All Posts by sw-blogs

4 Ways To Cut Costs During the Oil & Gas Downturn

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These are hard times in the Oil & Gas Industry. With the price of oil below $40, all of us in the industry need to cut costs. Here are 4 quick ways to cut costs during the downturn.

  1. Look at your credit card and bank statements to look for recurring charges that can be eliminated. You’ll be surprised by how many services or subscriptions you might have signed up for and forgotten. It might not seem like much but these charges add up quickly. Cancel all subscriptions and services you aren’t using or can do without.
  2. Cut back on company paid lunches and other special perks. You really don’t need to go out for lunch everday but you can if you want. Just don’t make the company pick up the tab. These meals can add up quickly to hundreds of dollars a month.
  3. Hold off on hiring new people until you find ways to justify and pay for them. Too often we hire because we think we see a need but don’t take into account what those wages will do to the bottom line. Will hiring increase efficiences and add to the bottom line? If so, go for it. Otherwise be hesitant to add overhead.
  4. Look at other high cost items you’re using that might have made economic sense during high prices, but now are a drain on cash. One of these could be your monthly software costs. If you’re using an Oil & Gas Accounting system that made sense during $80 oil but now isn’t giving you enough in return for it’s on-going maintenance costs, it might make sense to switch to a lower cost alternative that has the same functionality.

We’ve helped many companies switch away from their high cost oil & gas accounting software to SherWare. The benefits include lower yearly costs for maintenance and increased productivty for your current staff. This is a win/win because you can cut costs and avoid adding more wages!

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ABC123: Passwords are ruining your software security

Last week we discussed how to beef up your software security to avoid data breaches in your own office. One thing we glaringly left out was how much of a danger passwords are to cyberscares like Heartbleed in 2014 – a security bug that left around half a million of the Internet’s secure web servers certified by trusted authorizes vulnerable to the attack, which allowed the theft of private user’s sessions and passwords.

password.jpgGeneric Passwords

As we support many clients around the country, it is surprising how often people use generic passwords like Admin, Password, 1234, or their name. These passwords are worthless and you would be just as good not having one. Some may claim that a bad password is better than no password, but that is simply not the case with these as they are the first guesses that anyone is going to try. These are the equivalent of having 3 deadbolts on a door yet choosing to leave it unlocked because the door handle will keep the door latched and you feel the appearance of the 3 deadbolts will deter everyone from entering.

SplashData periodically releases a list of the worst passwords for a year. In 2013 these were the top 10 worst passwords:

1 123456
2 password
3 12345678
4 qwerty
5 abc123
6 123456789
7 111111
8 1234567
9 iloveyou
10 adobe123

Do any of these look familiar to you? If so, run to your computer and begin changing them now. While most security experts recommend have a unique password for every site you login to, it’s really impossible to ask of people to do.

Shared Passwords

Another common practice that we run into is that a password may be a secure one, but everyone in the office uses the same one, or everyone knows each other’s login. When a non-Admin employee can log in as any one of five users and gain access to permissions not assigned to their login, then the whole purpose behind the user permissions is compromised. Your office may be small enough that you are ok with that, but this should encourage you to reconsider.

Plain-sight Passwords

Some people will create passwords that meet every qualification for top security, but will then stick them to the monitor with a Post-It note. While this is efficient against outside cyber attacks, it does no good for someone that is able to physically gain access to the computer. If you do need to write down your passwords then store them in a safe or other location that is not as easily accessible to everyone.

If you haven’t already stopped reading to check out your passwords, consider changing the ones that contain the most sensitive data of yours including personal and payment info. You can also check into apps and computer programs that save and create secure passwords so you don’t have to such as Dashlane and LastPass.


Source: SherWare Blog

Three Ways to Beef Up Your Accounting Software Security

Have you been hearing about all the cyber attacks happening at major corporations this year in the news or had to cancel your credit card because of the recent credit card hack at Target? These big cyber scares can mean serious problems for customers across the country – but did you know there are security breaches in your own office just as serious?

