What is Backflush Accounting? – Master of Accounting Degrees

Manufacturing can be a very involved process with lots of tedious moving pieces, but the Just-in-time (JIT) model can streamline things by quite a bit. Essentially, JIT is a process in which extraneous, unnecessary parts of the production process can be cut out in order to lower costs and exhaustive effort.

One common method employed in JIT models is backflush accounting. With backflushing, it is possible to take down the total number of transactions in the production process to a far smaller and more manageable amount. Below are some of the most important things to know about backflushing and how it can benefit a business that successfully implements it into their model.

Eliminating Tedium

In the usual production process, costs have to be accurately tracked from beginning to end. With the backflush, the entire cost tracking process can be entirely eliminated altogether.

Rather than having to manually track each costing shift throughout the entire process, the backflush method completely automates the affair. Not only is the tracking automated, but it’s held off until the very end of the process entirely.

Generally Accepted Accounting Principles (GAAP) Adherence

With the backflush method in place, accounting usually becomes far less of a hassle than otherwise; however, not every business model leaves room for backflushing to be put into play. The ability to implement backflushing depends on whether or not it adheres to GAAP.

GAAP are the basic regulating principles for companies to follow when it’s time for financial statements to be processed. GAAP contain a number of general guidelines for companies to follow whenever reporting their accounting information. Also included in GAAP are hard-outlined standards that policy boards mandate full compliance with.

Any time that a company’s financial statements are distributed outside of the company itself, GAAP must be complied with. If a company’s stock happens to be publicly traded, then it’s even more essential for the company to ensure that it remains with U.S. Securities and Exchange Commission (SEC) compliance.

Potential Disadvantages

Using a backflush model can bring about some very helpful benefits in terms of efficiency, but depending on the specific circumstances, it isn’t without a potential drawback.

For some companies, the fact that the backflush method necessarily excludes an audit trail could be more disadvantageous than not. An audit trail could be considered a trail of “bread crumbs” that lead back to the original source of all accounting data accrued over the course of the manufacturing process.

In a backflush model, there is no sequential trail of data leading back to any original source over the course of the manufacturing process. If a company has to reconstruct its trades in order to test whether or not accounting data is completely accurate, a comprehensive audit trail will be necessary.

Conclusion

Traditional costing systems, by nature, leave a far wider margin of error than backflush accounting models do. Rather than leaving costing accuracy up to the mercy of human attention spans, backflush accounting uses computerized efficiency to keep things simple, swift and sweet.