SOP-005: Financial Operations

Standard Operating Procedure for Financial Recording and Reporting

Field	Detail
SOP Number	SOP-005
Version	1.0
Effective Date	2026-07-26
Prepared By	Lofty Golden Oil Ltd — IT & Operations
System	Lofty Golden Oil ERP
URL	https://loftygoldenoil.com

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1. Purpose

To standardize the financial recording, reporting, and compliance procedures for Lofty Golden Oil Ltd using the ERP system. This SOP ensures accurate books, proper internal controls, regulatory compliance, and reliable financial reporting.

2. Scope

This SOP covers all financial operations, including:

• Chart of accounts management
• Transaction recording (sales, purchases, production, expenses)
• Journal entries and reversals
• Voucher system
• Monthly close procedures
• Bank reconciliation
• Accounts receivable and payable management
• Tax compliance
• Audit preparation

3. Definitions

Term	Definition
GL	General Ledger — the main accounting record of all financial transactions
Chart of Accounts	The organized list of all accounts used in the company's accounting system
Trial Balance	A report listing all GL accounts and their balances to verify debits = credits
P&L	Profit and Loss Statement — shows revenue, costs, and profit over a period
Balance Sheet	Shows assets, liabilities, and equity at a point in time
Journal Entry	A record of a financial transaction in the accounting system
Debit Voucher	Document authorizing an outgoing payment
Credit Voucher	Document authorizing an incoming receipt
Accrual	Recording revenue or expenses when incurred, not when cash changes hands
VAT	Value Added Tax — 7.5% in Nigeria
WHT	Withholding Tax — tax deducted at source on certain payments
Audit Trail	The sequence of records providing documentary evidence of transactions

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4. Chart of Accounts Management

4.1 Account Structure

The chart of accounts follows a standardized numbering system:

Code Range	Account Type	Examples
1000–1999	Assets	Cash, Bank, Inventory, Fixed Assets
2000–2999	Liabilities	Accounts Payable, Loans, VAT Payable
3000–3999	Equity	Owner's Equity, Retained Earnings
4000–4999	Revenue	Sales Revenue, Other Income
5000–5999	Cost of Goods Sold	Raw Material Costs, Production Costs
6000–6999	Operating Expenses	Rent, Salaries, Utilities, Transport
7000–7999	Other Expenses	Interest, Losses
8000–8999	Tax Expenses	Income Tax, VAT

4.2 Adding New Accounts

1. Navigate to Accounting → Chart of Accounts → + New Account.

2. Enter the following:

   Field	Description
   Account Code	Unique numeric code following the structure above
   Account Name	Descriptive name (e.g., "Electricity Expense")
   Account Type	Asset, Liability, Equity, Revenue, Expense
   Parent Account	Higher-level account this rolls up to (if applicable)
   Description	Brief description of what this account tracks
   Status	Active or Inactive

3. Save the account record.

4.3 Account Management Rules

• New accounts require Admin or Accountant approval.
• Account codes must not be duplicated.
• Inactive accounts retain historical data but cannot receive new entries.
• Restructuring the chart of accounts requires MD approval.

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5. Transaction Recording

5.1 Sales Revenue

• Trigger: When a sale status changes to "Completed".
• Auto-recorded by the system:
  • Debit: Accounts Receivable (if credit sale) or Cash/Bank (if cash sale).
  • Credit: Sales Revenue.
• Verification: Review daily entries in Accounting → General Ledger → Recent Entries.

5.2 Purchase Costs

• Trigger: When a purchase record is saved in the Purchases module.
• Auto-recorded by the system:
  • Debit: Inventory (Raw Materials or Finished Goods).
  • Credit: Accounts Payable (if on credit) or Cash/Bank (if paid immediately).
• Verification: Review purchase entries against supplier invoices.

5.3 Production Costs

• Trigger: When a production run status changes to "Completed".
• Auto-recorded by the system:
  • Debit: Work-in-Progress (during production).
  • Credit: Raw Materials Inventory (consumed).
  • Upon completion:
    • Debit: Finished Goods Inventory.
    • Credit: Work-in-Progress.
  • Additional costs (labour, overhead) recorded as journal entries.
• Verification: Review production cost entries against production run records.

