What Is an Audit Trail?

 

 

An audit trail is a date and time-stamped record of the history and details around a transaction, work event, product development step, control execution, or financial ledger entry. Almost any type of work activity or process can be captured in an audit trail, whether automated or manual. Different fields will have audit trails that exist in a variety of forms to capture their unique areas of focus, but the overarching theme and purpose of the audit trail is to track a sequence of events and actions in chronological order. In today’s fast-paced IT and risk environment, viewing an audit trail or audit log in or as close to real-time as possible may be part of an organization’s day-to-day operations.

Specific to the healthcare and medical devices, an audit trail would track access and authentication to a patient’s medical record (typically in an Electronic Health Record or EHR), any updates made, and when that sensitive data was accessed.  In the financial sector, institutions like the SEC and NYSE will use an audit trail to uncover and review detailed information on trades when there are any questions about the accuracy, legality, or validity of trade data. Most information technology systems will also have a detailed audit trail for user activity, and some IT systems are built to aggregate inputs from other systems and create audit trail data from that.

What Are Audit Trails Used For?

Audit trails provide a record of events that are time-stamped and provide data to varying degrees. Some audit trails may only capture errors, and a few simple details, like in the anti-virus example above. Other audit trails are deeply complex, and require some technical expertise to read and process.

A simple example of an audit trail covering a transaction is a grocery store receipt. You enter the store to buy a lemon and walk out with a receipt recording the transaction. It will include what you purchased, the exact time that it happened, and the location where the transaction took place. In a more complex scenario, an audit trail is used to verify the source of funds for a down payment on a home by a mortgage lender. Financial regulators examine complex audit trails from brokerage firms when they want to investigate the suspicious market activity.

Audit trails are valuable evidence used to support audits, access controls, financial statements, investigations, security, and many other functions in an organization. They provide a way to prove the integrity of a transaction or activity, validate an activity, and ensure that key transactions, controls, and actions are being performed.

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What Is A Trial Balance Worksheet?

A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure that the entries in a company’s bookkeeping system are mathematically correct.

A trial balance is so called because it provides a test of a fundamental aspect of a set of books, but is not a full audit of them. A trial balance is often the first step in an audit procedure, because it allows auditors to make sure there are no mathematical errors in the bookkeeping system before moving on to more complex and detailed analyses.

How a Trial Balance Works

Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double entry accounting system. If the total debits equal the total credits, the trial balance is considered to be balanced, and there should be no mathematical errors in the ledgers. However, this does not mean that there are no errors in a company’s accounting system. For example, transactions classified improperly or those simply missing from the system still could be material accounting errors that would not be detected by the trial balance procedure.

Requirements for a Trial Balance

Companies initially record their business transactions in bookkeeping accounts within the general ledger. Depending on the kinds of business transactions that have occurred, accounts in the ledgers could have been debited or credited during a given accounting period before they are used in a trial balance worksheet. Furthermore, some accounts may have been used to record multiple business transactions. As a result, the ending balance of each ledger account as shown in the trial balance worksheet is the sum of all debits and credits that have been entered to that account based on all related business transactions.

At the end of an accounting period, the accounts of asset, expense, or loss should each have a debit balance, and the accounts of liability, equity, revenue, or gain should each have a credit balance. However, certain accounts of the former type also may have been credited and certain accounts of the latter type also may have been debited during the accounting period when related business transactions reduce their respective accounts’ debit and credit balances, an opposite effect on those accounts’ ending debit or credit balances. On a trial balance worksheet, all of the debit balances form the left column, and all of the credit balances form the right column, with the account titles placed to the far left of the two columns.

Types of Trial Balance

There are three main types of trial balance:

• The unadjusted trial balance
• The adjusted trial balance
• The post-closing trial balance

All three of these types have exactly the same format but slightly different uses. The unadjusted trial balance is prepared on the fly, before adjusting journal entries are completed. It is a record of day-to-day transactions and can be used to balance a ledger by adjusting entries.

Once a book is balanced, an adjusted trial balance can be completed. This trial balance has the final balances in all the accounts, and it is used to prepare the financial statements. The post-closing trial balance shows the balances after the closing entries have been completed. This is your starting trial balance for the next year. 

Trial Balance vs. Balance Sheet

The key difference between a trial balance and a balance sheet is one of scope. A balance sheet records not only the closing balances of accounts within a company but also the assets, liabilities, and equity of the company. It is usually released to the public, rather than just being used internally, and requires the signature of an auditor to be regarded as trustworthy.

