3 Accounting and accountancy Accounting mm Accounting involves recording and summarizing an organization’s transactions or business deals, such as purchases and sales, and reporting them in the form of financial statements, (See Units 11-14) In many countries, the accounting or accountancy profession has professional organizations which operate their own training and ipted ways examination systems, and make technical and ethical cules: these relate to a of doing things. Bookkeeping is the day-to-day recording of transactions. Financial accounting includes bookkeeping, and preparing financial statements for sharcholders and creditors (people or organizations who have lent money ro a company) m= Management accounting involves the use of accounting data by managers, for making plans and decisions. Auditing Auditing means examining a company’s systems of contcol and the accuracy or exactness of its records, looking for errors or possible fraud: where the company may’ have deliberately given false information, An internal audit is carried our by a company’s own accountants oF internal aaditors mm An external audit is done by independent auditors: auditors who are nor employees of the company. The external audit examines the truch and fairness of financial statements. It tries to prevent what is called “creative accounting’, which means recording transactions and values in a way that produces a false result ~ usually an arcificially high profi, There is always more than one way of presenting accounts. The accounts of British companies have to give a true and fair view of their financial situation. This means that the financial statements must give a correct and reasonable picture of the company’s current condition: Laws, rules and standards In most continental Furopean countries, and in Japan, there are laws relating to accounting, established by the government. In the US, companies whose stocks are traded on public stock exchanges have to follow rules set by the Securities and Exchange Commission (SEC), a government agency. In Britain, the rules, which are called standards, have been established by independent organizations such as the Accounting Standards Board (ASB), and by the accountancy profession itself. Companies are expected to apply or use these standards in their annual accounts in order co give a true and fair view. ‘Companies in most English-speaking countries are largely funded by shareholders, both individuals and financial institutions. In these countries, the financial statements are prepared for shareholders. However, in many continental Furopean countries businesses are largely funded by banks, so accounting and financial statements are prepared for creditors and the tax authorities.3.1 3.2 3.3 what type of work does each person do, and what is the name of each job? Look ac A and B opposite to help you. I record all the purchases and sales made by this department: 2 This month, I'm examining the accounts of a large manufacturing company. analyse the sales figures from the differear departments and make decisions abour our future activities. 4 Lam responsible for preparing our annual balance sheet. ‘When the accounts are complere, I check them before they ate presented to the excernal auditors. Match the rwo parts of the sentences, Look at C apposice to help you, 1 in Britain 2 In most of continental Europe and Japan 3 Inthe USA 4 In Bricain and the USA 5 In much of continental #urope a accounting rules are established by a government agency. b companies are mainly funded by shareholders o: stockholders. ¢ accounting rules are set by an independent organization. the major source of comparate finance is banks. © accomnting rules are set by the government. Find verbs in A, Band C opposite thar can be used te make word combinations with the nouns below. transactionsBookkeeping Double-entry bookkeeping heer Younis works in the acco department of a trading company: “L heya my’ career asa bookikoepes Bookkcepers record the company’s daily transactions: sales, purchases, debs expenses, and so on. Fach type of transaction is recorded in a separate aceount — the cash account, the li account, and so on, Double-entry bookkeeping is a system that records two aspects of every transaction. Every transaction is both a debit ~ a de and a corresponding credit ~ an adliion — in another, For example, fa company buys some raw materials — the substanees and components used ro make products ~ that it will pay for a month late its purchases account and credits the supplier's accounc. IF che company sells an item on eredit, i credits the sales account, and debits the customer's account. s this means the level of the company’s stock — goods ready for sale —is reduced, it netion ~ in one a ir debi debits the stock account. There is a corresponding inerease in its debtors — customers who owe money for goods or services purchased ~ and the debtors or accounts payable account is credited. Each account records debits on the left and eredits on the eight, If the bookkeepers do their work: correctly, the total debits always equal the coral credits. [lark: debtors; Ame: accounts receivable rE: creditors; Am: accounts payebl BrE: stock; AmE: inventory Day books and ledgers “For accounts with a large number of eransactions, like purchases and sales, companies often record the transactions in day books or journals, and then put a daily or weekly summary in the main doublentry records In Britain, they call the main books of account nominal ledgers. Creditors ~ suppliers to whom the company owes money for purchases made on creit ~ are recorded in a bouRhe edger. They still use these names, even though these days all the information is on a computes.” Note: In Britain the teems de aned money, oF to