Accounting

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Unit 8                      FINANCIAL ACCOUNTING

8.1 Getting started

      Accounting has been defined as “the process or art of recording and verifying accounts”. This in itself is not very informative. More helpful would be to review accountancy in much broader terms as a database of information about the activities of an organization which is expressed in monetary terms. It must answer three important questions:

  • What information is needed?
  • Who is the information for?
  • What form should the information take?

The information required is concerned with profits, growth, liquidity and solvency which is needed in order to help effective decision -making. The role of the accountant is to record and account for transactions over a period of time and to communicate or report the resulting information.

       Who requires the financial information? Two groups, one internal and one external, are interested in the performance of an organization. The internal group is comprised of the owners, managers and employees. Owners, both existing and potential, want to know how their investment has performed and what its future prospects are. Managers require financial information in order to review the success of past decisions and to help formulate and control future plans. Finally, the employees are interested with respect to job security and the company's ability to meet pay claims. The external group includes the government and creditors. The government requires financial information to verify tax liabilities and creditors are interested in order to assess the creditworthiness of the organization.

       With all these needs to satisfy, what form should the information take? The volume and detail of business information is so immense that whatever form is chosen it must be condensed. In this unit we will look at the three principal statements: the Balance Sheet, the Income Statement or Profit and Loss Account and the Funds Flow Statement.

 

Discuss the following points.

1. Accountancy has two distinct branches: Financial Accounting and Management Accounts. Which one accounts for the past?

2. Which one aids the planning and control of present and future events?

 

8.2 Look through the following vocabulary notes which will help you understand the text and discuss the topic.

 

financial accounting

финансовый учет

to verify

сверять, сличать

accountancy

бухгалтерская отчетность, делопроизводство

an accountant

бухгалтер с управленческими функциями

accounting

бухгалтерский учет

accountancy profession

бухгалтерское дело, учетные работники, бухгалтеры

bookkeeping

бухгалтерия, счетоводство

an account

счет, отчет

to account for smth

отчитываться о ч/л

liquidity

ликвидность

solvency

платежеспособность

to communicate information

сообщать информацию

to report information

предоставлять отчет, докладывать

prospects

перспективы

to meet pay claims

удовлетворять требования о выплатах

tax liabilities

налоговые обязательства

liabilities

обязательства

current/short-term  liabilities

текущие/краткосрочные обязательства

long-term liabilities

долгосрочные обязательства

assets

активы

current/short-term assets

краткосрочные/текущие активы

fixed assets

долгосрочные/необоротные активы

(in)tangible assets

(не)материальные активы

to assess

оценивать

assessment

оценка

creditworthiness

кредитоспособность

condensed

сжато выраженный

the Balance Sheet

Балансовый отчет

the Income Statement or Profit and Loss Account

Отчет о прибылях и убытках

the Funds Flow Statement

Отчет о движении средств

the Cash Flow Statement

Отчет о движении наличных средств

the Directors' Report

Отчет совета директоров

the Chairman's Statement

Отчет председателя

the Auditor's Report

Аудиторский отчет

the Annual Report

Годовой отчет

Notes to the Accounts

примечания/пояснения к отчетности

Statistical Tables

Статистические таблицы

the Added Value Statement

Отчет о добавленной стоимости

accounting concepts

учетные принципы

accounting conventions

методы и процедуры учетной практики

an assumption

допущение, предпосылка

going concern

принцип непрерывности деятельности предприятия

consistency

принцип постоянства (применения учетных методов)

accruals

начисления

matching concept

принцип соответствия

prudence and conservatism

консерватизм

realization principle

принцип реализации

revenue

выручка, доход

cost

стоимость, себестоимость

rules of thumb

«на глазок», из опыта, приближенно

objectivity

объективность

separate entity

самостоятельная хозяйственная единица

a legal person

юридическое лицо

money measurement

принцип денежного выражения

historic cost

первоначальная стоимость

to be valued at cost

оцениваться по себестоимости

to fall/decrease in value

понизиться в стоимости

depreciated/written down in value

списанный, обесцененный

double-entry

двойная запись

an entry

проводка, запись

a posting

разноска хозяйственных операции по счетам бухгалтерского учета

a transaction

хозяйственная операция

the code of practice

кодекс профессиональной этики

professional accountancy bodies

профессиональные бухгалтерские организации

a 'true and fair view'

достоверное и объективное представление

performance

результаты деятельности

to own

владеть

to owe

быть должным

Shareholders' funds/capital

акционерный капитал

limited liability companies

 