A trial balance is a less formal document. There are no special conventions about how trial balances should be prepared, and they may be completed as often as a company needs them. A trial balance is often used as a tool to keep track of a company’s finances throughout the year, whereas a balance sheet is a legal statement of the financial position of a company at the end of a financial year.

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What is an Invoice?

Definition: An invoice is a document issued by a seller to the buyer that indicates the quantities and costs of the products or services provider by the seller.

An invoice specifies what a buyer must pay the seller according to the seller’s payment terms. Payment terms indicate the maximum amount of time that a buyer has to pay for the goods and/or services that they have purchased from the seller.

An invoice indicates that a buyer owes money to a seller. Therefore, from a seller’s point of view, an invoice for the sale of goods and/or service is called a sales invoice. From a buyer’s point of view, an invoice for the cost of goods and/or services rendered is called a purchase invoice.

An invoice has historically been a paper document mailed to the buyer, but these days sellers can request payments online with electronic invoices.

What is included on an invoice?

Typically, an invoice document will contain a combination of the following details:

• The word ‘Invoice’
• A unique invoice number for both the seller’s and the buyer’s reference
• The name and contact details of the buyer
• The name and contact details of the seller
• The date the product was sent/delivered, or the date the service was rendered
• The date the invoice was sent
• The payment terms (detailing the method of payment, when the payment should be received, details about late payment charges, early payment discounts, etc.)
• A description of the product/service
• The price per unit of the products (if applicable)
• The total amount charged

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A Day In The Life Of A Bookkeeper

 

 

Join us as we accompany a women named Krystal through her day, shedding light on the authentic day-to-day activities of a bookkeeper. Gain a detailed understanding of her profession, along with insights into the qualifications and skills needed to excel as a bookkeeper. By the end of this video, you may be able to see yourself in a similar career. 

What Are Miscellaneous Expenses?

Miscellaneous expenses are a necessary, albeit tricky, part of running any business. They often cover a broad range of small, seemingly random costs that don’t fit into specific categories. While these expenses may appear insignificant individually, collectively, they add up and can affect your financial records and tax filings. Understanding what qualifies as a miscellaneous expense, knowing IRS rules, and adopting best practices for tracking and management can help you keep your finances organized and compliant. 

What Are Miscellaneous Expenses?

Miscellaneous expenses are costs that don’t clearly fall under pre-defined accounting categories, like office supplies or travel. In businesses, these may include things like minor repairs, work-related software subscriptions, or employee reimbursements for small purchases. 

Miscellaneous expenses can contain various small or irregular costs that don’t fit into primary categories like payroll or major supplies. Below are some examples of miscellaneous expenses broken down by category to help you understand common scenarios:

Marketing and Promotional Items

• Client Gifts: Small, one-time gifts, such as branded mugs or notebooks, are given as tokens of appreciation to clients.
• Event Giveaways: Promotional items handed out during trade shows or conferences, like pens, tote bags, or USB drives.

Minor Repairs and Maintenance

• Non-Essential Office Repairs: Fixing non-critical items, like replacing a coffee maker or repairing minor office furniture.
• Emergency Supplies: Small emergency kits or tools purchased for general office upkeep (e.g., toolkits for assembling furniture).

Travel and Hospitality Incidental Costs

• Tolls and Parking Fees: When employees drive for work-related tasks but aren’t reimbursed fully by the company.
• Last-Minute Lodging: Occasional, unplanned hotel stays due to unexpected travel requirements.
• Small Meal Expenses: Costs for coffee or light refreshments purchased for clients during meetings.

Training and Educational Resources

• Educational Subscriptions: Access to one-off or short-term subscriptions for educational or industry publications.
• Online Course Materials: Course fees for skill-specific training sessions or certifications that aren’t part of a broader training budget.
• Reference Books or Guides: Industry-specific books or quick reference guides purchased for team knowledge.

Office Supplies and Maintenance

• Consumables: Items that need periodic replenishment, like markers, erasers, and cleaning supplies.
• Printer Ink and Paper: Small purchases that support office operations but don’t fall under major office equipment expenses.
• Office Decorations: Items like wall art or seasonal décor to maintain a pleasant work environment.

Technology and Software-Related Expenses

• Single-Use Software Licenses: Paying for one-time software access, such as graphic design tools or a research database.
• App Subscriptions: Short-term or trial subscriptions to business tools or apps for evaluation.
• Device Accessories: Small accessories like chargers, cables, or external hard drives for office use.