the sums ors and creditors can refer to people or companies that owe ar are money in an account or balance sheet Balancing the books Ac the end of an accounting period, for example a year, bookkeepers prepare a trial balance which transfers the debie and credit balances of dilferenr accounts onto one page AAs always, the total debits should equal the roral credits. T 2 these balances 19 prepare the organization's financial sracem4d 4.2 43 ‘Match the words int the box with the definitions elow. Look at A and B opposite to help you, stock debtors aan amount entered (in the left-hand side of an account, recording money paid out a book of accounts customers who owe money for goods or services not yer paid for an amount entered on the right-hand side of an account, recording a payment received goods stored ready for sale suppliers who are owed money for purchases nos yet paid for 1 2 3 4 5 6 ‘Complete the sentences. Look at A, B and C opposite t0 help you. 1 shows where money comes from an! where it goes itis always ‘ransfetted from one to anther one, Every event is entered Wwice = onee as a credit and once as a 4 2 Mose busineses record very frequent oF numecous transactions in 3 The main account books are called sand the book relating to creditors i elled the 4 ln order t0 prepace financial statements, computes do a whieh copies all the debit and cred halanees of different accounts onto a single paye Complete the sentences using “debit or “eredit’ Look at A opposite ro help you. 1 Ifyou buy new assets, you the cash or capital aevount 2 LF you pay some bills, you the liabilities aecounr. 3 Lf you buy materials from a supplier on 60 days? credit, you the purchases account and the suppliers accoune. 4 Ifyou sel something to a customer who will pay 30 days later, you the sale and the customer's aecount.Accounting policies and standards Valuation and measurement Investors in companies want to know how much the companies are worth, so companies regularly have to publish the value of their assets and liabilities. Companies also have to calculate their profits or losses: their managers need this information, and so do shareholders, bondholders and the tax authorities. Companies can choose ther accounting polices ~theie way of doing their accounts There are a range of methods of valuation ~ decieling how merch something ts worth and measurement ~ determining how big something is ~ that are accepted by law or by official accounting standards. In che USA, there are Generally Accepted Accounting Principles (GAAP), [n most of the rest of the world there are International Financial Reporting Standards (IFRS), sct by the International Accounting Standards Board. These are technical rules or conventions ~ accepted ways of doing chings that are not written down ina law. Although businesses ean choose among different accounting policies, they have to he consistent, which means using the same methods every year, unless there is a good reason. to change a policy: this is known as the consistency principle. The policies alo have to be disclosed or revealed to the shareholders: the Annual Report will contain a “Statement of Accounting Policies’ that mentions any’ changes that have been made. This enables sharcholders to compare profits and values with those of previous years. Areas in which the choice of policies can make a big difference to the final profie figure include depreciation ~ reducing the value of assets in the company’s accounts (sce Unit 9), the valuation of stock or inventory, and che making of provisions = amounts of money Uedueced trom profits for future pension payments {As there is always more than one way of presenting accounts, the accounts of British companies have to give a true and fair view of their financial situation ~ meaning there are various possibilities ~ eather than the true and fair view ~ ning only one is possible, Bik: depreciation: Ame: depreciation, amortization Br: a true and fair view; Ame: a fair presentation WED Historical cost and inflation accounting The aim of accounting standards (see Unit 3) is to provide shareholders with the formation that will allow them to make financial decisions. This is one reason why in many countries accounting follows the historical cost principle: companies record che original purchase price of assets, and not their (estimated) current selling price or replacement cost. This is more objective, and the current value is not importane if the business is a yoing concern —a successful comp: its asses are nor going to be sold, oF do mot currently need to be replaced ‘However, some countries with regular high inflation, e.g, in South America, use inflation ‘accounting systems that take account of changing prices. One system used is replacement ‘cost accounting, which values all assets at their current replacement cost ~ che amount that would have to be paid to replace them now. wy that will continie to do business ~ as7A 7.2 73 March the two parts of the sentences. Look at A and B opposite to help you. 1 Companies’ managers, investors, creditors and the tax authorities all 2 There are different ways of doing accounting bue companies hat ake known to be eonsiseent, 3. Companies have tw disclose or 4 The historical cost principle is that the price paid ro buy assets, 5 A going concern ustally doesn’t ‘and not their current valve, is recorded in accounts fet market value of is assets the size of profits or losses 4 which accounting methods they © which means regularly using th 1b need co know the need ro know abc amie methods. Are the following statements true or false? Find reasons for your wersin A and B opposite 1 Companies are told which aecoun 20 this in thei Annual Report policies to us npanies can change their accounting