Source [www.gotcredit.com]How many different software programs do you use at work on a daily basis? Between tracking your contacts, financials, sales, email, and much more, it’s starting to add up. The login process for all of these can be burdensome and often results in poor security practices. One sure way to beef up security in your office whether its big or small is to set user permissions for your most sensitive data.

Here are three signs that are typically an indication that user permissions should be used:

Computers are left unattended:

Many employees fulfill a number of roles within most companies. This will often force them to leave their computer for various tasks like stocking supplies, getting the mail, and running errands. Computers are often left on and logged in to several software programs. This may not be a problem in small closed office environments, but should be a concern as the number of people with access to the office increases. Typically the employees that require the most in depth access are located in less accessible areas of the office. Those in more public areas of the office may only need basic functionality for most of what they do. Limiting the access of those in more public areas ensures that even if an unauthorized person gets on the computer, they are not able to see confidential areas or accidentally change something.

In many companies the person at the front desk fulfills many roles and does need full access at times. A good security compromise in this situation is to have two user permissions setup for this person. One for basic access that allows them to complete the daily entry tasks, and another with full access for the times they are utilizing the depths of the program. The user can then still have access to everything at times, while choosing to have limited access at other times. This will help limit what can be seen and changed by anyone that happens to come across unattended computers.

Multiple Departments:

Software security is not the only concern that is addressed by user permissions. Problems are often created by well-intended people that accidentally delete something while trying to look something up. Any employee that doesn’t use the software regularly can make mistakes while digging through the data. A great peace of mind can be obtained when someone knows that they can log on with limited access that will allow them to see their reports without chance of messing something up.

A great example would be the individual or department that handles Payroll. It is safe to assume that you trust this person, so security isn’t a concern. However, an occasion may arise where they need to perform a task that isn’t a part of their standard procedure. As they access a different parts of the software the possibility for mistakes increases. Since they don’t usually use the different windows, they may not recognize if something is deleted or manipulated incorrectly. Having user permissions that limit them to Payroll would force them to seek help from other employees that have more knowledge in the other areas which reduces the risk of mistakes.

Networked Computers:

It is a universal best practice to setup user permissions when software is installed or accessed across a network. With this setup it is likely that multiple people will be accessing the software. When networked, the software becomes much more accessible and the concerns from every other area mentioned become a greater concern. Security is also a concern, because without user permissions anyone in the office can now have access to the confidential aspects of the software.

Source: SherWare Blog

Why price is irrelevant when purchasing software

If you were to look around at all the marketing in our world today, you might be inclined to think that price is all that matters to make a sale. After all, why else would our inboxes be full each morning with special offers, one-day only sales and heavily discounted items we may have been looking at online in the past week?

pricetagWe live in a world where, we, as consumers like to get good deals. But honestly, when asked, most people aren’t in it for the price.

So what are consumers looking for if isn’t the best deal?

“Of course price is important to customers, but it’s seldom the most important consideration. In fact, surveys of customers show that price is usually six or seven items down on the list of importance,” said Michael Boyette, executive editor at Rapid Learning Institute.

This trend is especially true when someone is purchasing software.

Why is price not the only factor involved?

Too Much Risk

First, not many companies who are shopping for software have the time to shop based on price alone. The majority of software companies – especially niche software companies don’t generously display their prices online.  The reason? We too know that serious clients aren’t purchasing on price alone because there is too much risk involved.

Case in point: Let’s say Bobby wants to purchase oil and gas software. The reason he’s even looking for software is because he has a need for it. Either something about how he’s handling his oil and gas presently isn’t working for him, or he’s just starting his business and wants to start it off right.

If Bobby bases his research and purchase solely off of which software company has the best price – then he likely hasn’t taken the time to see if the software is capable of handling the specific issues he started looking for in the first place. He also doesn’t see the value of the software he just purchased because all that mattered was price – a lose-lose situation for both Bobby and the software company.

Bobby didn’t spend the time to qualify if the software could handle everything he was looking for or even if it was the best solution period for his needs. Now Bobby has a mediocre product, but an intact budget, and the software company has a new, but unhappy client who will cost them more time and money in the long run, and who will end up walking away to the next software company who can offer a solution at a cheaper price in the future.

