A Simple Oil and Gas Accounting System

A simple oil and gas accounting system is best. One system is better than three. That’s the mantra behind Corptex Systems Ltd., an innovative Calgary technology firm.

At that time, founder Brian Shyba was working as a consultant in Calgary’s oil and gas industry. With a background in business and programming, Brian was extremely versatile. He covered a lot of ground, consulting at more than 50 oil and gas companies.

In all these settings, Brian noticed a curious thing. Despite an obvious and pressing need for integration, each company operated separate oil and gas accounting systems for financial, production, and land accounting. That created complex operational problems. Like murky datasets. Awkward communication. Cumbersome programming. Uncertainty and pain points at every step of the way.

Brian knew one oil and gas accounting system would be better than three. “In those days, each system had separate cost centers, which were copied and didn’t integrate well. Same thing with production vouchers, which had to be copied. Same thing with business associates — every department used the same ones, but they created them separately, then got their wires crossed whenever there was an update. From a business and programming perspective, one system would be so much better.”

Fast forward to 2013, and Brian begins working on Energy Corridor, convinced he can create a better oil and gas accounting system. Fast forward again to 2016, when the company is founded. Fast forward again to 2017, when Energy Corridor goes live. Or to 2018, when the first financial accounting client converts from JVNexus to Energy Corridor. Or to 2020, when the financial and production modules merge … and The One is born.

Want to learn more? Visit Oil and Gas Accounting Software to learn more about Energy Corridor — the oil and gas industry’s first unified accounting system. Or better yet, contact us to schedule a demo.

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Operated Cash Calls

This post describes how to properly make operated cash call entries from the operator’s point of view. It includes standard procedures, and more importantly, how to handle cash calls when circumstances require non-standard adjustments.

Operated Cash Call Accounting Entries

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Projects with multiple partners have budgets defined in an “authorization for expenditure,” or AFE. Once the AFE is approved by all partners, it becomes the authorization for the project to incur costs on behalf of all partners. Operators issue operated cash calls to invoice non-operating partners for their share of expenses the project is expected to incur on their behalf.

Cash calls are usually generated when the project is ready to start incurring costs. In an ideal situation, all partners will pay the cash call invoice in a timely manner, making the project fully funded.

Cash calls are, in effect, prepayments made by partners for expenses that will be incurred by the project (AFE). The operator maintains these prepayments in their cash call payable account. Partners maintain these prepayments in their prepaid cash calls account.

Making a Standard Operated Cash Call

Operated cash calls are generated by the operator for each partner. The cash call amount is equal to the partner’s percentage of the AFE budget.

The cash call payable account (6310 in this example) must have the AFE and partner/vendor as mandatory. This liability will be drawn down as the project progresses and costs are incurred and invoiced, either through a joint venture bill or standard invoice.

The cash call receivable account (1425 in this example) must have the partner/vendor and invoice number/date as mandatory. This account is then treated like any other receivable account. For this example, we’ll have a cash call of $100.

Cash Call Entries

1. Credit cash call payableCR 6310 – Vendor Invoice: AFE: $100
2. Debit cash call receivableDR 1425 – Vendor Invoice: $100

Payment Received for Amount Invoiced

When the partner pays the cash call, the cash call receivable is cleared and the bank account (1010) debited.

Cash Call Entries

1.  Credit cash call receivableCR 1425 – Vendor Invoice: $100
2.  Debit bank accountDR 1010 – $100

Partner Pays More Than Invoiced Amount

When the partner pays more than the amount invoiced for the cash call, the partner is cash-called for the amount overpaid. The cash receipt entries do not change. In this case, the partner overpaid by $100.

Cash Call Entries

1.  Credit cash call payable – overpayment amountCR 6310 – Vendor Invoice: AFE- $100
2.  Debit cash call receivable – overpayment amountDR 1425 – Vendor Invoice: $100

Cash Receipt Entries

1.  Credit cash call receivable – full amount paidCR 1425 – Vendor Invoice: $200
2.  Debit bank account – full amount paidDR 1010 – $200

Partner Pays Less Than Invoiced Amount

When the partner pays less than the amount invoiced for the cash call, a reversal is made for the amount of the underpayment. The cash receipt entries do not change. In this case, the partner underpaid by $25.

