NAFAAR - the New Approach

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NAFAAR - The New Approach

To Financial Accounting, Auditing, and Reporting

Detailed Features Listing

Author: Steve L. Seawall, CPACopyright 2016 Custom Micro Works All rights reserved

Revised 2/10/2016

Single Entry Accounting System

Probably the most distinctive feature of NAFAAR is that it is a Single Entry accounting system. Virtually all other comprehensive financial accounting systems use standard double entry accounting.

The Single Entry feature makes it possible for NAFAAR to produce GAAP (accrual basis) financial statements almost effortlessly. What do we mean by effortlessly? Using our Single Entry technology, we have eliminated double entry postings of journal transactions. We have eliminated subsidiary ledgers. We have eliminated the most complex and time-consuming procedures that are present in all double entry accounting systems used to produce GAAP (accrual basis) financial statements. This is precisely why NAFAAR is so simple, efficient, and accurate!

Financial Reporting Capability

NAFAAR is designed to support virtually any financial reporting requirement you might have,with both simplicity and accuracy. Translated, that means NAFAAR can accommodate virtually any basis of accounting, accompanied with the related financial statement reporting model.

• Financial Statement Models. Some of the more commonly required financial statements:

GAAP Financial Statements (Accrual Basis of Accounting). GAAP (accrual basis) financial statements are a common reporting requirement for most business entities. These statements include the standard balance sheet and income statement.

Cash Basis Financial Statements. Our cash basis financial reporting model is not generally required for external reporting purposes. However, it is indispensable for use in tracking and monitoring cash.

Budgetary Basis Financial Statements. NAFAAR integrates the budget with the accounting system. Hence, the accounting system is referred to as a budgetary accounting system.

By default, NAFAAR employs the budgetary basis of accounting we refer to as the modified cash basis of accounting, modified for the inclusion of encumbrances. It is a very common basis of accounting and is sometimes called "encumbrance accounting" or "cash plus encumbrances".

Tax (Cash) Basis Financial Statement. For small business owners who report on a cash basis, the related tax basis income statement is merely an extension of the cash basis financial statement with minor adjustments for items such as depreciation.

Tax (Accrual) Basis Financial Statement. For business owners report on an accrual basis, the related tax basis income statement is merely an extension of the accrual basis income statement with adjustments for items such as depreciation.

Progression Reporting

Progression reporting is a modern day financial reporting phenomenon developed with the new NAFAAR technology. The concept of progression reporting means there is a natural progression from one reporting stage to another. That is, to get to stage 2 reporting, you must first complete stage 1 reporting, and so on. Each reporting stage builds on the previous reporting stage.

Progression reporting has the following characteristics:

Reporting Stages. Under the concept of progression reporting, financial reporting progresses from one stage to another stage. For example, you might progress from Stage 1 to Stage 2, from Stage 1 to Stage 3, and from Stage 3 to Stage 4. Be careful how you interpret our use of the words “progress” and “stage”.

Our use of the word “progress” does NOT mean to move forward or to improve something. When we use the word “progress”, it means to move to something different in the way of financial reporting.

Our use of the word “stage” does NOT mean there is a hierarchy or that one stage is more useful than another stage. When we use the term “stage”, it means that specific stage produces financial reporting that is clearly defined and different from any other stage.

We deliberately do not place a measured value as to the usefulness or importance of each reporting stage. Why, because all reporting stages have a very specific financial reporting objective that has a critically important purpose to one or more users. If this was not the case, the reporting stage would not exist.

Financial Statement Reporting Models. Each progression stage of reporting exhibits its own unique financial statement reporting model and basis of accounting. A properly designed reporting model typically has two important characteristics: 1) continuity reporting, and 2) period reporting. The most common financial statement reporting model is the traditional business reporting model consisting of: 1) a balance sheet for continuity reporting, and 2) an income statement for period reporting.