Price vs Value

So what does matter if price doesn’t when purchasing software?

“Customers will shop on price if they have no other way of differentiating you from your competition,” said Carolyn Higgins, president of Fortune Marketing Company.

Software purchases will ultimately come down to this: What is the company’s perceived value of the software and will it help alleviate their pain point?

You might opt out of purchasing a software program and say it’s because the price was too low or too high, but in reality, what you’re actually saying is that you didn’t go ahead with the purchase because you didn’t think the software was worth it. In your mind, you already have an idea of what value the software holds to you – and if what you’re looking at doesn’t reach that threshold – it doesn’t matter if it was the best deal or not.

The truth is that “people overvalue what they have, and undervalue what they don’t have,” said Neil Davidson in his book Don’t Roll the Dice.

Unless you can see the value of what the software can do for your company, you’ll go on price any day – and still not have the best solution for your business.

Value-Based Software

So how do you go about perceiving value?

“When somebody buys software, they want reassurance that it’s going to work and that you’ll be around if it doesn’t,” Davidson said.

Value is in what the software company can offer besides its price.

In Bobby’s search for oil and gas software – he places value in a product that has been used by others like him and that works well. If he’s doing the research, Bobby will want to know that others have used the software and what they think about it. If he’s going to invest time and money in this search, he probably also wants to see how the software works, ask some detailed questions of the support staff and understand what exactly will it take for him to get up and running.

In truth, he’s looking for the support system behind the software. The people. Their values. The way they run their business. Does it align with what he needs? Once Bobby has those questions answered, then he’s likely ready to buy and price won’t matter – whether it’s higher or lower than competitors.

What do you value when searching for software?


Source: SherWare Blog

5 Best Oil & Gas Blogs to Follow

Does catching up on current events that aren’t promoted on your Facebook newsfeed or highlighted on the the radio seem like a luxury? Blogs are where I usually turn to to decompress, but honestly, the oil and gas industry doesn’t have many interesting bloggers right now. Instead, here’s a list of the top five sites for the oil and gas industry. Each site has pros and cons, but will give you a variety of places to find current events, trends and analysis of what’s happening in the oil and gas industry.

SmartBrief Energy & Chemicals

I love this site as a source for oil and gas trends and news because it not only collects from 200+ e-mail newsletters and trade associations, but it’s content that is relative to what’s going on today in the United States.

Pros: This site gives you the headline and the first paragraph of the article – so you can either browse the main page to see what catches your eye, or click on the link for the full article. If I’m browsing blogs, it’s because I have a short amount of time and need a mind break – so I don’t want to spend my time following links.

Cons: I can’t think of any! I really like this site to quickly get an idea of what’s going on across the board.

Oil & Gas Journal

The Oil & Gas Journal is a go-to place to find articles, white papers and analysis on the industry at every stage of the production process – from exploration and drilling to refining and processing and pipelines and transportation.

Pros: This site really hits all facets of the oil and gas industry so it’s not only relevant to the downstream but the upstream sector as well. It also probably has the most research and articles that highlight trends, facts and data analysis as opposed to straight news articles.

Cons: The majority of articles require subscription to access the highly-detailed articles, but you can also sign up for weekly e-newsletters too.

Energy Industry Today

A website that collects energy related articles and aggregates them from a myriad of sources. These articles will tend to be broader world-view oil and gas news such as: “OPEC to keep ‘no output cut’ policy” and “Oil Price Forecast: Could Iran Deal Push Prices Higher?”

Pros: Registration is free for a majority of the articles and you can search for feeds that contain exactly what type of news you’re interested in.

Cons: The site only lists headlines so you have to click and read a bit to get a good synopsis of the article.

Google Alert for Oil Industry News

Google alerts are great for many reasons – but the news feature is like Google search on steroids. I love that it collects the most recent news articles and gives images and a brief synopsis right in my Google page.

Pros: It’s produced by Google – so its user experience is easy, intuitive and one click away if you already use Google for searching for news anyways. It also contains a variety of articles from all locations – not just the top stories run over and over on the same page.

