Common Cents Wednesday's: Holiday Edition

Audit’s, Bookkeeping & Credit Ratings

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In our re-vamped weekly segment, Common Cents Wednesdays, we help explain simple-to -complex financial terms. This week, we’re covering ‘audit’, ‘bookkeeping’ & ‘credit rating’. It might sound like a super dry read, but since you’re in the “Cafe” grab a Timmies doughnut to sweeten the knowledge.
We won’t tell.

Audit

Does this word strike fear deep in your gut? Though it’s understandable why it would, with so many horror stories out there, truth of the matter is audit’s are not much to worry about as long as everything is in order.

There are many different scenarios in which “audit” can apply, but in terms of accounting, an audit is basically financial fact checking to ensure everything is in tip-top shape, both from a reliability perspective and an operational perspective. An audit must adhere to certain standards which are established by an administration of some sort. These standards exist to ensure there is no “funny business” going on even at the auditor level.

I’m a regular Joe, you might be thinking. Who would ever want to audit me? The simple answer is “the government”, through an income tax audit.

It’s unfortunate, but the truth is the word “audit” has a very negative connotation to it, sending fear through everyone who receives a letter from Revenue Canada. Truth of the matter is that audit’s happen randomly, so even if you filed on time and paid your taxes perfectly, you can still be selected for one. The good news is as long as everything is in order, you may not end up having to pay any more money. Again, audit’s are about fact-checking, and if your ducks are in a row, you probably have nothing to worry about.

Bookkeeping

Bookkeeping is the recording of transactions, and though part of the accounting process, is not the same thing as commonly believed. Bookkeeping is the recording of various transactions, receipts, payments and purchases by an individual or by a business, where-as accounting is the evaluation stage of all said transactions.

Bookkeeping should be a necessary skill for all of us to develop and practice well, simply to understand where our money goes and how it’s being spent. Every time you write a check, make a deposit, pay for something, keep the record of those transactions and log them. The term “balance your checkbook” comes from this practice.

Credit Rating

Like taxes, credit ratings are just a way of life in the western world. They are just numbers which lenders (banks, service providers, etc) use to determine if they should offer you a loan or line of credit. The good news is your credit rating can be changed for the better if it ends up lacking for whatever reason, but the bad news is that a horrible financial decision on your part could have you reaping the consequences for years.

So where does this rating come from, you might ask?

Firstly, there are the “big three” agencies that lenders use to acquire someone’s rating are Equifax, Experian and TransUnion. These credit agencies use the following formula, known as FICO (after Fair Issac Credit Organization), to determine your rating:

-The number of delinquent payments you’ve had = 35% of the score
-The total credit you’re currently using = 30% of the score
-How long you’ve had lines of credit open = 15% of the score
-The types of credit lines you have = 10% of the score
-How large your past lines of credit have been = 10% of the score

Based on these percentages, a score between 300 and 900 is generated. This number signifies the level of “risk” the lender is taking to give you money. The lower the rating, the greater the risk.

Some of you might be thinking, hey, I don’t have any of those, I must have a great score automatically! Unfortunately, this is not the case. Many believe that, due to lack of activity in the credit world, they must inevitably start with a perfect score. The reality is that the score is an indicator of spending behaviour and risk, and with no credit history, there is no way to analyze that risk.
Most individuals just starting out may be approved for services, but with high interest rates.

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