Share capital

складочный капитал

Ordinary Share Capital

складочный капитал в форме обыкновенных акций

part ownership

 

Authorized Share Capital

объявленный уставный капитал, разрешенный к выпуску акционерный капитал

Issued Share Capital

выпущенный акционерный капитал, выпущенные акции

equity

собственный, чистый капитал

reserves

фонды, резервы

share premiums

надбавка к номинальной стоимости акций

revaluations

переоценка

retained profits

нераспределенная прибыль

to be due

подлежать

debentures

долговые обязательства

the balance sheet date

дата составления Баланса

bank overdraft

банковский овердрафт

dividends payable

дивиденды к оплате

goodwill

гудвил, цена фирмы, деловая репутация компании

vehicles

транспортные средства

stocks/inventories

товарно-материальные запасы

debtors/accounts receivable

дебиторская задолженность, счета к получению

creditors/accounts payable

кредиторская задолженность, счета к оплате

cash

денежные средства

the trading account

торговое сальдо

the profit and loss account

отчет о прибылях и убытках

the appropriation account

счет распределения прибылей

sales revenue/turnover

выручка от продаж

cost of goods sold

себестоимость реализованной продукции

direct labor

прямые затраты на оплату труда производственных рабочих

production overheads          

производственные накладные расходы

gross profit

брутто-прибыль, валовая прибыль

trading/operating profit

операционная прибыль

selling expenses

расходы по реализации товаров

administrative costs

административные расходы

profit before tax

прибыль без вычета налога

less

за вычетом

after-tax profit

прибыль за вычетом налога

net profit

чистая прибыль

ordinary dividends

дивиденд по обыкновенным акциям

solvent in the short term

платежеспособный в краткосрочном периоде

commitments

 

anticipated outflows

ожидаемый приток наличности

anticipated inflows

ожидаемый отток наличности

working capital

оборотный капитал

fixtures and fittings

принадлежности и инвентарь

an invoice

счет-фактура, накладная

a pro forma invoice

ориентировочный счет-фактура

a fiscal year

фискальный/налоговый год

an accounting period

отчетный период

a nominal ledger

номинальный регистр

a journal

учетный регистр

a trial balance

пробный баланс

depreciation/amortization

списание, износ/амортизационное списание

stock valuation

инвентарная оценка, оценка запасов

work-in-progress

незавершенное производство

finished goods

готовые товары


 

 8.3   Reading

The Basics of Financial Accounting

       The production of financial accounts is largely governed by three sets of influences: accounting concepts, accounting conventions and legislation. These have been developed over the years so that different accountants producing accounts for different organizations in various activities can do so using similar methods.

Accounting concepts There are four basic assumptions which underline the production of a set of accounts.

  • Going concern: the organization is assumed to be an enterprise that will 'continue in business for the forseeable future”.
  • Consistency: this means adopting the same procedure every time for recording and measuring items.
  • Accruals or matching concept: this concept recognizes revenues and costs as they are earned or incurred rather than as money is received or paid.
  • Prudence and conservatism: this concept is designed to balance the natural optimism of the businessman!

Accounting conventions Many conventions have been adopted over the years as tried and trusted 'rules of thumb'. Five principal ones are:

  • Objectivity: as far as possible accounts should be based on facts which are measurable and can be independently verified.
  • Separate entity: the company is recognized as a legal 'person' in its own right entirely separate from its owners and managers.
  • Money measurement: all company assets and liabilities are measured in a common unit, money.
  • Historic cost: all items are valued at cost. Where items fall in value through use they are depreciated or written down in value.
  • Double-entry: all transactions involve two sides: giving and receiving.

Some concepts and conventions are so fundamental that they have been incorporated into legislation and/or the code of practice of the professional accountancy bodies. All these concepts, conventions and legislation are concerned with ensuring that the information statements present a 'TRUE AND FAIR VIEW' of the organization and its performance.

    The Balance Sheet is a statement of the financial position of an organization at a given date. It shows the organization's resources on that date in terms of what it owns and what it owes, i.e. its assets and liabilities and shareholders' funds. Money and resources have been provided by the owners (shareholders) and creditors which have been invested in various assets. The organization is responsible for repayment or safekeeping of these funds. The money owed to creditors is known as Liabilities and that of the owners as Shareholders' Funds.

