- Definition: Topside journal entries are nonroutine, manual entries in bookkeeping journals not typically reflected in other company ledgers.
- Purpose: These entries help in maintaining an accurate financial record, especially during consolidations or before preparing financial statements.
- Risk Assessment: While topside entries can be a potential fraud indicator, there are legitimate reasons for their use.
- Risk Management: Companies can mitigate associated risks with stringent controls, approvals, and restricted permissions.
Understanding the Topside Journal Entry
The intricate world of accounting is full of nuances and specific methods to ensure accuracy in the financial records of a company. One such method that often piques the curiosity of accounting professionals is the topside journal entry.
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What Exactly is a Topside Journal Entry?
While most financial transactions are routinely entered into journals reflecting the company’s operations such as expenses, revenues, liabilities, and assets, there are certain entries that are nonroutine. These are known as topside journal entries. Contrary to the normal automated journal entries we see in most bookkeeping systems, these are manually entered.
The Center for Audit Quality points out that these entries usually do not make their way directly into the general ledger. Instead, many companies might record them separately, often on spreadsheets, and then incorporate them into the official financial records later. These entries often come into play post the consolidation of journals or ledgers but prior to the finalization of financial statements.
Why Use Topside Entries?
Topside journal entries often act as necessary adjustments. These might be used to rectify a previous error or to record an entry that is pending more information, which might have been unavailable during the close of business on the previous day. The key is that they help maintain the accuracy and integrity of the financial records.
The Process of Incorporating Topside Entries
Ensuring the proper incorporation of topside entries into financial statements is vital. To achieve this, companies might employ various methods:
- Identification: Keeping a list or a separate record of all topside entries made during an accounting cycle helps in easy identification and verification.
- Reconciliation: By reconciling the general ledger with the financial statements, accountants can ensure that all topside entries have been appropriately included.
- Auditing Techniques: Techniques such as the “roll forward” method aid in checking general-ledger accounts to guarantee the inclusion of all journal entries.
Navigating the Risks of Topside Entries
While topside entries are a valid and sometimes necessary part of bookkeeping, they are not without their pitfalls.
Potential for Misuse
The Association of Certified Fraud Examiners, along with other professional accounting organizations, have flagged topside entries as potential fraud risks. This recognition stems from several cases where companies have misused topside entries to manipulate or present incorrect financial data. Manual systems, especially those using handwritten ledgers or unrestricted data entry methods, pose the greatest risk.
Minimizing the Associated Risks
For companies that use topside entries for legitimate accounting reasons, it’s essential to ensure proper checks and balances. Here are some recommended best practices:
- Define Situations: Clearly outline the scenarios where topside entries are acceptable.
- Seek Approvals: Every topside entry should go through an approval process.
- Restrict Permissions: Limit the number of individuals who can make these entries. In automated systems, permissions can be set to allow only specific personnel to make these entries.
- Regular Reviews: Schedule periodic checks to review and verify topside entries.
- Automate Reversals: For temporary topside entries, program the system to auto-reverse them the subsequent day.
In the vast and intricate landscape of accounting, topside journal entries play a specific, albeit occasionally controversial, role. When used judiciously and with proper oversight, they can be an invaluable tool in an accountant’s arsenal, ensuring accuracy and completeness of financial records. By understanding their purpose and implementing rigorous checks and controls, companies can harness the power of topside entries while safeguarding against potential misuse.