“But Ariel, you focus on strategic finance—why an accounting tip?”
Good question. The fact is that here at Raftel Strategy we’ve been getting a lot of interest from companies and clients who are startups in Israel doing business in the US. And that makes sense: as a company with offices in Tel Aviv in Israel and Philadelphia in the US, we’ve got both feet straddling the same borders!
For instance, some US based consultants may not be as familiar as we are with “transfer pricing.” In transfer pricing, the Israeli entity needs to charge the US entity for service fees on a cost plus basis. This ensures a comfortable margin that allows the Israeli entity to capture and pay taxes in Israel, which in turn is a write-off for the US entity.
Anyway, it’s budgeting season, so whether you’re a bi-national, a multi-national, or just a one-country kind of company, accounting is on everyone’s mind. And whether you’re in healthcare or construction, media and entertainment or a charitable non-profit, here are 3 accounting tips that we think you should keep top of mind as you dive into your year end and budgeting efforts.
As you read these tips, please also keep in mind one of Raftel Strategy’s key premises:
Clean, accurate data at the source saves time and effort, allowing you to extract insights that drive strategic decisions. Solid data management leads to better forecasting, analysis, and long-term success. And it supports accurate accounting across all the touchpoints that accounting informs and governs.
ACCOUNTING TIP 1: Avoid booking journal entries directly to cash or credit accounts
We start off with a critical tip that we’re surprised to find isn’t as universally applied as you might think: Avoid booking journal entries directly to cash or credit accounts. To keep your reporting accurate and actionable, it’s crucial that these accounts reflect only actual transactions.
Which reports? Think: direct cash flow forecasting, AR/AP aging reports, etc.
What does this mean practically?
Don’t post journal entries against AR, AP, bank accounts, or credit cards. If you’re working with revenue recognition or prepaid expenses, journal entries should be posted to revenue/expense accounts and accruals (like prepaid expenses or deferred revenue).
ACCOUNTING TIP 2: Consider creating a separate cost center for blockchain and smart contract development
For our next tip, consider creating a separate cost center for blockchain and smart contract development. This will help track expenses and make it easier to justify your accounting treatment to auditors.
While this tip specifically arose from our work with a client in the construction sector, you may find it useful for technical accounting at other companies navigating the murky waters of blockchain accounting.
As more construction firms adopt blockchain for transparent, tamper-proof project tracking, a new accounting challenge emerges around the intersection of ASC 730 (Research and Development Costs) and blockchain-based smart contracts for project management.
Here's what you need to know if you’re developing blockchain infrastructure for project management:
Be cautious about capitalizing those costs. Under ASC 730, many blockchain development activities may need to be expensed as incurred, impacting short-term profitability.
The "technological feasibility" threshold is crucial. Only once you've established a working model for your blockchain system can you start capitalizing certain development costs.
Smart contracts add another layer of complexity. While they streamline processes, the costs to develop and implement these self-executing contracts often fall under R&D expenses.
Don't forget about ongoing blockchain maintenance and upgrades. These costs typically can't be capitalized and must be expensed as incurred.
Materiality matters. For smaller construction tech firms, these R&D expenses could significantly impact financial statements and investor perceptions.
Remember: Creating a separate cost center for blockchain and smart contract development will make it easier to track expenses and justify your accounting treatment to auditors.
ACCOUNTING TIP 3: If you want to allocate, overhead try the ABC method (Activity Based Costing).
Why do companies still allocate backend overhead to product lines? All it does is, at best, obscure profitability and, at worst, lead to misinformed strategic decisions.
If you want to allocate, overhead try the ABC method (Activity Based Costing). Look at actual business drivers for expenses and attribute costs when it is related to selling, supporting, or delivering the product.
Otherwise it is an unrelated fixed cost and should be kept to understand the business profitability. Just don't unnecessarily throw it into the product profitability, please.
SUMMARY:
Here are 3 accounting tips that we think you should keep top of mind as you dive into your year end and budgeting efforts.
ACCOUNTING TIP 1: Avoid booking journal entries directly to cash or credit accounts
ACCOUNTING TIP 2: Consider creating a separate cost center for blockchain and smart contract development
ACCOUNTING TIP 3: If you want to allocate, overhead try the ABC method (Activity Based Costing).
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