      In simple terms the Balance Sheet is made up of two elements, a source of funds and a use of funds. The first is normally divided into two sections, Shareholders' Funds and Liabilities, while the latter details the assets acquired. This can be summarized in Table 1 using traditional horizontal format.

Each section can be further divided to provide more detail.

     Shareholders' Funds can take many forms, the most common of which in limited liability companies are:

  • Ordinary Share Capital: represents funds invested in the company in return for part ownership. Often referred to as “equity”. The total number of shares allowed to be issued is called the Authorized Share Capital which may differ from the number actually sold, the Issued Share Capital.
  • Reserves: these can have three forms: share premiums, revaluations and retained profits. Share premiums occur when a company issues shares which are sold for a price higher than their nominal value. Revaluations take account of assets (usually land and buildings) whose current value is greater than the historic cost because of inflation. Retained profits are those profits which the company directors have decided not to distribute as dividends but to retain in order to finance future operations.

 

Table 1 Horizontal format for balance sheet


       Liabilities represent any monetary amount owed by the organization to another party. Long-term liabilities are borrowings which are not due to be repaid for at least 12 months. These comprise long-term bank loans and debentures, which are borrowings from the public.

      Current liabilities are debts which require payment within 12 months of the balance sheet date. They comprise creditors, bank overdraft, taxation and dividends payable.

     Assets are items owned by the business and can be of two forms: tangible and intangible. Intangibles include management skills or goodwill and as such are not normally shown in the Balance Sheet. The tangible assets are broadly divided into fixed and current assets.

     Fixed Assets are long-term resources of the business which are designated to be used for more than one accounting period. They include such items as property, plant and machinery, office equipment and vehicles.

     Current Assets comprise short-term resources which will be used up or change their form during the next 12 months. The constituent parts will be stocks, debtors and cash.

    The Profit and Loss Statement shows revenues and expenses and the resulting profit or loss for a given period of time (normally a year). The overall statement can be divided into three parts: the trading account, the profit and loss account and the appropriation account.

    


 

 

 

 

 

 

 

 

 

 

Table 2 Trading account

       The trading account details the sales revenue of the period less operating expenses to give a trading or operating profit or gross profit.

    


 

 

 

 

 

 

 

 

 

 

Table 3 Profit and loss account

       The profit and loss account starts with gross profit, deducts overhead expenditure (selling and administrative expenses) to arrive at an operating profit and then adds any income from non-operating sources to arrive at a total profit figure. From this total is deducted interest. The final figure is the profit before taxation.

     The appropriation account shows how Profit is distributed or “appropriated”. Some of it will be appropriated by the government as taxation. Part of the remaining after-tax profit will be distributed to shareholders in the form of dividends.


 

 

 

 

 

 

 

 

Table 4 Appropriation account

       The balance remaining is retained in the business to help finance future operations. It is added to Shareholders' Funds in the Balance Sheet under section Reserves.

      Funds Flow Statement The main long-term objective of a business is to make a profit but in order to do this it must remain solvent in the short-term. The business must possess adequate liquid funds in order to finance its current operations. If a firm does not possess sufficient funds to meet its short-term commitments it can be forced to close. It is vital for a firm to keep a close control of the flow of funds in a period so that it ensures the anticipated outflows are adequately covered by anticipated inflows. The Funds Flow Statement details from where the sources of funds were obtained and how they were used or applied. The main sources of funds are:

  • net profit
  • issue of new shares
  • raising of long-term debt or loans
  • sale of fixed assets or investments

The main application or use of funds are:

  • purchase of new fixed assets
  • payment of dividends
  • payments of taxes
  • repayments of debt
  • covering operating losses

       The total sources of funds less the total uses of funds will give the net increase or decrease in funds during the year and represents the overall change in working capital such as stock, debtors, trade creditors and cash.

Cash Flow Statements From March 1992, public companies have been required by a Financial Reporting Standard to present a Cash Flow Statement instead of a Source and Application of Funds Statement. This places far greater emphasis on cash inflows or outflows in an accounting period.

