Bookkeeping – Recurring Entries (Lesson 65)
Every day bills arrive from vendors that are mere repetition like the electric or phone bill. They basically recur every so often (mostly monthly). The bookkeeper must create a new entry as a part of his/her daily functions. This repetition consumes time and is a nuisance. In addition, because they repeat so frequently, bookkeepers often perform this task last and will sometimes forget to make the entry thus failing to pay the bill timely incurring late charges. To save time and reduce errors, bookkeepers should take advantage of technology and create recurring entries. As with any benefit there exists some drawbacks and with recurring entries this means inaccurate reports due to false assumptions.
This lesson explains what is a recurring (repeating) entry and provides a long list of examples. Next I’ll explain the advantages of creating recurring entries and how to recognize errors related to recurring entries. As with most things in life, there are drawbacks to using recurring entries.
Recurring Entry Definition
Repetitive bills with consistent frequency and a comparable dollar value are called recurring transactions. A perfect example is a loan payment. First it meets the test of repetition, i.e. same vendor for the same function. Secondly, the issue of consistent frequency is obvious as many loan agreements stipulate the same amount for several months into the future. As to the issue of comparative dollar amounts, most loan payments are the exact same amount every month.
Thus, a recurring (repeating) transaction must meet three tests.
- Repetitive – The transaction keeps on occurring from the same vendor for the same service or product;
- Consistent Frequency – The transaction repeats itself in a regular cycle. Most are monthly like rent or loan payments but others may occur as needed like trash disposal or restocking certain supplies; AND
- Comparative Dollar Value – The dollar amounts of the bills must be similar in value from one cycle to the next. It is OK that they are different, but an excessive deviation like 20% or more can create serious issues with clerical errors as the bills arrive. The greater the variance the less effective a recurring entry is for a bill.
The following is a long list of recurring transactions:
– Rent – General Liability
– Cleaning – Property
– Linens (Door Mats ,Cleaning Supplies) – Umbrella
– Utilities: – Worker’s Compensation
– Electric – Auto
– Water Office
– Sewage – Communications:
– Trash/Waste Disposal – Phone
– Cam (often quarterly) – Cell Phones
Loan Agreements Technology
– Auto Payments – Maintenance
– Equipment – Warranties
– Bank Notes – Retainer
– Line of Credit (Interest only) – Equipment Leases
– Advertising – Depreciation
– Banking (monthly fees) – Amortization
– Owner Payments
Every one of the above types of expenses customarily meets the three criteria for a recurring transaction. Notice that cost of sales type of transactions rarely if ever meet the criteria? This is because it is uncommon to have a direct cost that follows a set pattern. There is one that is close though, payroll.
Payroll, especially management salaries meets the three tests. It is repetitive, is paid every payroll period and the amount paid is certain. The problem with preparing the payroll as a recurring entry is in legal compliance. If a report is accidentally prepared and released prior to the actual payday the business then becomes committed to the transaction. There are some IRS tax consequences and state legal issues too. I advise against posting payroll prior to the actual payday.
Why prepare entries in advance anyway?
Advantages of Recurring Entries
Over time bookkeepers learn that the actual entry process takes time. The information has to be posted to the proper journal; the accounts selected must be correct; and the description must have adequate detail so that a reader several years from now can clearly understand the economic transaction. Creating a recurring entry reduces this workload, increases overall accuracy and acts as a prompt to review the actual transaction in the future.
The key is in the initial creation of the entry. Modern technology allows the bookkeeping to create a recurring (repeating) entry from an initial entry. Often the recurring function is selected (QuickBooks uses the term ‘Memorized’) and the entry is created for the current period (month). Once created the software queries the future conditions such as:
* Date of the month to automatically recreate the entry;
* How many periods or copies into the future for the entry; AND
* Shall the entry be automatically posted or does the bookkeeper want to be prompted to post the entry?
