November, 2007

It is critical that auxiliary and service center organizations use the vouchers and entries properly and consistently in order to fairly reflect their financial condition. Reporting auxiliaries and service centers (those earning more than $250,000 in revenue in one fiscal year) are required to record financial transactions on an accrual basis and to enter auxiliary vouchers on a monthly basis.(See ASOP 2.0 for specific details on the definition of a Reporting Auxiliary and Service Center.)

The entries must be recorded to fairly state the income statement and balance sheet, thus satisfying the matching principle1. At the heart of the Accrual Accounting concept is the Matching Principle, which simply dictates that revenues be matched with expenses in the same period whenever reasonably and practically possible to facilitate accurate and meaningful financial reporting. (This is in contrast to Cash basis accounting, where income and expenses are determined as cash is received and disbursed.)

There are three options on the auxiliary voucher document. They are the accrual, adjustment, and recode.

1. Accrual entries are entered into the FIS via an auxiliary voucher accrual entry (AVAE). Examples of this type of entry are the accrual of revenues earned but not yet received, or to record expenses incurred but not yet paid. This allows the organization to reflect the amount of revenue or expense incurred in the proper fiscal period and allows the matching of income with expenses. These entries automatically reverse in a subsequent period on a specified future date. The AVAE reversal date defaults to the 15th day of the month following the transaction posting; however, this date can be changed by the document creator if desired.

Common accrual entries are:
Accounts Payable
Accounts Receivable
Inventory
Cash-in-Transit

Example:
An auxiliary has received $300 of supplies that have not been invoiced in Accounts Payable. An accrual entry will ensure that the expense is recorded in the month it was incurred. The entry will reverse in the following month when Accounts Payable processes the invoice and pays for the item.

2. Adjusting entries are entered into the FIS via an auxiliary voucher adjusting entry (AVAD). Adjusting entries are generally made at the end of a fiscal period. Like the accrual, adjusting entries allow the organization to reflect the amount of revenue or expense incurred in the proper fiscal period and allows the matching of income with expenses. However, unlike an accrual entry, an adjusting entry does not reverse.

Common adjusting entries are:
Allowance for Bad Debt (See ASOP 6.0)
Deferred Income
Prepaid Expense
Income/Expense reclassification

Example:
A conference center receives cash for an event that will be held in a future period. To record the receipt of cash and defer the income, the following entry is recorded via the cash receipt document.

When the event occurs, the conference center makes an adjusting entry to recognize income earned. The AVAD will ensure that revenue is recorded in the month it was earned, while also relieving the deferred income liability.

3. Recode entries will be entered into the FIS via the auxiliary voucher recode entry (AVRC). Recode entries are used to record accounting adjustments to a prior period and move the associated cash between the accounts in the current period. (Note: cash cannot be moved between accounts using an AVAD.) The following three transactions occur when an AVRC document is used:

The overall effect is like that of an adjusting entry (AVAD) between accounts, except that in using the AVRC cash is moved to offset the adjustment.

It is important to note that a recode entry should not be used when corrections are made within the same account, because there is no need to affect cash. An adjusting entry (AVAD) should be used instead. A recode entry should only be used for reclassifications between accounts when cash must be moved between the two accounts. In cases where the entry should affect the current fiscal period only, the distribution of income and expense (DI) document should be used rather than the auxiliary voucher.

Example: To correct miscellaneous receipt entered into wrong account.

In reviewing its Monthly Operating Detail Report, "Residence Hall A" discovers that an erroneous income entry was posted to its account. "Residence Hall B's" account should have received the income instead. The AVRC can be used to move the income to the correct account in the month in which it was earned and subsequently move the cash.

a. The recode voucher (AVRC) is created by the auxiliary

b. The recode voucher (AVRC) automatically reverses in the current period.

c. A DI is automatically generated by the reversal of the AVRC. The DI moves the cash between the accounts in the current period while offsetting the reversing entry to income.