 

8.4 Comprehension

  8.4.1 Answer the questions using the active vocabulary      and Unit 8 Glossary.

  1. What is the production of financial accounts largely governed by? 

2. What are the accounting concepts?

3. What are the accounting conventions?

4. What are all these concepts, conventions and legislation concerned with?

5.  What three basic financial statements do you know?

6. What does the Balance Sheet describe?

7. How is the accounting equation typified in the Balance Sheet?

8. What the basic elements of the Balance Sheet?

9. What are the most common forms the Shareholders' Funds can take?

10. What do reserves consist of?

11. What is meant by liabilities? Current liabilities? Short-term liabilities?

12. What is meant by assets? Tangible assets? Intangible assets? Current assets and fixed assets?

13. What does The Profit and Loss Statement show?

14. What parts сan it be divided into?

15. Compare all terms meaning 'profit' used in these accounts.

16. Why is it vital for a firm to keep a close control of the flow of funds in a period?

17.  What are the main sources of funds shown on the Funds Flow Statement? 

18. What is the main application or use of funds?

19. How can the overall change in working capital be estimated?

20. What is the difference between the Cash Flow Statement and the Funds Flow Statement?

21. What can happen to a firm if it does not possess sufficient funds to meet its short-term commitments?

22. Why should accountants follow the principle of Prudence and conservatism?   

 

8.4.2  Mark these statements T(true) or F(false) according to the information in the Text and Unit 8 Glossary. If they are false say why.

1. An account is a section in a ledger devoted to a single aspect of a business.

2. Assets represent what a business owes or is due. 

3. Liabilities represent what a business owns or is due. 

4. Assets are the uses of funds.

5. Liabilities are the sources of funds.

6. Accounting concepts are the same as accounting conventions.

7. The Balance Sheet shows revenues and expenses and the resulting profit or loss for a given period of time.

8. The Balance Sheet is a snapshot of the company's financial position on a certain date.

9. Current Assets comprise short-term resources which will be used up or change their form during the period of more than 12 months.

10. Intangibles include management skills or goodwill and as such are normally shown in the Balance Sheet.

11. The profit and Loss statement is a summary of all the accounts of a business.

12. Overdraft is the withdrawal of funds in excess of one's present balance.

13. The Cash Flow Statement is a report which shows the flow of money in and out of the business over a period of time.

14. Matching means adopting the same procedure every time for recording and measuring items.

15. An entry is part of a transaction recorded in a journal or posted to a ledger.

16. Gross profit is the balance of the trading account assuming it has a debit balance.

17. An invoice is an original document either issued by a business for the sale of goods on credit or received by the business for goods bought.

18. Money measurement means that all company assets and liabilities are measured in a common unit, money.

19. Profit is the excess of expenses over revenue.

20. A share premium is the extra paid above the face value of a share.

 

8.5 Language practice

8.5.1  Match the English terms in the left-hand column with the    definition in the right-hand column.

 

1

Account

A

A report which shows the flow of money in and out of the business over a period of time.

2

Invoice

B

A column in a journal or ledger to record the 'To' side of a transaction

3

Assets

C

A column in a journal or ledger to record the 'From' side of a transaction.

4

Matching principle

D

This is a class of fixed asset which includes office furniture, filing cabinets, display cases, warehouse shelving and the like.

5

Double-entry bookkeeping

E

A method of analyzing the sales and expenses which make up those sales to a particular period.

6

Overheads

F

A section in a ledger devoted to a single aspect of a business.

7

Cash flow statement

G

Assets of a non-physical or financial nature. An asset such as a loan or an endowment policy are good examples.

8

Fiscal year

H

An account which shows the gross profit or loss of a manufacturing or retail business, i.e. sales less the cost of sales.

9

Realization principle

I

A system which accounts for every aspect of a transaction - where it came from and where it went to.

10

Current liabilities

J

An amount of money put into the business (often by way of a loan) as opposed to money earned by the business.

11

Fixtures and fittings

K

A term describing an original document either issued by a business for the sale of goods on credit or received by the business for goods bought.

12

Capital

L

The balance of the trading account assuming it has a credit balance.

13

Debit

M

These are the costs involved in running a business.

14

Trading account

N

The term used for a business's accounting year. The period is usually twelve months which can begin during any month of the calendar year (e.g. 1st April 2001 to 31st March 2002).

15

Intangible assets

O

They represent what a business owns or is due.

16

Credit

P

The principle whereby the value of an asset can only be determined when it is sold or otherwise disposed of, i.e. its 'real' (or realized) value.

17

Gross profit

Q

Debts which require payment within 12 months of the balance sheet date. They comprise creditors, bank overdraft, taxation and dividends payable.

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Accounting has been defined as “the process or art of recording and verifying accounts”. This in itself is not very informative. More helpful would be to review accountancy in much broader terms as a database of information about the activities of an organization which is expressed in monetary terms. It must answer three important questions:
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