5.4 Expenses

• Trigger: Manual entry via the Expenses module.
• Entry process:
  1. Navigate to Expenses → + New Expense.
  2. Enter:
     • Expense category (GL account)
     • Amount
     • Date
     • Description
     • Payment method
     • Attach receipt/proof
  3. Save the expense record.
• Approval: See approval authority matrix (Section 15).
• GL Entry: Debit Expense Account, Credit Cash/Bank.

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6. Journal Entries

6.1 When to Create Journal Entries

Scenario	Description
Corrections	Fixing errors in previously recorded transactions
Accruals	Recording revenue/expenses earned/incurred but not yet invoiced
Adjustments	End-of-period adjustments (depreciation, provisions, prepayments)
Transfers	Moving amounts between GL accounts
Reclassifications	Correcting misclassified transactions

6.2 Step-by-Step Journal Entry Creation

1. Navigate to Accounting → Journal Entries → + New Entry.
2. Enter the Entry Date (the date the entry should be recorded).
3. Enter the Description/Reference (explain the purpose of the entry).
4. Add Debit lines:
   • Select the GL account.
   • Enter the debit amount.
5. Add Credit lines:
   • Select the GL account.
   • Enter the credit amount.
6. Verify: Total Debits must equal Total Credits.
7. Attach supporting documentation (calculations, source documents).
8. Click Save.
9. Approval: Journal entries above ₦500,000 require Manager approval; above ₦2,000,000 require MD approval.

6.3 Reversal Procedures

1. Navigate to Accounting → Journal Entries → [Select Entry].
2. Click Reverse.
3. Confirm the reversal.
4. The system creates a new entry that is the exact opposite (debit becomes credit and vice versa).
5. The original entry and reversal are both retained in the audit trail.
6. Add a note explaining the reason for the reversal.

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7. Voucher System

7.1 Debit Vouchers (Outgoing Payments)

Used when the company makes a payment to a supplier, vendor, or for expenses.

1. Navigate to Accounting → Vouchers → + New Debit Voucher.
2. Enter:
   • Payee name and details
   • Amount
   • GL account(s) to be debited
   • Payment method (Cash, Bank Transfer, Cheque, POS)
   • Reference/invoice number being paid
   • Date of payment
3. Attach supporting documentation:
   • Supplier invoice
   • Approved requisition or purchase order
   • Delivery note/goods received note
4. Submit for approval per authority matrix.
5. After approval, process the payment.

7.2 Credit Vouchers (Incoming Receipts)

Used when the company receives money from customers or other sources.

1. Navigate to Accounting → Vouchers → + New Credit Voucher.
2. Enter:
   • Payer name and details
   • Amount
   • GL account(s) to be credited
   • Payment method received
   • Reference (invoice number, transfer reference)
   • Date of receipt
3. Attach supporting documentation:
   • Customer payment confirmation
   • Bank statement entry
   • POS receipt
4. Submit for approval per authority matrix.
5. Record the receipt in the appropriate account.

7.3 Supporting Documentation Requirements

Transaction Type	Required Documentation
Purchase payment	Supplier invoice + PO + GRN + Approval
Expense payment	Expense claim form + Receipt + Approval
Customer receipt	Payment confirmation + Invoice reference
Bank transfer	Transfer slip/receipt + Narrative
Petty cash	Petty cash voucher + Receipts
Journal entry	Calculation/supporting memo + Approval

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8. Monthly Close Procedures

Target: Completed within 5 business days of month-end.

Step 1: Reconcile All Bank Transactions

1. Download bank statements for the month.
2. Navigate to Accounting → Bank Reconciliation.
3. Match each bank transaction with the corresponding GL entry.
4. Investigate and resolve unmatched items.
5. Complete the bank reconciliation (see Section 9).

Step 2: Review and Approve All Pending Expenses

1. Navigate to Expenses → Pending Expenses.
2. Review all expense submissions for the month.
3. Approve valid expenses; reject invalid ones with comments.
4. Ensure all approved expenses are recorded in the GL.

