For those of you using QuickBooks as your accounting system, I want to address a few things. QuickBooks can be deemed an adequate accounting system by DCAA, but this can only happen in conjunction with spreadsheets, policies and procedures, journal entries, and trained personnel.
Government contractors are required to use the accrual method of accounting. This means costs are recorded in the period in which they occur, and revenues are recognized in the period earned. Government contractors are also required to reconcile account balances, reconcile subsidiary ledgers to the General Ledger, and monitor indirect rates on a periodic basis (monthly at a minimum).
For my clients with cost-type contracts, I generally perform these month end tasks, including invoice preparation, as the invoice must be supported by a “Labor Distribution Report”. QuickBooks does not create nor provide a “Labor Distribution Report”.
Let me try to explain where/how QuickBooks fails. If an employee works a two week period ending October 26, 2018, the cost of the employee’s time needs to be recorded as of October 26, 2018. Most accounting systems have a labor distribution system that takes the hours from employee timesheets multiplied by pay rates, and books the dollar amounts as of October 26, 2018 debiting the various labor accounts, and crediting Salaries/Wages Payable (or a similarly named account). QuickBooks does not do this. In QuickBooks, employee pay does not hit the General Ledger until a paycheck is created. If your pay date is not the exact same date as your pay period end date, your labor is recorded in the wrong period. To be compliant, a “Labor Distribution” must be created and a journal entry entered for employee pay as of October 26, 2018, and reversed on the Paycheck date in which it is paid. This can get extremely tricky, especially if you invoice on a schedule that does not exactly match your pay schedule (i.e. bi-weekly payrolls with monthly invoicing), and even if you get the entries right, leading DCAA through the reconciliation between amounts paid and amounts invoiced (which have to match exactly, and tie to the QB Job Cost Ledger and paystubs) is complicated.
A similar issue happens with vendor invoices, especially subcontractor invoices. If a subcontractor works the same two week period ended October 26, 2018, those costs must be recorded as of October 26, 2018. What if the subcontractor doesn’t submit an invoice until a week or so later, and it is dated November 5, 2018? I expect most of you book the invoice with a November 5, 2018 date, and once again the costs are recorded in the wrong period. If you book the November 5, 2018 invoice with a October 26, 2018 date, the costs are recorded in the correct period, but your Accounts Payable Aging is incorrect. The correct handling once again is to accrue the subcontractor costs as of October 26, 2018 with a journal entry, and reverse on the invoice date. This does not just apply to direct costs, but to indirect costs as well. You might notice that I always invoice for each month on the last day of the month to match costs to the period incurred, and thus eliminate this issue for you at least when it comes to MY invoices.
Revenue must be recorded in the period earned . Creating an invoice in QuickBooks records revenue, but once again an invoice dated past October 26, 2018 for the above referenced employee and subcontract labor books the revenue in the incorrect period. If you date the invoice October 26, 2018, but it is not submitted until a later date, you have an incorrect Accounts Receivable Aging, and most likely have annoyed your customer. Once again, the proper handling is creating a journal entry to book the revenue in the proper period, reversing on the invoice date.
Government accounting system requirements were developed primarily to support cost-type contracts. That’s why those of you without cost-type contracts are able to operate seemingly efficiently using QuickBooks. QuickBooks does a good job of creating invoices for T&M and/or Labor Hour contracts (albeit most likely booking revenue to the wrong period), and you also don’t get audited to the extent you would with a prime cost-type contract.
Don’t be fooled however into thinking your system is compliant just because you are not being audited, and don’t be tempted to think you could pass a DCAA audit without my or another competent and experienced government contracts accountant.
For most of you, we have been making year end accrual entries to at least true-up costs on an annual basis so we are ready for Incurred Cost Proposal preparation should that requirement arise. (Incurred Costs are reported on an annual basis). Without the need for cost-type reporting and invoicing, it seems a lot of busy work (and extra cost) to be doing all the accruals and reversals on a more frequent basis, but that is the requirement to be truly compliant.
For those of you who have requested a letter from me per your customer’s request (example excerpted below), note the wording. It says the accounting and billing systems CAN track and account for costs and billings in accordance with FAR Parts 30 and 31. It does not say that it DOES. It only DOES if the proper steps are taken.
To Whom it May Concern:
RE: ABC COMPANY
I am a Certified Public Accountant familiar with Federal Acquisition Regulations (FAR) Parts 30 and 31.
ABC COMPANY’s accounting and billing systems can track and account for costs and billings in accordance with FAR Parts 30 and 31.
If you need additional information, please contact me.
I’m just touching on the highlights here of what it takes to have a complaint accounting system when using QuickBooks. I’ve discussed these issues with each of you before, but understanding and/or retention may be less than ideal, so addressing the issue again seems prudent. If you have questions and/or concerns, or if you want to be truly compliant using QuickBooks, or if you are interested in possibly upgrading to a system with less limitations, please contact me.
Thanks for taking the time to review and improve your understanding of the issues.
REBECCA A BOWER CPA PC