Rent – When the lease for the space is signed, the bookkeeper can create a recurring entry to pay the lease five days before the due date. If the lease is for 36 months, have the entry repeat itself 35 times. There is no need to have it prompt for entry, automatic creation is appropriate. Make sure the debit and credit are correct; in this case it would appear as follows:
Date ID Ledger Control ID Description DR CR
ZZ/23/16 Rent-Main St. Facilities/Rent Monthly Rent per/contract 1,425.00
Rent-Main St. A/P Main St. R/E Monthly Rent per/contract 1,425.00
When the recurring function is engaged, the entry looks exactly the same except the month (ZZ) in the date field advances in monthly units.
Now instead of having to enter the entry it is automatically reproduced by the accounting software each month. Imagine the ease of this for the volume based entries like depreciation, amortization and loan payments. In addition, the information is already there when the company advances to the next month. In this case the rent is posted to the income statement and the queue exists to pay the rent during the third or fourth week of the month.
Recurring entries save time, reduce errors and prompts the bookkeeper to pay the bills on time. However there are some disadvantages.
Disadvantages Of Recurring Entries
There are a few disadvantages related to recurring entries. They include 1) a learning curve for the accountant, 2) a high error rate with bills that change in value from month to month and 3) an increased likelihood of misinterpreting reports. The following sections elaborate on these further.
Most accountants don’t utilize recurring entries and some don’t understand them. Imagine how difficult it is for a bookkeeper to comprehend this concept. A multiple bookkeeper office for the same company where everyone enters data, if one creates recurring entries and the other isn’t aware or understands them; the entries often are generated twice and I’ve seen them paid twice. Recurring entries are a sophisticated tool and every member of the accounting team in the office should be aware of how it works.
Increased Error Rate With Changing Bills
One of the three tests to qualify as a recurring entry is the comparative dollar amount. This means that the value changes very little from month to month. A good example is the electric bill. It is always very similar from month to month but it is different in the exact total. The recurring entry sets this dollar amount to match the original or first entry. Accountants have to pay attention to the actual bill amount and simply open the recurring entry (in QuickBooks you simply click on that entry in the utilities or accounts payable account) and change the dollar amounts for both the debit and credit.
If you fail to make the change, the final check cut to pay the bill will not match the actual amount due.
A big drawback is pulling a financial report from the future. The report will include the recurring transaction data thus skewing the financial results. Invariably management will not understand the concept of recurring entries dated into the future. Here is an example:
The owner of ACME wants a year to date income statement and generates a report dated for the year ending December 31. Seems innocent enough. However, expecting a profit, there is a loss. Looking at the details he discovers rent for 12 months, a lot of utility costs; and depreciation that is way more than expected.
Again the software assumes that the user understands the difference between a year to date report and a report with a year’s worth of information presented. This same problem occurs when creating vendor reports and ledger reports. If the user doesn’t fully understand the report’s parameters and limitations. There is often a misinterpretation.
Summary – Recurring Entries
Recurring (repeating) entries are transactions that meet three tests; 1) they are repetitive; 2) consistently occurring like weekly, monthly or quarterly and 3) relatively comparative in dollar value from one transaction to the next. By posting the entry one time and initiating the recurring function with the accounting software a bookkeeper can save time and reduce the error rate from inputting data. There are some drawbacks and they include a learning curve, a high error rate with fluctuating bills and a possible misinterpretation of financial statements. Overall it is a great accounting tool if used wisely. ACT ON KNOWLEDGE.
Do you want to learn how to get returns like this?
Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.
There are four key principles used with value investing. Each is required. They are:
- Risk Reduction – Buy only high quality stocks;
- Intrinsic Value – The underlying assets and operations are of good quality and performance;
- Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
- Patience – Allow time to work for the investor.
If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above.
Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:
- Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
- Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
- Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.
Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:
- Lessons about value investing and the principles involved;
- Free webinars from the author following up the lessons;
- Charts, graphs, tutorials, templates and resources to use when you create your own pool;
- Access to existing pools and their respective data models along with buy/sell triggers;
- Follow along with the investment fund and its weekly updates;
- White papers addressing financial principles and proper interpretation methods; AND
- Some simple good advice.