Step 3: Verify All Sales, Invoices, and Payments Recorded

1. Navigate to Sales → Sales and verify all sales are completed and recorded.
2. Navigate to Sales → Invoices and verify all invoices are generated.
3. Navigate to Sales → Payments and verify all payments received are recorded.
4. Cross-reference with delivery records and bank statements.

Step 4: Generate Trial Balance

1. Navigate to Accounting → Reports → Trial Balance.
2. Set the period to the closing month.
3. Verify that Total Debits = Total Credits.
4. If not equal, investigate and correct discrepancies before proceeding.

Step 5: Generate Profit & Loss (P&L) Statement

1. Navigate to Accounting → Reports → P&L Statement.
2. Set the period to the closing month.
3. Review:
   • Total Revenue
   • Cost of Goods Sold
   • Gross Profit
   • Operating Expenses
   • Net Profit/Loss

Step 6: Generate Balance Sheet

1. Navigate to Accounting → Reports → Balance Sheet.
2. Set the date to the last day of the closing month.
3. Review:
   • Total Assets
   • Total Liabilities
   • Equity position
   • Verify the accounting equation: Assets = Liabilities + Equity

Step 7: Review Variances

1. Compare current month results to:
   • Budget (if budget is configured in the system).
   • Prior month results.
   • Same month last year (if historical data exists).
2. Investigate significant variances (> 10% or > ₦500,000).
3. Document explanations for variances.

Step 8: Management Reporting

1. Compile the Monthly Financial Report including:
   • P&L Statement
   • Balance Sheet
   • Cash Flow summary
   • AR Aging summary
   • AP Aging summary
   • Key variance explanations
   • Recommendations
2. Submit to MD by the 10th of the following month.

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9. Bank Reconciliation

Frequency: Monthly (completed as part of monthly close)

Step-by-Step:

1. Obtain bank statement:

   • Download electronic statement from the bank, or
   • Obtain printed statement from the bank.

2. Navigate to the reconciliation module:

   • Go to Accounting → Bank Reconciliation.
   • Select the bank account and period.

3. Match transactions:

   • The system displays GL entries on one side and bank statement lines on the other.
   • Match corresponding entries:
     • Amounts must match exactly.
     • Dates should be within 3 business days of each other.
     • Reference numbers should align where available.

4. Handle discrepancies:

   Discrepancy Type	Action
   Bank charge not in GL	Create a journal entry to record the charge
   Interest earned not in GL	Create a journal entry to record the interest
   Unpresented cheques	Note as reconciling item; will clear in future period
   Uncredited deposits	Note as reconciling item; will appear in future statement
   Errors (bank)	Document and notify the bank
   Errors (company)	Create correcting journal entry

5. Complete reconciliation:

   • Once all items are matched or explained, mark the reconciliation as complete.
   • The system records the reconciled status and date.

6. Filing:

   • Print or save the completed reconciliation report.
   • File with the monthly financial records.
   • Retain for a minimum of 7 years per Nigerian tax law.

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10. Accounts Receivable Management

10.1 Monitoring Aging

1. Navigate to Sales → Invoices → Aging Report.

2. Review weekly at minimum.

3. Track the following aging buckets:

   Aging Bucket	Action Required
   Current	No action
   1–30 days	Friendly reminder call
   31–60 days	Written demand letter
   61–90 days	Escalation to Manager; consider credit suspension
   90+ days	Escalation to MD; bad debt provision; potential legal action

10.2 Follow-Up Procedures

1. For overdue invoices:
   • Call the customer on the due date.
   • Send a reminder email/letter at 7 days overdue.
   • Escalate at 30 days overdue.
2. Record all follow-up activities in the invoice notes.
3. Update the AR aging report weekly.

10.3 Bad Debt Provisions

1. Quarterly, review all overdue accounts.
2. Create a bad debt provision for accounts deemed unlikely to be collected:
   • Navigate to Accounting → Journal Entries → + New Entry.
   • Debit: Bad Debt Expense (6000-series).
   • Credit: Allowance for Doubtful Accounts (1000-series, contra-asset).
3. The provision amount is typically:
   • 50% for accounts 61–90 days overdue.
   • 100% for accounts 90+ days overdue.
4. Requires Manager approval.

