Today we want to look at Criteria #7, Approval and documentation of adjusting journal entries. First, we will define "adjusting journal entries" by means of an illustration. When posting an invoice, it is necessary to assign the transaction a account number/description and a job number. So if you purchase material specifically for a contract, you would charge an account (Materials) and a job number that corresponds to the contract (Job 123). If later you find that the account number or job number is in error, you need to make an adjusting journal entry - move it from material to supplies, for example. Or, if you charged it to the wrong job, you need to make an adjusting journal entry to move the transaction from the incorrect job number to the correct job number.
A journal entry to move costs between two accounts is very simple. To use our illustration, moving a $100 purchase from "Materials" to "Supplies" would look like this.
That seems pretty straight-forward but for DoD purposes, the 'who, 'what, 'when, 'where, and 'why questions must be answered. DoD requires:
- Written justification in sufficient detail to answer the who, what, when, where, and why questions.
- Approval of the adjusting journal entry (although not stated, the approval must be from a position higher than the person making the adjustment).
- Retention of the justification and approval documentation for the minimum record retention period.
- Maintained where it is readily available and accessible.
There are very practical reason for requiring written justification and approval. First, its a good internal control step - there's someone watching. Secondly, humans forget things. It happens to us all of the time - we ask why such and such adjustment was made and even the person making the adjustment cannot remember. Thirdly, employees turn over. The person making the adjustment may have left the company or transferred to another division, or is otherwise nowhere to be found when the auditors come knocking and asking questions.