Communication and Utility Costs

• One-Time Data Purchases: Buying extra mobile data for an urgent work-related task.
• Postage and Courier Fees: Small, occasional postage or courier costs for sending documents or packages that aren’t part of regular operations.
• Telecommunication Repairs: Repair costs for small office telecom equipment, such as headsets or conference call devices.

Miscellaneous Employee Perks

• Team Lunches: Occasional team lunches or snacks to celebrate a team achievement or encourage morale.
• Small Holiday Gifts: Modest gifts provided to staff for holidays or work anniversaries.
• Recreational Supplies: Small items like board games or magazines in the break room to enhance employee comfort.

Why Are Miscellaneous Expenses Important?

While they may seem minor, tracking miscellaneous expenses accurately can prevent financial inconsistencies, aid in tax deductions, and streamline your records. 

Proper categorization and documentation of these expenses can maximize deductions and maintain clarity in your accounting processes. Source

Capital Tax: What It Means and How It Works

 

What Is a Capital Tax?

The term capital tax refers to a tax levied on the taxable capital of some financial institutions in Canada. Taxable capital may include paid-up capital stock, contributed surplus, retained earnings, long-term debt, or reserves. Canada's federal government, along with some provinces, imposes capital taxes on institutions that meet certain criteria, including banks. Capital taxes, which constitute a minimum tax on financial institutions, provide federal and provincial governments with steady revenue.

Understanding Capital Taxes

A capital tax is a tax imposed on some financial institutions in Canada. This includes banks, trust and loan corporations, and life insurance companies. The tax is levied on the company's taxable capital. Only financial institutions with capital employed exceeding $1 billion pay the federal capital tax at a rate of 1.25%.

These criteria differ depending on whether the tax is being levied by the federal government. Some Canadian provinces have conditions that are different than the federal government if they also levy a capital tax. The provinces that impose the tax are listed below.

The taxable capital generally comprises the following elements:

• Shareholders' equity
• Surpluses and reserves
• Retained earnings
• Long-term debt
• Loans and advances to the corporation
• Reserves

Taxable capital doesn't take into account certain investments in other corporations.

For tax purposes, the Financial Corporation Capital Tax Act defines a financial corporation as a bank, trust company, credit union, loan corporation, or life insurance company and includes an agent, assignee, trustee, liquidator, receiver, or official having possession or control of any part of the property of the bank, trust company, or loan company but does not include a trust company or loan company incorporated without share capital.

History of Corporation Capital Tax

The federal government imposed a capital tax on all corporations within Canada with taxable capital employed in Canada of more than $50 million before 2006. This rule also applied to non-resident corporations that conducted business in Canada through a permanent establishment. This tax was eliminated at the federal level on Jan. 1, 2006. Financial and insurance companies with taxable capital over $1 billion are still levied a 1.25% capital tax by the federal government. Capital taxes paid on a provincial level are deductible for federal income tax purposes.

Financial institutions can deduct some investments in other Canadian corporations from their taxable capital. The amount of capital tax owed can also be reduced by the amount of income tax the corporation pays. Any unused federal income tax liability can be applied to reduce the capital tax for the previous three years and the next seven years.

The capital tax generates a steady stream of revenue for Canada's federal and provincial governments. While the federal government does not levy a general capital tax, the capital tax effectively constitutes a minimum tax on financial institutions.

What Is the Difference Between Capital Tax and Capital Gains Tax?

A capital tax is a business tax levied by governments in Canada on a corporation's taxable capital, such as a company’s retained earnings and share capital. The federal government and some Canadian provinces levy this tax on financial institutions that meet certain criteria, including banks, trust and loan corporations, and life insurance companies.

A capital gains tax is a tax on the profit from selling a capital asset, such as stock shares, bonds, digital assets, jewelry, coin collections, and real estate. Many governments impose a capital gains tax on taxpayers.

The Canadian corporate capital tax is only applicable to financial institutions in Canada, whereas a capital gains tax may be owed by individual investors and corporations in various countries. Source

The Basic Bookkeeping Terms You Need to Know

From balance sheets to income statements, there’s no denying that there are new terms and phrases you’ll come across. In practice, they’re quite easy to understand once the terms are broken down into much simpler definitions.

Although we can’t possibly list them all here, here are five of the most popular bookkeeping terms you should understand.

