During the normal course of the business, there are a lot of transactions that require a certain explanation. Generally, things might not always go as planned, and therefore, organizations need to adjust in accordance with these activities. When such situations arise, accountants need to make the necessary amendments to their books, so that the books are able to comply with the accounting principle of full disclosure.
Memorandums are created in order to combat this particular issue. In this aspect, it can be seen that the primitive motif of the memorandum is to ensure that these transactions or ‘notes’ are mentioned alongside the financial statements so that the users of the financial statements have a complete understanding of the process in itself.
Memorandum is defined as a document, or a note, that goes alongside financial statements or general ledger entries. This note serves the purpose of ensuring that there is proper clarity pertaining to these transactions and all disclosures are fully made.
Memorandum also serves as a reminder, or a note in the general ledger entries, so that the accountants can revisit these statements and make the required amendments if any. Hence, a memorandum primarily serves to reiterate a certain transaction or a certain change in the financial statements.
It must be noted that the memorandum serves two main purposes, as far as companies are concerned. Firstly, they serve the purpose of ensuring that companies have internal records kept and maintained. In the same manner, it can be seen that it also serves the purpose of acting as a communicative tool between the organization, and third-party. From the perspective of internal control, memorandums tend to be extremely resourceful because they act as reminders of issues that need to be fixed because of the closing of the month-end (or year-end).
As mentioned earlier, memorandums are mostly un-official documents that do not need to be necessarily published in the year-end financial statements. However, there is a need to realize that memorandums should still be maintained since they might be used during the company’s audit process. In the same manner, they might also help the company maintain a relatively strict internal control policy since it marginally reduces the chances of error or mistakes caused as a result of the creation of memorandums.
It must also be noted that in certain cases, companies might opt to declare memorandums in the financial statements as ‘Notes to the Financial Statement’. This is because it might help the users of financial statements understand the financial statement in a better manner. For example, if there is a one-off transaction that might come off as unusual, memorandums can be used in order to communicate this to the users of the financial statements, in order to mitigate the chance of confusion, whatsoever.
Memorandums may, or may not exist within the company. Companies might have tens of memorandums one year, followed by no memorandums in the next year. This purely depends on the transactions, and the existing need to have memorandums in the first place. Either way, this is something that is quite subjective and is primarily contingent on the preexisting need to have memorandums in the first place. Also, having, or not having a memorandum is also not a reflection on the company and its operations.
Therefore, it can be seen that memorandums essentially serve the purpose of facilitating better results and record-keeping that mitigate the risk of errors when it comes to basic bookkeeping.