NAFAAR Budgetary Accounting – Progression Stage 1 andStage 2. NAFAAR’s Budgetary Accounting module is deliberately designed to satisfy the reporting requirements of progression Stages 1 and 2, which are needed or required for virtually all financial accounting entities:

Stage 1 – Cash Basis Financial Statement Reporting Model (discussed in more detail below).

Stage 2 – Budgetary Basis Financial Statement Reporting Model (discussed in more detail below).

A typical business would also progress from Stage 1 to Stage 3 to produce accrual basis financial statements (balance sheet and income statement). When we use the phrase “progress from Stage 1 to Stage 3” we are acknowledging that Stage 3 financial reporting is dependent on Stage 1 reporting.

NAFAAR Technology – Any Financial Statement Model, Any Basis of Accounting. As you might have guessed, NAFAAR is designed with the capability of producing any type of financial statement, using any basis of accounting.

NAFAAR Technology is in sharp contrast to old technology on which virtually all other comprehensive financial accounting systems are based. In NAFAAR terms, the old technology is a single-state reporting system that is designed to produce a single set of financial statements consisting of the traditional accrual based balance sheet and income statement.

In contrast, NAFAAR technology has the capability to produce an infinite number of reporting stages, only one of which is the traditional accrual based balance sheet and income statement.

Data Integrity Protection Features

NAFAARhas an arsenal of weapons designed to protect against breaches, both intentional and unintentional, to data being stored in the data warehouse. Some of these protective measures are voluntary, meaning we leave it up to the client to decide. Others automatically take place in the background.

Intelligence Reporting. Business and accounting intelligence reporting has been around a long time. Put in very simple terms, intelligence refers to the retrieval of information for decision-making purposes. For local governments, NAFAAR provides critical accounting intelligence for legal compliance reporting purposes as well as business decision making. However, the same information is critically important to the business owner, albeit not for legal compliance purposes.

Our focus with NAFAAR is to provide assurance to the user that the accounting intelligence is accurate, complete, reliable, and understandable. We do this by keeping the accounting system simple to maintain, by protecting the integrity of the underlying data, and by being able to provide the accounting entity auditing and reporting tools to demonstrate on a regular basis that data integrity is intact.

Security. NAFAAR provides optional menu level access security.

Backup Protection. NAFAAR provides optional backup protection, including snapshot backup, compressed (zipped) backup, and offline backup storage.

Full Chart of Accounts. NAFAAR will provide you with a complete chart of accounts for all modules, including the budgetary accounting system, billing and accounts receivable, payroll, and GAAP.

Electronic-Based Internal Controls. The New Approach introduces a whole new world of electronic-based internal controls you cannot find in other systems. It’s our way of saying “Out with the old technology” and “In with the new technology.”

The accounting and auditing professions, including academia, are still preaching the same old stuff because they do not have anything new. We are all about new reporting, new procedures, new technology, new, new, new. Our shift in focus to electronic-based internal controls is part of our overall effort to better protect against breaches to data integrity.

Regression Auditing. NAFAAR is deliberately designed to encourage regression auditing. That is, we believe it is important to re-create selected prior period financial reports from the same raw data used for the original report to provide assurance the data remains intact. This might include prior period bank account reconciliations and monthly financial statements provided to the governing body or the business owner for a prior month.

Periodic (Monthly) Monitoring for Data Integrity Breaches. NAFAARmonthly data integrity monitoring procedures include numerous reconciliation procedures as well as internal self-auditing procedures which are relatively simple to follow and understand, and do not require any special knowledge of accounting or the accounting system.

Budgetary Accounting Features

NAFAAR is designed around three commonly accepted accounting principles that surfaced about 100 years ago in response to local government corruption:

Principle 1 – Fund Accounting. The concept of fund accounting was in response to growing cities collecting moneys from different sources for different purposes, and not knowing how to keep track of it. At that time, a century ago, the predominant financial accounting model was double entry posting of journal transactions to general ledger accounts. That same model was modified to create a separate fund for distinct functions of the city with each fund having its own set of accounts. Whereas a business would have a single set of accounts and a single set of financial statements (e.g., balance sheet and income statement), a city would have multiple sets of accounts and multiple sets of financial statements.