• Balance Sheet: A report which breaks down your business’ financial situation. It includes the assets, liabilities and the capital of the business. Its purpose is to help show what your business owes and owns.
• Chart of Accounts: A full list of accounts used in your business to categorise financial transactions. This can include assets, liabilities, equity, income and more.
• Expense: This is the fixed, variable, accrued or day-to-day costs that a business may incur through its operations.
• Trial Balance: A business document where all ledgers are compiled into debit and credit columns. This is to make sure a company’s bookkeeping system is mathematically correct.
• Profit and Loss: A financial report which shows the revenue and expenses over a period of time.

This is just scratching the surface. There are plenty of additional terms and phrases that will help you get started. Source

What is Multidimensional Accounting?

As businesses grow and diversify, managing financial data across various departments, products, or even regions can become a tangled web of confusion. 

Traditional accounting methods often fall short, leaving companies grappling with inaccurate reporting, lack of insight, and a frustrating inability to track performance effectively. Enter multidimensional accounting—a modern solution designed to offer a clear, organized view of financial data.

Multidimensional accounting makes it easier to categorize and simultaneously analyze the finances across a business’s multiple accounting cycles and facets, providing a 360-degree view of operations.

Multidimensional accounting enables a more nuanced understanding of where money is coming from and where it’s going whether it's tracking costs by department, revenue by product line, or expenses by project. 

For growing businesses, especially those with complex operations, the inability to slice and dice financial data in this way can lead to inefficiencies or missed opportunities. But multidimensional accounting can help avoid all that—here’s how it works.

Multidimensional accounting helps segment and analyze information across various dimensions. Unlike traditional accounting systems, which primarily focus on a single dimension—typically accounts—multidimensional accounting incorporates multiple aspects.

Common dimensions in a multidimensional accounting system include:

• Departments: Track financial performance by specific departments
• Products or services: Analyze profitability or costs associated with different product lines or services
• Regions: Understand revenue and expenses based on areas
• Projects: Track profitability on a per-project basis

Many businesses use tags or codes to create a multidimensional account system within their current accounting software. For example, you can turn your current system into a multidimensional accounting one with an accounting numbering system. 

An account numbering system is a structured way to assign unique identifiers to each account in the general ledger (GL). This system usually combines numbers and letters to categorize accounts, such as assets, liabilities, revenue, and expenses. For example, a revenue account might include a department tag, product tag, and region tag. 

Dimensions of a general ledger

From there you can add multiple dimensions to the general ledger. The dimensions of a general ledger typically include:

• Account code: Primary identifier for the type of a transaction
• Cost center: Department or unit within the company responsible for the transaction
• Product/service line: Product or service related to the transaction
• Location: The geographical area where the transaction occurred
• Project code: Identifies the project associated with the transaction

Do you need a multidimensional accounting solution?

Multidimensional accounting helps decision-makers better understand what’s going on in their organizations. Businesses that are growing or operating as multiple entities face challenges that standard accounting systems can’t always address. 

If you're growing or complex business with any of the following, a multidimensional accounting solution might be right for you:

• Complex operations like managing multiple departments, products, or locations
• Inaccurate reporting due to inconsistencies or outdated financial data
• Limited insights when trying to understand the performance of different business segments
• Slow decision-making because of a lack of timely, actionable financial information 
• Regulatory compliance with a need to adhere to complex regulations
• Accounting features that make multidimensional possible, and easy to integrate and use, will also come with several advantages. For example, you’ll get deeper insights to pinpoint exactly which department, product, or region is driving those costs and why.

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Write-Down vs. Write-Off

Both of these accounting techniques are ways for a business to indicate how an asset has declined in value

"Write-down" and "write-off" are both accounting terms. The difference between them is largely a matter of degree, but it's also important to understand which one to use under what circumstances. Write-offs and write-downs are a common part of business. It's not necessarily a poor reflection of the company.

A write-down is a technique that accountants use to reduce the value of an asset to offset a loss or an expense. A write-down can become a write-off if the entire balance of the asset is eliminated and removed from the books altogether. Write-downs and write-offs in this sense are predominantly used by businesses. The term "write-off" can also apply to the deductions that individual taxpayers take to reduce their taxable income, but that is a different meaning, as explained below.

How Write-Downs Work

A write-down is recorded on a company's books as an adjustment to the existing inventory. A credit is applied to the equipment or whatever the inventory item is, and the total value is reduced accordingly.

