claim (my, might that be on a spreadsheet…?). As such, it understandable why more mature organizations use purchase orders as the document to help convey the commitments they wish to make and to help the organization make superior assessments of economic performance while at the same time, minimizing surprises. With the consistent data entry practice and search for accruals, we can analyze how good our estimates are and then refine as needed.

Summarizing NetSuite Vendor Bill Accrual Practice

The key to this procedure’s success lies in keeping practices consistent and understanding how NetSuite behaves in day-to-day operations. If data comes into NetSuite in a reliable fashion, we can ask meaningful questions. Then, using the tools of saved search coupled with data entry imports (which also can be scripted), we can use the power of the NetSuite database to give us the information we need.   If you see practices you want to improve in your NetSuite driven accounting operations, let’s have a conversation.

Marty Zigman

Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.

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