Principle 2 – Cash Verification. In so many words, the principle of cash verification simply states that “if your financial statements show that you have $100,000 cash on the books as of a certain date, you better be able to prove it.” It’s hard to believe this requires a principle, but very likely you are well aware of embezzlements going on all across the nation.

Principle 3 – Integrated Budget and Encumbrance (Purchase Order) Accounting. In so many words, the third principle states that to be effective, the budget must be integrated into the accounting system. Much more important than budget integration was the proposed use of “encumbrance” accounting for budgetary purposes, whichto this day continues to be the predominant budgetary basis of accounting across the nation, as evidenced in the authoritative and non-authoritative accounting literature and state laws across the nation.

Fund Accounting System. NAFAAR is a fund accounting system. But it is designed for use by both local governments (e.g., cities) and private sector businesses. The fund accounting system’s capabilities include the following:

Unlimited Number of Funds

Fund-Based Budgeting

Fund-Based Cash Basis Reporting

Fund-Based Budgetary Basis Reporting (Encumbrance/Purchase Order Accounting)

Fund-Based GAAP Reporting (e.g., accrual basis financial statements)

Budgetary Accounting System. NAFAAR employs encumbrance accounting (i.e., purchase order accounting) as the budgetary basis of accounting. It is integrated into the fund accounting system. In fact, it is very simple to use, and opens the door to accounting intelligence you cannot imagine.

The Budgetary Accounting system is designed specifically to demonstrate compliance with the statutory balanced budget requirements of most states. This includes a monthly year-to-date budgetary status (compliance) report by fund.

Electronic Cash Receipt Book. The NAFAAR electronic cash receipt book is a huge first step in protecting the cash you collect, as well as reconciling budgetary accounting to banking.

Initial documentation for all cash receipts for internal control purposes

Electronic receipt book number tagging for internal control purposes

Electronic date stamp for bank deposit purposes and internal control

Specific identification of customer payments vs. all other cash receipts

Specification identification of cash vs. checks for reconciliation purposes

Cash receipt printout for office use and a stub for the customer

Special Cash Receipting Procedures. Cash receipt processing is basically the same for all receipts, but with minor variations depending on the type of receipt:

Over-The-Counter Cash Receipts

Online Direct Bank Credit Cash Receipts

Credit Card Payments

Remotely Collected Cash Receipts

Cash Receipt Processing – Starts with Cash Receipt Book Entry. Cash receipt processing starts with the electronic cash receipt book entry. This initial entry identifies whether the cash receipt collected is 1) a customer payment on account, or 2) a non-customer payment.

Customer Payments. Cash receipts designated as customer payments will automatically appear in AR as pending customer payments waiting to be processed in AR.

Non-Customer Payments. Cash receipts designated as non-customer payments will automatically appear in BA as pending cash receipts waiting to be processed.

Cash Disbursement Process to Pay for Vendor Invoices (AP).

Paper Check Disbursements.

Non-Paper Check Disbursements – Electronic Checks.

Non-Cash Transactions –Non-Cash Treatment. Non-cash transactions are, by design, accounted for separate and apart from cash transactions for internal control purposes. This reduces the risk that data breaches affecting cash will go undetected.

Non-cash transactions are stored in the data warehouse separate from cash, and separate from each other. Each non-cash transaction entry allows for a short comment to explain the purpose of the transaction for auditing purposes. We recommend a Memo to File where a more detailed explanation is needed.