10.4 Write-Off Procedures

1. When a debt is confirmed uncollectible:
   • Obtain Manager approval for amounts up to ₦100,000.
   • Obtain MD approval for amounts ₦100,000 – ₦500,000.
   • Obtain Board/Owner approval for amounts above ₦500,000.
2. Create a journal entry:
   • Debit: Allowance for Doubtful Accounts.
   • Credit: Accounts Receivable (customer account).
3. Attach the approval documentation.
4. Maintain the customer record with a note about the write-off.

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11. Accounts Payable Management

11.1 Invoice Processing

1. When a supplier invoice is received:
   • Navigate to Purchases → + New Purchase.
   • Record the invoice with full details.
   • Attach the supplier invoice.
   • Verify against the purchase order and goods received note.
2. Submit for approval per authority matrix.

11.2 Payment Scheduling

1. Navigate to Purchases → Pending Payments.
2. Prioritize payments:
   • Critical: Suppliers with urgent demands, legal notices.
   • Due: Invoices approaching or past their due date.
   • Standard: Invoices within credit terms.
3. Schedule payments to optimize cash flow while maintaining supplier relationships.

11.3 Vendor Management

1. Maintain accurate supplier records in Suppliers module.
2. Review supplier performance quarterly:
   • Delivery timeliness
   • Product quality
   • Pricing competitiveness
   • Payment terms
3. Update supplier status (Active, Inactive) as needed.

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12. Tax Compliance

12.1 VAT (Value Added Tax) — 7.5%

• Collection: VAT is automatically calculated on sales invoices (7.5%).
• Recording: VAT collected is tracked in the VAT Payable account (2000-series).
• Remittance: File and remit VAT monthly to the Federal Inland Revenue Service (FIRS).
• Deadline: 21st of the month following the reporting period.
• Process:
  1. Navigate to Accounting → Tax → VAT Report.
  2. Generate the VAT return for the period.
  3. Verify the output VAT (collected) and input VAT (paid on purchases).
  4. Calculate net VAT payable (Output - Input).
  5. File the return and make the payment.
  6. Record the payment as a journal entry.

12.2 Withholding Tax (WHT)

• Deduction: WHT is deducted at source on qualifying payments (typically 5%–10%).
• Recording: WHT deducted is tracked in the WHT Payable account.
• Remittance: File and remit WHT monthly to FIRS.
• Deadline: 21st of the month following the deduction.

12.3 Annual Filing Preparation

• Maintain all financial records for the fiscal year.
• Generate annual reports:
  • Annual P&L Statement
  • Annual Balance Sheet
  • Tax computations
• Support external auditors with requested documentation.
• File annual returns with:
  • FIRS (Company Income Tax)
  • CAC (Corporate Affairs Commission)
  • State tax authorities (if applicable)

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13. Audit Preparation

13.1 Maintaining Audit Trail

• All transactions in the ERP are logged in the audit_log table.
• The audit log captures:
  • User who made the change
  • Timestamp of the change
  • Table and record affected
  • Type of change (create, update, delete)
  • Before and after values (where applicable)
• The audit log is immutable — it cannot be edited or deleted by any user.

13.2 Document Retention

Document Type	Retention Period
Financial statements	7 years
Tax returns and computations	7 years
Invoices (sales and purchases)	7 years
Bank statements	7 years
Payroll records	7 years
Contracts	Duration + 7 years
Audit reports	Permanent
Board minutes	Permanent

13.3 Supporting Evidence

For each transaction, maintain:

• Source documents (invoices, receipts, contracts).
• Approval records (requisition approvals, journal entry approvals).
• Reconciliation records (bank reconciliations, intercompany reconciliations).
• Calculation workpapers (for provisions, accruals, adjustments).

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14. Document Control

Version	Date	Author	Changes
1.0	2026-07-26	Lofty Golden Oil IT & Operations	Initial release

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End of SOP-005