One of the main tasks in oil & gas accounting is accounting for the revenue being produced by the wells and paid out to the owners. Here is where we start talking about debits and credits.
Before we get into debits and credits, let’s talk about the challenges of accounting for revenue in the oil & gas industry. In most other industries, the product is made, the price is set, then it’s sold and cash is received. The transaction is booked as a simple two-sided accounting entry debiting cash and crediting revenue.
In the oil & gas industry, we have to manage booking revenue for a product who’s price is a moving target and who’s inventory is mostly unknown. Oil and gas producers’ main assets are the minerals in place on the developed and undeveloped properties it holds. Most of these properties have been leased by the producers. These minerals in place are known as reserves. The accounting for oil and gas reserves requires the use of estimates made by petroleum engineers and geologists. Reserves estimation is a complex, and imprecise process.
Once properties are producing, the oil and gas reserves related to the producing properties will deplete resulting in a decline in production from the properties.
An independent oil and gas producer’s revenue consists primarily of:
Let’s take a look at each of these.
For producers the majority of the oil and gas revenue will be in the form of working interest. Overriding royalties are also common, while landowner royalties are less common for exploration and production companies. Oil and gas revenue might also be in the form of a net profits interest and production payments.
Some operators generate income from operating wells, supervising drilling, transporting gas, hauling and disposing salt water, and other activities incidental to their operations. Sale or sublease of property.Producers frequently sell or sublease property. Transactions include both developed and undeveloped property. Distinguishing between a sale and a sublease is critical for tax purposes.
Some exploration and production companies use derivatives in their operations to hedge risk associated with oil and gas prices. Derivatives are financial instruments whose values are derived from the value of an
underlying asset. Typically, oil and gas companies use futures, options and swaps.
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When considering accounting software for your oil and gas company, what makes the decision to integrate your internal software with Quickbooks® accounting software a good one?
A Quickbooks integrated software solution makes sense for your business when your accountant or bookkeeper uses Quickbooks, when Quickbooks is required for governmental reporting, or when key players use Quickbooks for their accounting needs.
Integrating your software systems with other software programs or systems should be done when it increases communication internally (between departments, employees, etc.) and externally (between your business and your outside accounting firm). Integrating your business critical oil & gas software with QuickBooks helps with communication between you and your accountant since most accountants are familiar with QuickBooks and can actually restore your data and run the reports they need.
The most important reason to integrate your internal accounting software with Quickbooks is to facilitate quality control processes between your business and your bookkeepers and accountants. With automatic integration, you reduce the chance of data errors or information loss between different wells, different departments and your final financial reporting for the month/quarter/year.
With the increased communication available through a Quickbooks and accounting software integration between your company and your accountant, communication gives your management tools to have accurate and real-time financial reports, manage long-term accounting problems and build predictive algorithms to predict financial returns.
Decreasing costs is every business owner’s quest. Costs are usually more under the business’s control than revenues are, so that makes cutting costs a priority. The first way that integrating your oil & gas software with QuickBooks reduces costs is in hiring. Bringing on a new employee is much easier if the accounting system is easy to learn or probably already known by the new hire. This has already been mentioned, but costs are lower when the information provided to your accountant at year-end is organized and in a format they can readily use. QuickBooks helps with this tremendously.
Since the most important part of using internal software which integrates with external Quickbooks programs is improving your communication processes and systems, the most important question to ask is “Who needs the integration?”
Any software integration should promote communication, increase efficiency and decrease costs. If serving the right relationships, a Quickbooks integrated software system for your oil and gas software firm can increase quality communications.
SherWare’s Disbursement and JIB Manager Integrated Edition is the only oil & gas software that integrates directly with QuickBooks. It handles all the wells, owners and division of interests and let’s QuickBooks handle the accounting. Click the link below to learn more!
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Accounting for Oil & Gas requires a good set of accounts which are used to keep track of all accounting activities. This list of accounts is called the “Chart of Accounts” and will be every account needed for oil & gas operations accounting. There are two main sections of the chart of accounts, which are, Balance Sheet accounts and Income Statement or Profit & Loss accounts.
Balance Sheet accounts consist of categories such as Assets, Liabilities and Equity. Assets are items of value owned by the company. Liabilities are obligations of the company to transfer something of value, like an Asset, to another party. Equity is the value of the assets contributed by the owners of the company.
