Problem with the Plug
Accountants have a dirty little secret. It is called the "plug". There is another fancier term for the plug: "by induction". The "plug" has big problems.
In a properly functioning accounting system there would never be the need to "plug" numbers. The process of "plugging" involves inserting or adjusting numbers (i.e. unsupported adjustment) to whatever is needed to make something work the way it should work.
For example, if you had two systems that should always agree and for some reason they don't in fact agree; you have to adjust one of the two systems to make the balances of the two systems match.
The practice of plugging is commonly used in the "eleventh hour" when you are trying to get a report out but something is not working and the "debits" are not agreeing with the "credits" or something is not adding up correctly and if you issued the report as is you would look a bit foolish because things are not balancing or adding up correctly. So, you "plug" something to make everything work.
Accountants sometimes justify this "plugging" by abusing the principle of "materiality". Per the materiality principle, accounting rules can be ignored if something has such a small impact that a user of the financial statement will not be misled. Materiality is a good tool, but it should not be abused.
So, imagine that a reporting economic entity has a $500 discrepancy between its total debits and credits. To resolve this, an accountant might create a journal entry that "plugs" debits or credits an account by $500. This plug balances the financial statements. It is crucial to ensure that the adjustment is, in fact, legitimate and justifiable.
But what if the $500 discrepancy what just an indication that something is wrong and there is some other issue, maybe fraud, that now goes undetected because the accountant never got to the bottom of the real cause of the discrepancy?
Not doing the "transaction chasing" necessary to get to the bottom of a situation can lead to transparency problems in your financial statements. Financial stakeholders might not get a real understanding of the situation at work.
A common place for plugging numbers is on the cash flow statement. Why? Because these line items are not explicitly and formally tracked within the accounting system. The correct fix is to formally track cash flow statement (and changes in equity information) in the accounting system.
In essence, while plugging numbers might seem to offer short-term solutions, it can pose significant long-term risks if not used judiciously and with very good judgement. Always better to aim for accuracy and transparency in financial reporting.
The need to plug is an indication of an accounting system which is not working the way that it should work. The plug tends to address the symptom, not the problem. Modern accounting tools will make the "plug" a thing of the past.
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