The Tyranny of the Budget

If you spend any time at all determining the proper way to account for transactions, eventually you will come across a transaction where your GAAP answer on how to account for something is challenged because the answer does not align with the budget. One group may complain that you said something needed to be capitalized because all they have is expense budget, while another group will complain you said something needs to be expensed because all they have is capital budget available. But those are the easy disagreements to deal with because at least you are dealing with booking the invoice as it was billed.

It gets more complex when you tell someone the credit they received on a maintenance invoice really needs to reduce a capital expenditure because even though the credit was included on the maintenance bill it was earned due to the purchase of capitalized equipment. The person who thought they could solve their budget problem by telling the vendor to just give them the credit on a certain invoice forgot that GAAP says look at what earned the credit, not where it was taken to reduce a payment.

This actually shows that the earlier in the process you get accounting involved, for instance in setting up the budget, the better off you are in getting to the proper answer in the end. There are also implications on setting up your controls. For example, instead of having to review every invoice to make sure credits were not improperly taken to the wrong account, you could have a control over the proper expense/capital split in approving the budget and a control over reviewing contract terms with vendors. These controls will reduce the likelihood of people trying to play fast a lose with credits to meet a budget issue as well as making sure you know how and when credits should come vendors so they can be properly accounted for.

In fact, the early involvement can have the added benefit of working with procurement and operations so that the contract gets the right words to support the GAAP answers everyone wants. Once the contract is signed we are stuck with the resulting accounting and everyone looks at accounting as the bad guy. Instead, accounting can be seen as part of the team by working up front to change the words in order to get the accounting outcome everyone wants before the contract it is signed.

The tyranny of the budget is a fact of life in corporate world, but it doesn’t have to always be bad. If you set up controls to use the budget process proactively and work with operations early to help them get the accounting answers they want, everyone can win.

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