Income Statement accounts consist of categories such as Revenue, Cost of Goods Sold and Expenses. Revenues are the result of the sale of production, oil & gas, from the wells. Revenues can also result from services provided or the gains on equipment sold. Cost of Goods Sold are the costs related to the sales of production or services provided. Expenses are the costs incurred in order to operate the wells and company.
The accounts in the chart of accounts are crucial to good accounting. For every transaction in your accounting system, one account will be debited and one account will be credited. This keeps the accounting system in balance. For example, when you pay your telephone bill, you will take money from your cash account (credit) to pay the bill and you’ll recognize the telephone expense by debiting the telephone expense account for the same amount.
The chart of accounts is the heart of the accounting system. Every transaction entered has to be tagged with an account so it knows where to post. Once the accounts are set up. They can be used to build the accounting system.
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When it comes to using a software program for your Oil & Gas accounting, there are several things you should keep in mind to focus your business processes and create a quality financial management system. The following 4 tips help you integrate your software, plan your business systems, and build quality throughout your company:
Although these 4 tips seem like varieties on a theme, automate everything, they are unique parts of your business which often get overlooked when integrating a new accounting software system. And each of these areas (governmental reporting, quality control information, financial planning and site-to business automation) has a drastic effect upon your ability to create quality business systems for your company.
We have software that can help tie all your systems together into a cohesive unit which will help to increase the quality of your business processes.
Source: SherWare Blog
Oil & Gas accounting isn’t that difficult to understand. Accounting is accounting, so the first step in learning oil & gas accounting is to understand accounting.
The basic element in accounting is an account. Accounts are how transactions are grouped and collected. For instance, Cash could be an account. This account could represent a checking or bank account where a business’s cash or money is kept. Accounts Receivable is another example of an account. This is where money owed to the business is kept. An account called Wages is used to keep track of the wages paid to employees.
Accounts are grouped together according to the type of account. Some of the account groupings are:
Every transaction in accounting has at least two parts, a debit and a credit. This is the essence of what’s called double-entry accounting. Because of the two-fold effect of transactions, the total effect on the left, or debit, side will always be equal to the right, or credit, side. All the debits in a transaction must equal all the credits in a transaction.
Here’s a posting example using the cash method: On February 1st, 2015 you receive $25,500 of oil revenue.
|Cash – Operating||2/1/2015||$25,500|
Cash is debited and Revenue Payable is credited creating a balanced transaction.
Here are the rules for debiting and crediting accounts. To increase an asset, you debit it; to decrease an asset you credit it. The opposite applies to Liabilities and Equity.
|Accounting Element||To Increase||To Decrease|
Once you have a basic understanding of accounting, understanding a specific type of accounting, such as Oil & Gas Accounting is much easier.
Source: SherWare Blog
The day has arrived! We’re excited about the new look and think that it will greatly enhance our ability to provide value to our prospective and current clients.
The redesign has been over a year in the making. It’s been a fun process and has stretched us in some ways which I believe are for the better.
We believe we have great oil & gas accounting software and think we should do better about letting the world know about it.
The Oil & Gas Accounting Manager is our fully integrated, (which means that it has everything in one application), accounting software for oil & gas operators. It includes revenue distribution and joint-interest-billing integrated with all the regular accounting modules like G/L, A/P, A/R and Financial Reporting.
The Disbursement & JIB Manager Integrated Edition is our top selling Quickbooks® integrated revenue distribution and joint-interest-billing software. Is uses QuickBooks for the accounting module and posts transactions in real time so that you don’t have to enter data twice. We’re the only oil & gas accounting software company that offers this real time integration.
We also have the Disbursement and JIB Manager which is a basic revenue distribution and joint-interest billing application. It has everything needed to create royalty and working interest owner checks as well as billing for expenses. You would use this application if you already have an accounting application in place which doesn’t handle revenue distribution or joint-interest-billing, and you don’t want to switch.
The newest edition to our applications is Well Profits which handles tracking revenue and expenses for oil & gas royalty owners and investors. It will also integrate with QuickBooks if you want to keep track of the accounting in QuickBooks but need better reporting at the well/lease level.
We’ve been busy and we’re really excited about this next year! Please check out the site upgrade and let us know what you think.
Source: SherWare Blog