Non-cash transactions include the following:

Interfund Transfers

Cash Receipt Adjustments

Expenditure Adjustments

Encumbrance Adjustments

Period-to-Period (Continuity) Financial Reporting. NAFAAR has very sophisticated period-to-period (e.g., month-to-month, year-to-year)fund financial reporting capability:

Cash Basis Financial Statement By Fund:

Fund Beginning Cash Balances

Fund Cash Receipts

Fund Cash Disbursements

Fund Ending Cash Balances

Fund Accounts Payable

Fund Outstanding Encumbrances (e.g., Purchase Orders, Contracts, etc.)

Budgetary Status Financial Statement By Fund:

Fund Beginning Uncommitted Cash (i.e., Unencumbered Cash)

Fund Budgetary Receipts (includes Cancelled Prior Year Encumbrances)

Fund Budgetary Expenditures

Fund Ending Uncommitted Cash

Fund Remaining Budgetary Balance

Supporting Financial Reports. Detailed financial reports are available that support virtually all monthly and year-end financial statements:

Month-EndCash Balance Reports By Bank Account and Investment

Cash Receipt Reports

Cash Disbursement Reports

Budgetary Receipt Reports

Budgetary Expenditure Reports

Accounts Payable Reports (Unpaid Vendor Invoices)

Outstanding Encumbrances Reports (includes Purchase Orders and Contracts)

Detailed Inquiry Capability with Reporting Options.

Cash Receipts

Purchase Orders

(Vendor) Invoices

Checks (Paper and Electronic)

Interfund Transfers

Cash Receipt Adjustments

Expenditure Adjustments

Encumbrance Adjustments

Form 1099 Processing and Reporting Capability.

Banking Features

Cash Tracking. Accurate and complete tracking of all bank accounts and all cash-equivalent investments (e.g., certificates of deposit).

ACH Customer Payments. The AR module is designed to create ACH text files for submission to the ACH processor to electronically transfer customer payments from the customer’s bank account to your bank account.

ACH Vendor Payments. The BA module is designed to create ACH text files for submission to the ACH processor to electronically transfer vendor payments from your bank account to the vendor’s bank account.

Direct Deposit Paychecks. The PR module is designed to create ACH text files for submission to the ACH processor to electronically transfer payments from your bank account to your employee’s bank account.

Online Payments to Vendors. The BA module is designed to create “electronic vendor checks” in instances where you make the payment online. An electronic check is virtually identical to a paper check electronically (i.e., in the computer). That is, in both cases, a check record is created in the system. But for electronic (online) payments, a pre-numbered paper check is not required, and not needed.

Monthly Bank Account Reconciliations. Bank account reconciliations are designed to be conducted as of the end of each month. In actuality, bank account reconciliations can be conducted as of any date. We discourage anything other than month-end reconciliations, except where there is a critical need to do so.

Monthly Cash Summary Report. The Banking module provides a complete monthly summary of all cash belonging to the accounting entity, including bank accounts, cash-equivalent investments, and in-office petty cash and change.

Reproducible Reconciliations and Report. All bank account reconciliations and cash reports are reproducible, directly from the original raw data, at any time, for audit protection purposes.

Banking and BA Integration. The Banking and BA modules are uniquely integrated to make it possible to trace cash being reported “on the books” directly to banking records (e.g., bank statements) that are both easily verified and created outside of your accounting system.

This integration feature has far-reaching audit protection implications because BA is, in turn, integrated and reconcilable to all other modules, including AR, Payroll, and GAAP. The protection is inherent in the capability to verify the accuracy, completeness, and reliability of all cash transactions flowing to and from BA. This type of electronic internal control sophistication simply does not exist in any other comprehensive financial accounting and reporting system.

Accounts Receivable Features

Service and Product Billing Capability.

Utility Billing Capability.

Unlimited Number of Customers.

Unlimited Number of Service Addresses.

Unlimited Number of Utilities.

Unlimited Number of Utility Rates for Each Utility.

Multiple Service Addresses Can Be Assigned to a Single Customer.