Cons: If you’re looking for insight into the oil and gas industry – this isn’t the place to start. This feed is strictly going to be news stories pulled from the web.

ExxonMobil Perspectives

Yes, this is put out by a huge oil conglomerate, but I think its opinion pieces and perspectives on issues the industry is facing today such as fracking, global oil markets and energy topics in general is not only informative but interesting to read.

Pros: It’s not a curated content site for news like the others. Here is a place where you’ll get a little bit on insight into what top energy industry leaders and experts in the field think on timely topics.

Cons: It’s not a neutral site because it’s put out by Exxon. But it’s not a place where they overtly promote their business -and even if they did, it’s their site, right?

Where are the places you browse to first for headlines regarding the industry? What do I need to add to this list?


Source: SherWare Blog

What your personality can tell you about how you’ll handle a software switch

Why is it that some people handle change better than others at work? One of the most common questions we get at SherWare is how hard will it be for someone to switch their software? Which means the underlying question is: how much change is this going to be for our office?

143084796_8fe04da177_zChange is inevitable, and really in the long run a good thing. But change can often be uncomfortable, and no one likes to uncomfortable. Well what if your personality could tell you a bit about how you handle change?

Steve Faktor from Idea Faktory came up with nine corporate personalities in a Forbes magazine interview several years ago that are spot on for some characters I’ve had the pleasure of working with over the years. Reading the descriptions got me thinking: What does your personality tell you about how you’ll handle a major change like a software switch?

Bambi

Bambi’s are typically new recruits or hires in your office. They start out eager to do anything set before them and you can get them to do about anything you ask, as they are eager to use their skill sets learned in school that they’ve been practicing. They are eager to please and love new opportunities and the prospect of mentorship from others in the office.Bambi

How you’ll handle change: If you’re given new leadership responsibilities because of change, access to superiors and recognition for the hard work you’re putting in – you’re on board. You’ll take on whatever is required to get the software up and running, as long as you get the credit deserved for your effort. You’ll be the one to read the entire manual or getting started guide as soon as it’s downloaded. You’ll have written questions out in the margins, and made it a personal goal to figure this out before everyone else to show others your value in the office.

Believer

Believers are the people that carry the torch for your brand and they get others excited about coming to work. They proudly wear the company-logoed shirts and hats, use the coffee mug at home and have pictures of company events hanging up in their office.

Alpha

Alphas are a branch of the Believers – -and the ones who have the dedication and foresight to eventually take over the business. They love competition and moving up the corporate ladder and are someone who others in the company look up to and take their word as truth. They may be a bit forceful, abrasive and come off as a know-it-all, but the bottom line is they get things done.

How you’ll handle change: As long as you have a direct mandate from your boss this is the direction to go, you are on board. You don’t see switching software as something hard or high risk, like you normally thrive under, but with recognition for your efforts from your superiors and deference or praise from subordinates – it’s all in a day’s work. If you’re a one-man show, then you are looking at the software switch as a way to show how much it improves your performance. You’re looking for how to speed up your work, improve your analytics or cut out time spent on the software in general.

Survivor

Survivors are also a branch of Believers. They move up the corporate ladder into senior positions but don’t necessarily have the drive to run the show. They know how the office dynamics work, know what’s expected of them and have made it to the top by sheer longevity and lack of rocking the boat. They don’t like taking risks and survive by their loyalty to the Alpha personality in the office.

How you’ll handle change:  This is the last thing you want to see happen. You don’t want a new way to handle distributions. Yes, what you do is tedious and often annoying, but it works for you. You probably still have a desktop computer, use a copy of Windows 98 you’ve been hiding on a CD in your desk and have never considered a Facebook account. The only thing that will make change bearable is if you have recognition from others for your effort and the ability to brag to others about it.

Solider

Soldiers make up the last branch of Believers. They are team players and excel when told what to do or if they know exactly what’s expected of them. They are dependable, will stay late to finish projects, and are loyal to the company but don’t aspire to run the show. They don’t like to network and schmooze in the office to rise in the ranks.

