Accounting 100
Designed for Canadian small business
Accounting Theory
(Part 1)
Accounting Theory
(Part 2)
Today’s accounting software packages typically lack audit trails.
Since the early days of the Renaissance, accounting transactions were first recorded in journals and then posted to ledgers. As late as the early 1990s, most accountants and bookkeepers designed special purpose ‘journals’ for most of their small business clients. These journals were designed for use with multi-columnar journals and electronic calculators with a ‘paper tape’.
In the small, local accounting firms on Vancouver Island where I did my articling in the 1980s, the standard practice was for the bookkeeper to perform a ‘quick and dirty’ bank reconciliation on a paper tape from their printing calculator, and attach it to the ‘cash receipts and disbursements journal’ for each month. In other words, the bank reconciliation formed a fundamental part of the bookkeeping process.
That is often no longer true.
Accounting journals are the ‘books of original entry’ in any accounting system. Today’s most widely used spreadsheet package – Microsoft’s Excel ™ – was first released in the late 1980s and didn’t achieve dominance until the early to mid-1990s. All spreadsheets were modeled after these same, flexible multi-columnar journals, favoured by accountants.
For some reason, systems designers for all of the most commonly used accounting applications must have decided that journals were just a superfluous intermediate step in the accounting process.
So what happened to journals, and why is it a problem?
All of the popular accounting packages ‘link’ to a business’ online banking service. In Canada we’re told by Statistics Canada that 78% of households use online banking. Since these software packages ‘pull’ automatically from a trusted source – the bank – the presumption is apparently that all the transactions will exist within the accounting system after the linkage is made.
Effectively the data from a company’s online bank (credit card, PayPal, and Amazon) accounts could function as a set of special purpose accounting journals. After all, each transaction represents one half of the relevant accounting entry – minus it’s ‘equal and opposite’ other (banking) half.
Somehow though, inexperienced or untrained bookkeepers often manage to misclassify, overlook and/or accidentally delete enough of these transactions to make reconciliation impossible without a copy of the bank statement for reference.
Over the course of year, there can often be multiple errors that aren’t discovered until the bank(s) are ‘reconciled’. By the end of the year, the number of errors can require extensive and painstaking remedial work to correct.
While all accounting packages do import transactions from linked accounts, a human readable copy of the bank statement would be helpful.
This could function as a kind of ‘special purpose journal’, thereby improving the audit trail immensely. Ideally this would be integrated into standard the accounting workflow.
In order to reconcile the bank, copies of each monthly statement should be kept by the business for reference. Ideally, the person responsible for maintaining the accounting system would perform a reconciliation monthly.
We can speculate as to why transactions are deleted, overlooked or misclassified. There are certainly many possible causes – but in a great many cases, a reconciliation is done only once a year – when the public accountant is engaged to assist in filing the tax return. They must often search through the entire general ledger account for each bank account and compare each bank entry with the bank statement. This can be costly work.
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