ARST 575G

1. ARST 575G Financial Records: Theory & Practice

2. Agenda • The Vatican Financial Records – Guest lecture by Professor Luciana Duranti • Accounting concepts, methods and records

3. Aho • Origins & Purpose of accounting records • Descriptive • Explanatory • Rhetorical – used to justify commercial activity about which there was a great deal of suspicion in Medieval Europe • Pacioli – father of double-entry bookkeeping. Some debate as to whether he invented it or simply articulated practices in use at the time. • “In the name of God and Profit” – Medieval accounting ledgers always opened with this phrase and God was invoked at the top of each page • Double entry is designed to account for all debits and credits arriving an 0 balance to show how honest the merchant is

4. 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.

5. The Idea of Double Entry 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 The books must balance!

6. Accounting Records – An Overview • An accounting system records, retains and reproduces financial information relating to financial transaction flows and financial position. • Financial transaction flows are assigned to one of the primary groups i.e. assets, liabilities, and equity. • Within these primary groups each distinctive asset, liability, income and expense is represented by its respective "account". • An account is a record of financial inflows and outflows in relation to the respective asset, liability, income or expense. • Income and expense accounts are considered temporary accounts, since they represent only the inflows and outflows absorbed in the financial-position elements on completion of the time period.

7. The accounts generation process

8. Source documents • Review of p. 91 of Gautier

9. Source Book • Also called day books, journals or books of first entry • All transactions must be recorded in the day books (practice dating from later medieval period) • Usually divided into three categories • Sales • Purchases • Cash (which includes cheques and credit card receipts) • Cash has dual role because inflows and outflows are recorded

10. Ledgers • Also known as books of account, or the accounts • Items from the Source books are “posted” to the Ledgers • Categories of ledgers • Sales ledger • Purchases ledger • General or nominal ledger • Cash • Categories are determined on the basis of “chart of accounts” • Entries from the journals are posted to the ledgers periodically, typically once per month

11. 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

12. 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

13. 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

14. Paul Kee Article • Explores relationship between accounting and technology used for accounting through a socio-technical lens • “DBMS stores data in highly disaggregated form and can create journals and ledgers as virtual files for reference and auditing purposes. In effect, the data structures and operations of DBMS make the traditional structures and operations of double-entry accounting increasingly obsolete.”

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

16. 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)

17. Question? • Aside from financial statements, what additional information is needed to interpret the financial accounts of an organization?

18. Next Class • Selection of organization for assignment 1 – see me after class to let me know or if you would like to discuss • Read the business section of a newspaper and reflect on the link to accounting records