For Your Information
From the BDC Accounting Department:
Under Exchange Act Rules 17a-3 (requirement to make books an records, including
ledgers reflecting all assets and liabilities) and 17a-4 (preservation of records)
and conducts rule 3110 (requiring above) your broker-dealer must keep your books
in accordance with generally accepted accounting principles or “GAAP” Under “GAAP”,
the accrual method of accounting is used. That means all broker-dealers must
recognize revenues when they are earned as well as liabilities (bills) when they
occur.
What does this mean to your broker-dealer?
Accrued Expenses impact your net capital by increasing your aggregate indebtedness
(AI). Your AI ratio to net capital cannot exceed 800% during the first year
of operations or 1500% thereafter. In addition, your minimum net capital may
be based on your level of aggregate indebtedness.
How do you determine what constitutes an accrued expense?
Sometimes accruals can be estimates (for example, your cell phone bill), other
accruals are set costs (your yearly audit). Even if you have not yet
received the bill when you are closing the books you should account for a liability
that you know the firm has incurred. Let’s look at an example of
an accrued liability:
ML Retton is the bookkeeper for USA Team Securities. She
is about to close her books for the month of March as she will need to submit
her financials to BDC for their quarterly review. After she finishes her
bank reconciliation, she prints out a year to date general ledger. In the
first week of April, she has written three checks. The first check is to
the Olympic Times for $75.00 for an ad they placed in March for an administrative
assistant. The second check is a bill to BDC for FINOP services for the
month of March. The third check is to pay the rent for their office in
Athens, Omaha. Which of these expenses should ML accrue for the month of
March, even though USA Team Securities physically writes the checks in April?
The answer is: Checks one and two. Check Three is for an expense
that occurs in the month of April as it covers April 1-30. The prior two
expenses were incurred in the prior period of March.