Cash Call Entries

1.  Debit cash call payable – underpayment amountDR 6310 – Vendor Invoice: AFE-$25
2.  Credit cash call receivable – underpayment amountCR 1425 – Vendor Invoice: $25

Cash Receipt Entries

1.  Credit cash call receivable – full amount paidCR 1425 – Vendor Invoice: $75
2.  Debit bank account – full amount paidDR 1010 – $75

Refund Cash Call

Once the project has been completed and all expenses have been accounted for, if the project is under budget, a refund may be issued to the partners. This refund is for $50.

Refund Entries

1.  Debit cash call payableDR 6310 – Vendor Invoice: AFE – $50
2.  Credit bank accountCR 1010 – $50

Reverse or Close Cash Call

In the following situations, the $100 cash call may be reversed or closed:

  • The project has been put on hold or canceled with no payment received.
  • The partner wishes to pay their share of costs as they occur and has been cash-called with no payment received.

Refund Entries

1.  Debit cash call payableDR 6310 – Vendor Invoice: AFE-$100
2.  Credit cash call receivableCR 1425 – Vendor Invoice: $100

Cash Call Drawn Down with No Payment Received

These entries are required if the cash call will not be paid. In this case, the joint venture process has drawn down the cash call by $10. We need to move the amount drawn down from the cash call payable account to the JV receivable account (1420).

Cash Call Reversal Entries

1.  Debit cash call payableDR 6310 – Vendor Invoice: AFE-$100
2.  Credit cash call receivableCR 1425 – Vendor Invoice: $100

Move Invoice to Receivable Account Entries

1.  Credit cash call payable – for the invoiced amountCR 6310 – Vendor Invoice: AFE-$10
2.  Debit JV receivables – for the invoiced amountDR 1420 – Vendor Invoice: $10

Partner Pays Cash Call, Then Rescinds Payment

This situation is effectively the same as the one in Cash Call Drawn Down with No Payment Received. The cash call has not been paid and the cash call has been drawn down. Payment may have been made but, for example, was netted off the next payment received from the partner.

Cash Call Reversal Entries

1.  Debit cash call payableDR 6310 – Vendor Invoice: AFE-$100
2.  Credit cash call receivableCR 1425 – Vendor Invoice: $100

Move Invoice to Receivable Account Entries

1.  Credit cash call payable – for the invoiced amountCR 6310 – Vendor Invoice: AFE-$10
2.  Debit JV receivables – for the invoiced amountDR 1420 – Vendor Invoice: $10

Transfer Cash Call to a Different AFE

Partner requests balance ($5 in this case) from one AFE to be moved to another AFE. This may happen when a project has ended with funds outstanding in the cash call payable account for the partner.

These funds may be transferred to another project instead of being refunded. Here we assume that the new AFE has been cash-called; therefore, we need to apply the transfer payment to the new cash call invoice.

Cash Call Reversal Entries

1.  Debit cash call payable – old AFEDR 6310 – Vendor Invoice: AFE-$5
2.  Credit cash call receivable – new CC invoiceCR 1425 – Vendor Invoice: $5

Partner Sells Interest in Project and Requests Refund

Entries are required if the sale is for the project only. No entries are required if the sale is for the entire company.

The division of interest (DOI) for the AFE will also have to change to reflect the new partner. These entries are needed if the original partner is to be refunded the remaining cash call balance ($15) and the new partner cash-called for the same amount.

Cash Call Refund Entries

1.  Debit cash call payable – refund original ownerDR 6310 – Vendor Invoice: AFE-$15
2.  Credit general payable – refund original ownerCR 6210 – Vendor Invoice: $15

Cash Call New Partner

1.  Credit cash call payableCR 6310 – Vendor Invoice: AFE-$15
2.  Debit cash call receivableDR 1425 – Vendor Invoice: $15

Partner Sells Interest in Project and Transfers Cash Call Balance to New Partner

Entries are required if the sale is for the project only. No entries are required if the sale is for the entire company.

The DOI for the AFE will also have to change to reflect the new partner. These entries are needed if the original partner transfers the remaining cash call balance ($15) to the new partner.

Cash Call Refund Entries

1.  Debit cash call payable – refund original ownerDR 6310 – Vendor Invoice: AFE-$15
2.  Credit cash call payable – transfer to new partnerCR 6310 – Vendor Invoice: AFE-$15

Operated Cash Calls Are Routine Accounting

Operated cash calls are extremely common in joint venture projects, and they sometimes pose difficulties.

But once you know the rules for the standard situations — as well as some alternative methods for handling the non-standard situations — these difficulties fade away. Operated cash calls then become routine accounting.

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