A write-down can instead be reported as a cost of goods sold (COGS) if it's small. Otherwise, it must be listed as a line item on the income statement, affording lenders and investors an opportunity to consider the impact of devalued assets. Large write-downs can reduce owners' or stockholders' equity in the business.

Companies can also reduce a portion of an asset's value based on depreciation or amortization.

How Write-Offs Work

Writing an asset off in business is the same as claiming that it no longer serves a purpose and has no future value. The business is effectively declaring that the value of the asset is now zero. Once an asset has been written off in this manner, this valuation is permanent.

Old equipment can be written off even if it still has some potential functionality. For example, a company might upgrade its machines or purchase brand-new computers. The equipment that's being replaced can be written off in this case. Its economic value would be listed as $0.

A bad debt write-off can occur when a customer who has purchased a product or service on credit fails to pay the bill and is deemed to have defaulted on that debt. From the perspective of the business that debt is now uncollectible. When that happens, the accounts receivable on the company's balance sheet will written off by the amount of the bad debt, which reduces the accounts receivable balance by the amount of the write-off.

An adjustment to revenue must be made on the income statement to reflect the fact that the revenue once thought to be earned will not be collected if the company uses accrual accounting practices.

A negative write-off is essentially the opposite of a normal write-off in that it refers to a business decision to not pay back or settle the account of a person or organization that has overpaid.

It's up to the company to credit back the amount of a discount to the consumer when that customer pays full price for a product on credit terms, then is given a discount after a payment is made. It's considered to be a negative write-off if the company decides not to do this and keeps the overpayment instead. Negative write-offs can harm relationships with customers and also have negative legal implications.

Common Types of Write-Downs or Write-Offs

Here's a non-exhaustive list of activities a business may undertake that may need to get written off or written down.

• Accounts Receivable Accounts receivable may be written off when it becomes clear that a customer will not pay the amount owed. This often occurs after repeated collection attempts have failed, meaning the receivable is uncollectible.
• Inventory: Inventory is written down when its market value falls below its cost due to obsolescence, damage, or declining market demand. If inventory becomes completely obsolete or unsellable, it may be written off entirely.
• Fixed Assets (Property, Plant, and Equipment): Fixed assets are written down when their market value declines significantly, often due to technological advancements, physical damage, or changes in market conditions. This ensures the balance sheet reflects a more accurate value of the assets. For example, think of how commercial real estate valuations were negatively impacted post-pandemic.
• Intangible Assets: Intangible assets, such as patents, trademarks, and goodwill, may be written down if they lose value due to legal challenges, changes in market conditions, or impairment. Goodwill, in particular, is written down when the acquisition value of a company exceeds its fair market value.
• Investments: Investments in securities or other companies can be written down when their market value decreases below the acquisition cost. This adjustment reflects the current fair value of the investments on the balance sheet, as the company usually has to report the unrealized gain on its financial statements.
• Research and Development Costs: Capitalized R&D costs can be written down if a project is discontinued or fails to achieve the desired results. This ensures that only successful and valuable projects are reflected in the financial statements, and projects that didn't make the cut and won't provide future benefits to the company are expensed in the current period.

Implications of Write-Downs and Write-Offs

When a company decides to write off an asset, it essentially acknowledges that the asset no longer holds any economic value. The immediate impact of a write-off is a reduction in the asset’s book value to zero, which directly affects the company's total assets and its net worth.

On the income statement, a write-off results in an expense, which reduces net income for the period in which the write-off is recognized. This decrease in net income can affect financial ratios such as return on assets and return on equity. If you frequently write off amounts, this may raise concerns about your company's asset management practices, potentially leading to implications in case you need to do a third-party audit.

From a tax perspective, write-offs can provide immediate benefits. The expense recognized from the write-off may reduce taxable income, thereby lowering your company’s tax liability for the period. This can improve cash flow in the short term, as less cash is required for tax payments.

Unlike a write-off, which removes an asset entirely from the balance sheet, a write-down reduces the asset’s carrying amount. The primary implication of a write-down is its impact on the balance sheet, where the asset’s reduced value results in lower total assets and equity.

On the income statement, a write-down is recognized as a loss, which reduces net income for the period. This reduction in net income can affect financial ratios such as the gross margin ratio. For fixed assets, a write-down can affect depreciation expense in future periods, as the asset's lower carrying amount will result in lower depreciation charges. Source