QuickBooks is a popular accounting software option for small businesses in many different industries, including government contractors. Whether you choose QuickBooks Online, or QuickBooks Desktop – it’s affordable, easy to use, comes in a variety of different plans, and there are many training and support resources available. However, government contractors should be aware that additional steps must be taken for QuickBooks to be “DCAA compliant”.
For QuickBooks (or any other accounting software) it’s important to select the best plan, configure settings, create a compliant chart of accounts, set up job costing, and process transactions correctly. The following tips will help you strive for an adequate accounting system, and ensure your long term success as a government contractor!
Select the best QuickBooks plan
In order to configure QuickBooks most effectively, make sure you have subscribed to QuickBooks Online Plus or QuickBooks Desktop Enterprise. These versions include job costing features required for government contract accounting.
Configure QuickBooks settings properly
In QuickBooks Online, these settings are found by navigating to the gear icon, selecting Account and settings and clicking the Advanced tab.
- Select the accrual accounting method
- Enable close books and set a closing date
- Enable account numbers
- Turn on project financial tracking
Create a compliant chart of accounts
Create account numbers according to your indirect cost pools (i.e., fringe benefits, overhead and general & administrative). Organize accounts using primary and sub-account options. A common high-level chart of accounts structure is (five-digit account numbers):
- 1xxxx: Asset accounts
- 2xxxx: Liability accounts
- 3xxxx: Equity accounts
- 4xxxx: Revenue accounts
- 5xxxx: Direct cost accounts
- 6xxxx: Fringe benefits (indirect costs) accounts
- 7xxxx: Overhead (indirect costs) accounts
- 8xxxx: G&A (indirect costs) accounts
- 9xxxx: Unallowable expense accounts
Set up job costing
After each customer record is created, set up projects (for each contract), service items (billable amounts) and classes (to track costs by CLIN).
Process transactions correctly
Enter vendor invoices as Bills (not Checks or Expenses)
Using Check or Expense transactions will record the transaction as cash basis based on the transaction date which isn’t correct for government contractors. The Bill transaction will record an expense based on the transaction date and a payable due on a future date. When paid, the payable is cleared and the cash disbursement is recorded. This distinction is important for compliance with GAAP, and the requirement that government contractors keep their books on an accrual basis.
Example: A consultant submits an invoice for services rendered in February on March 1. The invoice states it’s due March 15. Using a Bill transaction, selecting the transaction date as February 28 records the expense properly in February. If the Check or Expense transaction was used when the payment was made on March 15, the expense would be recorded incorrectly in March (instead of February).
Allocate payroll, direct expenses and indirect expenses to jobs
For every transaction entered into QuickBooks which should be allocated to a job (Bills, Checks, Expenses, Journal Entries), select the appropriate project in the Name or Customer:Job field. This will ensure your P&L by customer report is accurate which is an important month end review task. A Class may also be assigned to transactions if desired.
Prepare adjusting journal entries
For GAAP compliant accounting, adjusting journal entries (AJE) are created at the end of a period to record accruals, deferrals and other transactions not recorded using other transaction forms. For example, in QuickBooks, revenue is not recorded until an invoice is created. However, at the end of any given month, the company has performed services and amounts are due from the customer. Recording an AJE will account for the revenue earned by the company in the correct period. The following are commonly required journal entries for government contractors:
- Depreciation (debit depreciation expense and credit accumulated depreciation based on a depreciation schedule)
- Prepaid expenses (debit appropriate expense account and credit prepaid expense asset, e.g., insurance premium paid in advance for one year)
- Labor expense accrual (debit salaries/wages expense and credit payable for amounts between end of last pay period and month end date)
- PTO expense accrual (debit PTO expense and credit payable for total of employee’s accrued hours multiplied by their pay rate as of the month end date)
- Revenue accrual (debit unbilled receivables asset and credit revenue for amounts which will be invoiced to the customer)
Note: For most AJEs–expense and revenue accruals–it’s important to reverse them on the first day of the new month. Otherwise, expense and revenue totals may be overstated.
Reconcile accounts
Reconciling accounts is important to ensure all transactions are recorded and that balances make sense.
- Use bank statements to reconcile checking, savings and credit card accounts.
- Run the P&L by customer report and reconcile direct costs to the company P&L.
Finally, it’s important to note that QuickBooks is only one part of an adequate accounting system, not the adequate accounting system required for government contractors. An adequate accounting system is one that is “DCAA compliant”, or capable of passing a DCAA audit. Any accounting software can be part of an adequate accounting system if it is properly configured and operated by competent users.
Do you have questions? Please feel free to email me.
Disclaimer: This blog post is for general informational purposes only. Blog posts cannot substitute for useful accounting, tax or legal advice, which can only be obtained from consultation with an accountant, attorney or other qualified professional considering the specifics of your business/situation. All information on the blog is provided in good faith, however, there is no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, availability, completeness, reliability, or validity of information shared via blog post, comments, etc. The views expressed on this blog are solely those of the author(s) and do not necessarily reflect the views of JAS MAS LLC dba Acounten.