How you’ll handle change: If switching to a new software program is what’s going down, you’re got it handled. The software switch is clearly something needed, it will help boost the company’s productivity and you’ll get recognized for your effort, so it’s a no brainer. You’ll go through the training required to learn the program, work with the support team to get everything converted accurately and learn how to run the program efficiently.

Pragmatist

Pragmatists are very capable at getting the job done, appreciate their job and the company, but aren’t going to take the alpha’s word as truth without data and facts to back it up like the Believers in the office. They’re typically more analytical and skeptical and take more convincing to get on board.

Natural

Naturals are a branch of Pragmatists. They are as talented and driven as Alphas, but tend to earn genuine loyalty from building relationships instead of by pure force of personality. They like to network and make decisions based off of what feels right, not just what will get them to the top. They excel in situations where they are working with others who they like outside of the office.

How you’ll handle change: You understand that switching software is what’s necessary to move the company forward, and probably even saw it coming or were instrumental in bringing the need to the attention of superiors. You like having new responsibilities and a challenge at work to learn something new. You can see down the line that this is something that will enhance your job and the company’s productivity.

Heretic

Heretics are a branch of Pragmatists. They are the ones in the office that you can’t predict what they’ll do. Their harebrained ideas are either pure genius or insane – and it’s a fine line to decide which category they fall. They are big idealists and innovators and will either drive the company to make big exciting changes, or will get bogged down by working in an office with rules and regulations and leave.

How you’ll handle change: Approached in the right way, you’ll easily be on board to handle a software switch. You’ll need to see the big picture of why you needed to change in the first place. But given time to explore the new software on your own and discover how it works without having to worry about manuals, rules or timelines, you’re going to do what it takes to get the rest of the team up to speed with the new software.

Toiler

Toilers are the last branch of the Pragmatists. They make up the largest population in an office. They view work as a means to support their family and a way to get what matters most to them outside of the office. They aren’t looking for a rise in the company ladder, but will continue on completing whatever is asked – some at incredibly efficient rates and some at super slow paces just because it doesn’t matter to them as long as it gets done. It’s a job. Period.

How you’ll handle change: Change is just another thing thrown at you at work. You could take it or leave it, although change might make the day a little bit more exciting. You don’t really care about the big picture, but want to know what’s the short-term objective. How is switching software going to help you this week, this month, this year? Is there an incentive offered to get it done quickly? You love a little tangible reward to get things done and once you see why switching software is important to your job, you’re on board.

So where do you see yourself?

To read the full descriptions of each corporate personality, check out the article here.


Source: SherWare Blog

Death by Spreadsheet

Does the following describe you? You own an oil and gas operating company and to save money you or someone else has setup an elaborate spreadsheet to track your oil and gas disbursements. You’ve spent hours setting up this spreadsheet and have duplcated the sheet for each well you operate.

death_by_spreadsheet

You have the steps memorized.

  • Click on the 1st worksheet
  • Press CTRL+A to select all
  • Press CTRL+C to copy the setup
  • Create a new sheet
  • Click in cell A1 and press CTRL+V to paste into the new sheet.

What happens, heaven forbid, that you are incapacitated or unavailable when the next distribution has to be done. Do you trust someone else with your system?

Here’s a gun, spin the cylinder and pull the trigger. You’ve entered the death by spreadsheet zone.

Here are four reasons you should stop using spreadsheets and consider moving to an oil and gas software instead:

Four Reasons to Stop Using Spreadsheets:

1. It’s inefficient. Spend your time doing what you really need to be doing instead of working on distributions and manually computing everything. With our oil and gas accounting software, once you have your owners/investors, wells and interests set up, the only thing left to do is enter your bills and incoming revenue.

2. They are more prone to errors. Spreadsheets leave room for what I like to call “operator errors.” Mistype one field and there’s no way to catch the mistake until it’s too late. You can spend your time quadruple-checking everything and the tiniest mistakes can still be missed. They are especially prone to errors because you can’t see the formulas by just looking at the sheet. You might have missed a formula or not set the formula to use an absolute cell so when you copied it the formula isn’t looking at the correct cells anymore.

