CHAPTER 2 The Recording Process

Chapter Preview InChapter 1, we analyzed business transactions in terms of the accounting equation, and we presented the cumulative effects of these transactions in tabular form. Imagine a company like MF Global(as in the following Feature Story) using the same tabular format as Softbyte to keep track of its transactions. In a single day, MF Global engaged in thousands of business transactions. To record each transaction this way would be impractical, expensive, and unnecessary. Instead, companies use a set of procedures and records to keep track of transaction data more easily. This chapter introduces and illustrates these basic procedures and records. Feature Story Accidents Happen How organized are you financially? Take a short quiz. Answer yes or no to each question: Does your wallet contain so many cash machine receipts that you've been declared a walking fire hazard? Do you wait until your debit card is denied before checking the status of your funds? Do you verify the accuracy of your checking account about as often as you clean the space behind your refrigerator? If you think it is hard to keep track of the many transactions that make upyourlife, imagine how difficult it is for a big corporation to do so. Not only that, but now consider how important it is for a large company to have good accounting records, especially if it has control ofyourlife savings.MF Global Holdings Ltdwas such a company. As a large investment broker, it held billions of dollars of investments for clients. If you hadyourlife savings invested at MF Global, you might be slightly displeased if you heard this from one of its representatives: "You know, I kind of remember an account for someone with a name like yours—now what did we do with that?" Unfortunately, that is almost exactly what happened to MF Global's clients shortly before it filed for bankruptcy. During the days immediately following the bankruptcy filing, regulators and auditors struggled to piece things together. In the words of one regulator, "Their books are a disaster ... we're trying to figure out what numbers are real numbers." One company that considered buying an interest in MF Global walked away from the deal because it "couldn't get a sense of what was on the balance sheet." That company said the information that should have been instantly available instead took days to produce. It now appears that MF Global did not properly segregate customer accounts from company accounts. And, because of its sloppy recordkeeping, customers were not protected when the company had financial troubles. Total customer losses were approximately $1 billion. As you can see, accounting matters!