In the context of accounting, to “validate” means to confirm the accuracy, legitimacy, and completeness of financial data, transactions, or accounting processes. This often involves cross-referencing entries, reconciling accounts, and verifying that financial transactions comply with standard accounting principles and relevant regulations. Validation is a critical step to ensure that financial statements are accurate and reliable.
How Validation Might Work in Accounting
- Invoice Validation: Before recording an invoice in the accounts payable system, an accountant may validate the information by checking that goods or services were actually received and that the invoice matches a purchase order.
- Bank Reconciliation: An accountant could validate the cash balance reported in the accounting system by reconciling it with the bank statements, thereby confirming that both records match.
- Internal Controls: Many companies have internal controls that require validation steps for significant financial transactions. For example, a second approval might be required for expenditures over a certain amount.
- Audit Trail: A proper audit trail, consisting of original documents and recorded transactions, serves as a validation mechanism to verify the accuracy of reported financial data.
- Statutory and Tax Compliance: Accountants validate that all entries and processes comply with relevant laws, such as tax codes and financial reporting standards, to ensure that financial statements are legally compliant.
- Period Closing: At the end of an accounting period, various accounts like revenue, expenses, assets, and liabilities are validated and reconciled to prepare for financial statement generation.
- External Audit: An external audit serves as a final, independent validation of a company’s financial statements, confirming that they present a true and fair view of the company’s financial position.
Validation is crucial for maintaining the integrity of a company’s financial records and is an essential part of transparent and accurate financial reporting. Failure to properly validate financial data can lead to errors, misrepresentations, and in some cases, financial fraud.
Example of Validate
Let’s consider a fictional small business called “Happy Paws Pet Shop” and examine a common accounting scenario where validation is essential: the process of invoice validation and payment.
Scenario: Receiving an Invoice for Dog Food Supply
Happy Paws Pet Shop receives an invoice from its dog food supplier, “Woof Foods Inc.,” for a shipment of dog food. The invoice amount is $1,000.
Step 1: Validate the Invoice against the Purchase Order
Before recording the invoice in the accounts payable system, the accountant at Happy Paws needs to validate the information on the invoice. They start by cross-referencing it with the original purchase order (PO) issued to Woof Foods Inc. The PO confirms that Happy Paws did indeed order $1,000 worth of dog food.
Step 2: Confirm Receipt of Goods
Next, the accountant checks the delivery records to confirm that Happy Paws actually received the shipment of dog food. The records show that all items were received as ordered.
Step 3: Double-Check the Amount and Terms
The accountant then verifies that the invoice amount matches the purchase order and delivery receipt and checks for any additional charges that may not have been authorized. Everything matches, so they proceed.
Step 4: Entry into Accounts Payable
After validating the invoice, the accountant makes an entry into the accounts payable system to acknowledge that Happy Paws owes Woof Foods Inc. $1,000.
- Journal Entry:
- Debit: Inventory Expense $1,000
- Credit: Accounts Payable $1,000
Step 5: Payment Authorization
Before making a payment, Happy Paws may require managerial approval for amounts over a certain threshold. The manager validates the invoice, the accounting entry, and the pending payment, then approves it.
Step 6: Making the Payment
Once the payment is approved, the accountant prepares a check or electronic payment for $1,000 to Woof Foods Inc.
- Journal Entry:
- Debit: Accounts Payable $1,000
- Credit: Cash/Bank $1,000
Step 7: Record Keeping
Lastly, the accountant files away the invoice, purchase order, delivery receipt, and payment records as part of the audit trail. This will serve as validation for any future audits or reviews.
In this example, Happy Paws Pet Shop used a multi-step validation process to ensure the accuracy and legitimacy of an invoice before recording it and making a payment. This kind of validation is crucial for maintaining accurate and reliable financial records.