3. Your job is much harder than it has to be. Why manually enter everything each month, figure out the layout and make sure each column has been entered correctly when you can let your oil and gas software compute automatically? Stop reformatting spreadsheets to get the numbers you want. Instantly get the reports you need without having to adjust formulas and rearrange numbers.

4. They don’t really save you money in the long run. When you think about how much time it takes to create, enter and compute your distributions each month. Not to mention all the double and triple checking to tie your numbers, you are paying for it not only in the extra time paid to employees doing the work, but also in the wasted hours you could have been using elsewhere, doing what’s really important to you and your business.

Perhaps this scenario described fits you. Maybe it fits someone else you know. Why not find out more information about our oil and gas accounting software that can simplify your work and make your job easier.

Interested? Find out more about our software packages.

If you are unsure which one may work for your business best, check out our Software Comparision.

We can make the transition between your spreadsheets to our software smoother by converting your spreadsheet data directly into our software. Saving you time on data entry time and giving you all the history and information on your wells you need.

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Source: SherWare Blog

Oil & Gas Accounting 101 – Joint Interest

Due to the capital intensive, high-risk nature of developing oil and gas properties, companies routinely combine their capital and knowledge in joint operations to share the cost and reduce risk. These sharing arrangements usually involve the transfer an operating interest or non-operating interest by one party to another in exchange for a contribution to the project.

Here’s some of what you need to know for oil & gas accounting…

Farm-out

In order to develop a property, the owner of an operating interest (working interest) may transfer (farm-out) the operating interest. In a farm-out arrangement some of the entire burden for developing the property is transferred to another person. In exchange for assuming the burden, the transferee receives the operating interest in the property.

As a part of the transaction, a non-operating interest is partitioned out of the operating interest and retained by the owner. The retained interest is usually an overriding royalty, but could also be a net profits interest or a production payment. In a farm-out arrangement, the assignor of the mineral interest will transfer any leasehold cost from the operating interest to the non-operating interest.

Joint Ventures

Joint ventures are a type of sharing arrangement. A joint venture is a nonincorporated association of two or more persons or companies who pool their resources to drill, develop, and operate an oil and gas property or properties.

Each owner has an undivided interest in the property. Joint ventures may be created in several ways, some of the most common being:

  • Two or more operators lease a single property as joint lessees.
  • A working interest owner assigns an undivided fractional share of the property to another person or company in exchange for cash, property or services contributed to the “pool of capital” necessary to develop the property.
  • Working interest is assigned to another operator under a carried interest arrangement.

An operator’s expenses associated with the operation of oil & gas wells could consist of:

Intangible Drilling Costs

Intangible drilling costs (IDCs) include all expenses made by an operator incidental to and necessary in the drilling and preparation of wells for the production of oil and gas, such as survey work, ground clearing, seismicdrainage, wages, fuel, repairs, supplies and so on. Broadly speaking, expenditures are classified as IDCs if they have no salvage value.

The following is a nonexhaustive list of potential IDCs incurred in the exploration and development of oil & gas wells.

  • Administrative costs in connection with drilling contracts.
  • Survey and seismic costs to locate a well site.
  • Cost of drilling.
  • Grading, digging mud pits, and other dirt work to prepare drill site.
  • Cost of constructing roads or canals to drill site.
  • Surface damage payments to landowner.
  • Crop damage payments.
  • Costs of setting rig on drill site.
  • Transportation costs of moving rig.
  • Technical services of geologist, engineer, and others engaged in drilling the well.
  • Drilling mud, fluids, and other supplies consumed in drilling the well.
  • Transportation of drill pipe and casing.

Intangible Completion Costs

Similar to IDCs these expenses are related to nonsalvageable completion costs, including labor, completion materials used, ompletion rig time, drilling fluids etc. Intangible completion costs are also almost always deductible in the same year they take place, and usually make up about 15% of the overall well cost.

Tangible Drilling Costs

Expenditures necessary to develop oil or gas wells, including acquisition, transportation and storage costs, which typically are capitalized and depreciated for federal income tax purposes.

