Accounting

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.