The primary objective of oil and gas (O&G) accounting software is to manage the specific requirements of upstream O&G operators. With businesses across industries swiftly embracing digital transformation, understanding what such accounting solutions offer can help you choose the right software for your company.
Here’s what you stand to gain from buying the right accounting software for your O&G business.
Revenue accounting aims to distribute revenue among the all interest partners for an oil well, timely payment to royalty owners, and filing of regulatory reports. Here are some of the benefits that O&G accounting software will provide.
- Prior period adjustments
- Ownership changes
- Revenue allocations
- Cash flows and revenue distribution
Prior Period Adjustments
Prior period adjustments could be necessary since the distribution of revenues occurs after the finalization of ownership. However, there could be changes in production volumes, agreement setup, or pricing that might need to be adjusted.
O&G software facilitates reversing and rebooking of entries without going through all the records, and time-consuming spreadsheets and manual processes are avoided.
An oil well can have multiple partners, and there may be a lag between the actual change of ownership and notifying the change to the revenue accountant. Horizontal drilling of wells complicates matters. O&G accounting software helps in tracking ownership and handles accounting for horizontal wells easily.
The costs and revenues per well need to be billed accurately, keeping in mind the various contracts with the owners of the oil well. Accounting software solutions for the O&G industry contain integrated product platforms that help allocate revenues to different oil wells and owners.
Cash Flows and Revenue Distribution
Revenues are booked on an accrual basis, with reversal of accrued values once the actual calculations are done. Accounting software enables revenue calculation from the pipeline or purchaser according to the terms of the contract. It also offers sales values according to production, a compilation of revenue information, and the prediction of cash flows.
Joint Interest Billing (JIB) Accounting
Joint interest billing consists of the calculation and allocation of costs between the different partners. The operations and finances are handled by two companies, and the non-operating company gets the agreed share of the billing.
The concept of deducting the allocated costs before the settlement of revenues according to the Operating Agreement is known as netting. O&G accounting software helps keep records of revenues and costs.
Lease Operating Statements
Lease operating statements contain details of expenses for each oil well. With O&G accounting software, you can detect inconsistencies in expenses, allowing for a more accurate assessment of operating site profitability.
Maximizing Partner Billing
To ensure that partner billing is accurate, it is calculated using an operating agreement and follows the COPAS guidance. For accurate billing, proper allocation of shared costs is required. Without proper records, the costs would not be allocated, resulting in losses.
O&G software for accounting allows integration with authorization for expenditure (AFE) and accounts payable for accuracy of partner billing.
Cost Center Allocations
When calculating the cost for each oil well, the costs of the compressor and servicing need to be included. O&G software solutions help calculate the compressor level costs and allocation based on volumes generated per well. As such, there is no discrepancy in cost allocation at the level of the well.
Calculation and Allocation of Overhead
While operators are liable for insurance costs, the partners in an oil well are not. O&G accounting software programs have features like an insurance application and automated COPAS overhead. These modules make the allocation of allocable costs easier.
Authorization for Expenditures (AFE)
The AFE is the cost associated with the drilling and completion of a well, approved by a non-operating partner. These costs are important for calculating the profitability of each oil well. O&G software facilitates in origination, distribution, and circulation of AFE for approval. It also reports any difference between the budget and field estimates.
Cost Center Accounting
Many departments within the O&G industry form part of the overheads but don’t directly contribute to revenues, like accounting, research and development, human resources, or IT.
With O&G accounting software, tracking administrative overheads is a simple process. You can easily compare costs, maintain accurate records, and track business expenses.
Management of Invoices
When AFE, delivered materials, and invoices are integrated, accountants can process invoices faster. The higher the volume of invoices processed, the higher the organizational efficiency.
With a robust software program, accounting professionals in O&G can tackle issues like invoice approval through automatic notifications. Once the invoice is uploaded into the software, you can quickly check the status of approval.
The company can avail of vendor discounts provided bills are paid within the defined time frame. Manual accounting might not process the invoices on time, leading to lost discounts. However, O&G accounting software hastens the approval process and helps you save money.
Manual Journal Entries
Every O&G company will have manual journal entries. These are required to ensure the accuracy of ledgers, rectify errors, and record transactions that are not a part of sub-ledgers like JIB. Considering the volume of these entries, keeping track of individual items is challenging.
O&G companies can instead use accounting software for faster approval of journal entries. These solutions also offer easy access to files and higher integrity of accounting entries. Plus, there will be a precise audit trail for every transaction.
Managing Line Item
Errors in managing line items can be very costly. For example, a miscoded bill could lead to inaccurate cost allocation. With O&G accounting software, individual line items in every invoice are recorded more accurately.
Managing Accounts Receivable
The chances of recovering accounts receivable are down to 50% if not done within 90 days. To this end, O&G accounting software facilitates automated reminders to monitor accounts receivable, thereby eliminating cash flow issues.
Incorporating accounting software solutions for audits allows the O&G industry to easily facilitate multiple types of audits. These include owner audits, partner audits, joint interest audits, or financial audits at the required intervals.
Each state in the United States has different calculations for production taxes on sales. Thus, calculating the individual tax rates for production sites and partners at multiple locations is challenging. But O&G software allows the calculation of state-wise taxes in a seamless way.
Adopting O&G accounting software can improve efficiency, reduce errors, and enable companies to save money and other precious resources. As such, traditional accounting roles within the sector need to transform accordingly to meet the ever-changing requirements of the O&G industry.
Learn more about COPAS
COPAS is the Council of Petroleum Accountants Societies. It consists of twenty-six oil and gas accounting societies spanning across both the United States and Canada. These societies work together to gain a competitive advantage in the oil and gas industry, both on a national and local level. Becoming a member of COPAS may be the solution you’ve been looking for.
Bryan Kesler is a renowned CPA exam mentor and also the founder of CPA Tutor Boost. He aims to provide affordable tutoring solutions to smart accountants struggling to pass the CPA exam. Find his resources and connect with him at cpatutorboost.com.