1. ARST 575G Financial Records: Theory & Practice

2. Agenda 1.Assignment 1 - due 2.Accounting concepts, methods and records – continued 3.Accounting, Accounting Records and Accountability

3. The “magic formula” of accounting Assets = Liabilities + Equity And, expressed differently Equity = Assets – Liabilities Each entry consists of one debit and one credit which together decrease and increase the account by an equal amount to achieve a balance.

4. The Idea of Double Entry Customer’s Ledger Account (Dr) Sales Account (Cr) The books must balance! A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different accounts

5. The accounts generation process Source Documents Sales orders Invoices Receipts Source Books Purchases day book/journal Sales day book/journal Cash book (dual role as a journal and a ledger) Ledgers Sales Ledger Purchases Ledger General or nominal Ledger Financial Reports Trial Balance & Balance Sheet Income Statement/Profit & Loss Statement Cash Flow Statement

6. Financial Reports Balance Sheet (& Trial Balance) – Prepared at least annually (by law e.g. Companies Act, Income Tax Act) – Shows the organization’s “position” in respect to assets, liabilities, and owner’s equity (capital) – From the ledger accounts a trial balance can be created. The trial balance lists all the ledger account balances The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column If totals do not balance, then adjustments must be made The adjusted trial balance amounts are used to prepare the balance sheet

7. Financial Reports, cont’d Income Statement or Statement of Profit and Loss – Designed to report the income flow of the business Cash Flow statement – Shows cash inflows and outflows – Used to gauge an organization’s liquidity position

8. The Production of the Accounts Review of Gautier p. 97 Review sample documents – can you tell which type of account the documents represent? If time, review of Gautier questions on p. 99

9. Concepts and theories governing the Accounts Generation Process The generation of accounts is governed by a number of accounting concepts and theories: 1.Entity concept 2.Money measurement concept 3.Going concern concept 4.Cost concept (Value in use – Cost of acquisition = Income) 5.The realization concept 6.The accruals concept 7.The matching concept 8.The periodicity concept 9.The consistency concept (now replaced with the concept of comparability) 10.The prudence concept (replaced under IASB standards with now linked with the concept of reliability rather than realization)

10. Accounting Standards The application of accounting concepts and theories is set out in organizational policies and procedures, which are since the 1970s have been governed by accounting standards issued by external authorities 2000 = (UK) Accounting Standards Board issues Financial Reporting Standard (FRS 18) Canada & US used GAAP = Generally Accepted Accounting Principles (Jan. 1 of this year, Canada adopted the accounting standards of the International Accounting Standards Board IASB standards consist of International Financial Reporting Standards and International Accounting Standards (refer to Gautier pp. 86-87)

11. Densmore Reading In what ways do personal accounting records from the 19 th century differ from the accounting records of larger organizations the same period? What challenges do these records present in relation to arrangement & description?

12. Accounting & Accountability Link between financial reports, such as the balance sheet, and the rise of joint stock company. Owners hired managers – financial reporting arose to overcome the information asymmetry created by this arrangement Internal auditors – function as checks on integrity of the accounts External auditors – independent third parties Periodic crises has led to greater and greater regulation over the structure and rules of presentation of the financial reports (e.g. In companies acts, accounting standards) and the rise of oversight bodies (e.g. Registrar of companies, public accountants).

13. Accounting & Accountability - Poovey Poovey – argues that the credit worthiness of merchants in the early to mid-1600s was demonstrated by their ability to keep rule- governed, balanced account books. Malynes (17 th ) recognized that the accounts were conjectural because they required an artificial stoppage of time (a snapshot of the flow of trade) 17 th century and the origins of the “Balance of Trade” via a linkage between the double entry bookkeeping of merchants and high cultural debates about “reason of state” taking place at the time. In the notions about the balance of trade one can detect the precursor to general equilibrium theory Mercantile self government held up as a model to emmulate – again foreshadowing J.S. Mills and the invisible hand of the market and the classical economists

14. Accounting & Accountability - Poovey Idea of “precise” and therefore “accurate” became an accounting orthodoxy – see p. 77 of Poovey. Misselden argued that it was more important that the accounts by prepared with precision than that the entries be accurate. COSO, Sarbanes-Oxley and CoBIT

15. Sarbanes-Oxley Section 404 Compliance Build on COSO Framework

16. Sarbanes-Oxley Section 404 Compliance