Examples of such expenditures include:

  • Well casings
  • Wellhead equipment
  • Water disposal facilities
  • Metering equipment
  • Pumps
  • Gathering lines
  • Storage tanks
  • Gas compression and treatment facilities

Leasehold Acquisition Costs

The cost and expenses associated with acquiring properties, including:

  • Property Rentals
  • Lease Bonuses
  • Legal Fees
  • Right of Ways

Lease Operating Expenses

The costs associated with operating a producing well. Lease operating expenses can include:

  • Pumping
  • Administrative Fees
  • Chart Integration
  • Electric
  • Data Processing
  • Supplies

As you can see, there are several different types of costs associated with drilling and producing wells and they are treated differently depending on how the joint venture or partnership is setup. Having a good oil and gas accounting software package is critical to keeping track of these expenses.

 

Accounting 101 E-Book


Source: SherWare Blog

Oil & Gas Accounting 101 – Accounting Methods

 

taxcodeMost small independent producers, who are not required to use a GAAP method of accounting, use a tax method of accounting or a hybrid of successful efforts and tax.

The rules for tax accounting are set forth in the Internal Revenue Code and the corresponding Treasury Regulations.

The general rule for accounting methods in the Internal Revenue Code states:

Taxable income shall be computed under the method of accounting on the

basis of which the taxpayer regularly computes his income in keeping his books. (IRC Sec. 466(a))

This means that your taxable income is calculated using the same method you use doing your monthly accounting. That’s what “keeping your books” means.

This code section goes on to define the permissible methods. The permissible accounting methods under IRC Sec. 466(c) are:

  • Cash receipts and disbursement method (cash method)
  • Accrual method
  • Any other method permitted under the law, and
  • Any combination of the methods permitted under the regulations

The accounting method used must clearly reflect income and be consistently applied. Treas. Reg. Sec. 1.446-1 states:

It is recognized that no uniform method of accounting can be prescribed for all taxpayers.Each taxpayer shall adopt such forms and systems as are in his judgment best suited to his needs. However, no method of accounting is acceptable unless it clearly reflects income…provided all items are treated consistently from year to year.

Cash Method

The cash method means that you recognize income when you receive payment, either for the oil & gas produced or for services performed. It also means that you recognize expense when you pay the bill for the expense.

Accrual Method

The accrual method means that you recognize income when the oil or gas is produced and expenses when the expense is incurred.  So gas produced in March would be March revenue even though you might not receive the payment from the first purchaser until May. Expenses are incurred when you receive the bill for the expense instead of when you pay the bill.

Other Methods Permitted

This generally doesn’t apply to oil & gas accounting. It deals with methods such as the “crop method of accounting” and the “long-term contract method”

A Combination of Methods

You can combine methods such as using the cash method for receivables (revenue), and the accrual method for payables (expenses).

Notice that the accounting method can be the cash method, the accrual method or a hybrid method of cash and accrual as long as you stay consistent.

 

Accounting 101 E-Book


Source: SherWare Blog

Oil & Gas Accounting 101 – Division of Interests

 

The percentages that determine the amounts paid to the different people or entities participating in the well is called the Division of Interests or Division Order. The division order is a document spelling out what the Division_orderowners in the well are to be paid and when.

The interests (percentages) that make up the division of interests are typically determined in the following manner:

Royalty Owners – paid the percentage their land makes up of the entire drilling unit. If they own 100% of the land the well is drilled on they would typically get a 12.5% royalty.

Overriding Royalty Owners – typically paid around 3%.

Working Interest Owners – pay their share of the expenses based on the amount they invested in the well. If they put up 50% of the cost of the well, they would get a 50% working interest. The working interest owner’s share of the revenue is determined by first subtracting the royalties paid from 100 and then multiplying the remainder by their working interest.

Example:
Assume a well has a 12.5% royalty and an overriding royalty of 3.0%. The royalties are paid first so this would leave 84.5% for the working interest owners.

100.0% – 12.5% – 3.0% = 84.5%

Owner Type Expense Pct Revenue Pct
Royalty 12.500%
Overriding Royalty 3.000%
Working Int 1 75.00% * 84.50% = 63.375%
Working Int 2 25.00% * 84.50% = 21.125%
Totals 100.000% 100.000%

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Source: SherWare Blog