This article is relevant if you are an accountant using NetSuite and you would like to automate allowance or reserve-based accounting.

Background

When working with our clients on new NetSuite ERP implementations, oftentimes they are enthusiastic about enhancing their accounting practices as a function of the change over from the old system. While we deal with the chart of the account rationalization and business modeling with dimensions, we discuss their practices for accruals.

There is a class of accruals that are meant to be measured using today’s estimates but which will actually be realized tomorrow.  The major idea in accrual accounting is to help produce the best interpretation of economic performance at measurement periods (e.g., monthly, quarterly, and annually) that help owners and investors understand their capacity to meet their existing and future obligations. These obligations demonstrate the ethics in accrual accounting — because all other people, besides those that have equity, are paid first in a winddown situation.

Thus, we have two major types of accounting that help bookkeepers match revenues and costs and address future obligations:

1. Allowance Accounting: book an accrual representing future obligations generally to existing customers or vendors.   Examples include allowance for doubtful accounts (bad debts), product warranties, sales returns, and inventory obsolescence.
2. Reserve Accounting: book a liability representing a claim on equity for a future project, typically a large capital expenditure. Examples include a purchase of future fixed assets, installation of new equipment, paying dividends to shareholders, or legal obligation settlements.

Allowances as an Alternative to the Direct Charge Method

One way to record matters is the direct charge-off method. This method is simple.   We book a class of expenses when we realize it — yet it is something that we should have anticipated earlier.  This method violates the matching principle and does not conform to GAAP standards and procedures. Thus, it is not acceptable to use this method to record the write-offs of certain accounts (such as uncollectible accounts) in financial statements prepared for the public in accordance with FASB and GAAP regulations.

Thus, in this article, we are going to avoid this method.

Allowance Accounting Method

In general, there are two major ways to make assessments about the amount to reserve or allocate under the allowance method:

1. Periodic: for the specific topic in mind, at the end of a period, accountants work with business managers to assess the amount that should be represented as a liability on the balance sheet.  For example, the accounts receivable manager may review the customer aging and use his or her judgment to estimate the amounts that are likely to be not collectible. See below for the accounting entry.

Determine the current amount on the balance sheet. If you need to increase the balance based on the current assessment, produce this bookkeeping:

2. Transactional: another class of allowances can be assessed transactionally.  For example, experience may show that 2% of all sales result in a return. In this case, we book a returns allowance entry every time there is a sale. Under this method, the bookkeeping looks like as follows:

Note, while we desire this kind of bookkeeping, NetSuite does not offer a native way to produce this.   The classic example is that NetSuite wants to debit sales when you produce a return — far from our objective.

Automating NetSuite Transactional Allowance and Reserve Accounting

With the background above, the opportunity is to leverage the power of the NetSuite platform to automate transactional allowance bookkeeping. Doing so will help the accounting department more quickly close their books because they have less work to do to book their period-end accruals. Of note, anything automated should be assessed for operational reliability by period reasonableness review practices.

As my firm is a NetSuite Systems Integrator specializing in NetSuite Platform innovations and enhancement, we have created a number of algorithms that make the setup of these kinds of automation easy. Please consider the following articles:

• 2016: Drive Custom NetSuite Based Multi-Sales Discount Programs
• 2016: Automate Allowance Programs using NetSuite SuiteGL
• 2020: Get Control over NetSuite Sales Returns General Ledger Accounting

These tools allow us to help our clients quickly get their reserve and allowance accounting programs in place.

Implement your NetSuite Driven Allowance and Reserve Accounting

Our clients enjoy that all of our algorithms are available without license-charge. The idea is that we focus on business problems bringing our best thinking and tools to our disposal to solve real challenges. The key to generating value is to listen to concerns and have best practices combined with proven pragmatic capacities to realize results.

If you found this article relevant, feel free to sign up for notifications to new articles as I post them. If you are ready to tackle your allowance accounting challenges, 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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