policies whenever they like, as long as they disclose 3 Companies could produce several profit figures, depending on how they depreciated their assets, valued their inventory, e« 4 There is only one correct interpretation of a company’s financial position, and company accounts must show this, 5 Ina Ine of countries, companies do nor record the current value of their assets 6 In countries with high inflation, companies value theie assets at their current replacement cost ‘Complete the table with words from A and B opposite front of the stressed syllable in nd related forms. Puta stress mark in ich word. The first one has been done for you. present | [- l [ valuable (oan oo) OR a ee ee Rentak The balance sheet 1 Assets, liabilities and capital Balance Sheet, 31 December 20_ _ ($’000) Current assets 3,500 Liabilities 6,000 Fixed assets 6,500 Shareholders’ equity 4,000 Total assets 10,000 Total liabilities and Shareholders’ equity 10,000 Company law in Britain, and the Securities and Exchange Commission in the US, require ompanies to publish annual balance sheets: starements for shareholders and creditors, The balance sheet is a document which has two halves. The rotals of both halves are always the same, so they halance. One half shows a business's assets, which are things ‘owned by the company, such as factories and machines, thar will bring future economic Denefits. The other half shows the company’s liabilities, and its capital or shareholders” equity (see below), Liabilities are obligations to pay other organizations or people: money that the company owes, or will owe ata furure dase. Theve often include loans, taxes that will soon have t0 be paid, furure pension payments to employees, and bills from suppliers: companies which provide raw materials or parts. If the suppliers have given the buyer a period of time before they have to pay for the goods, this is known as granting credit, Since assets are shown as debits (as the cash or capital account was debited to purchase them), and the rotal must correspond with the roral sum of the credits ~ that is the liabilities and capital - assets equal liabilities plus capital (or A = L + C) American and continental European companies usually pur assets on the lefe and capital and liabilities on the right. In Britain, this was traditionally the other way round, but now most British companies use a vertical format, with assets at the top, and abilities and capital below. Bré: balance sheet; AmE: balance sheet or statement of financial position BrE: shareholders’ equity; AmE: stockholders’ equity MELD Shareholders’ equity Shareholders’ equity consists of all the money belonging to shareholders, Part of this is share capital - the money the company raised by selling its shares. Bur shareholders’ equity also includes retained earnings: profits from previous years that have nor becn distributed - paid out to shareholders ~ as dividends. Shareholders’ equity is the same as the company’s net assets, or assets minus abilities, A balance shect does not show how much money a company has spent or received during a1 year, This information is given in other financial statements: the profit and loss account and the eash flow statement. (See Unit 14)Wa 2 Are the following statements crue or false? Find reasons for your answers in A and B apposite 1 British and American balance sheets show the same information, bur arranged differently. 2. The revenue of the company in the past year is shown on the balance sheet. 3 ‘The two sides or halves of a balance sheer always have the same tora. 4 The balance sheet gives information on how much money the company has received from sales of shares, 5. The assets toral is always the same as the liabilities rotal. 6 The halance shect tells you how much money the company owes Complete the sentences. Look at A and B opposite to help you. are companies thar provide other companies with materials, components, etc. are profits thar the company has not distributed to shareholders, are things a company owns and uses in its business. consist of everything a company owes, consists of money belonging to a company’s owners, Make word combinations using a word from each box. Then use che word combinations to complete the sentences below. Look at A and B opposite to help you distribute liabilities grant money owe profits pay retain 1 We a lot of our because we don't any of our to the shareholders, 2. Most businesses have customers who . because they them 30 or 60 days? 3. We have a tor of son. that we'll have to Sater this year, liv "I'm afraid our accountants are being investigated for fraud — on the brighter side, our financial statements have made the New York Times best-seller fiction list.” ONT aoe er] Look at the balance sheets of some large companies. What are the most common sub-divisions of these categories: assets, liabilities, and shareholders’ equity?The balance sheet 2: assets Fixed and current assets WCET ance sree 21 oecerer 22. (2000) Current assets Gash and equivalents 3,415 Accounts receivable 8,568 Inventory 5,699 Other current assets 5,962 Total current assets 23,286 Non-current assets Property, plant and equipment 4,900 Goodwill ‘950 Long-term investments 6.285 Total non-current assets 44,715 Total assets 34,959 In accounting, assets are generally divided into fixed and current assets, Fixed assets |or non-current assets) and investments, such as buildings and equipment, will continue ro be sed by the business for long rime. Current assets are things that will probably be used by the business in the near furore. They include eash ~ money available to spend immediately, debtors - companies or people who owe money they will have to pay in the near future, and stock, Ifa company thinks a debt will not be paid, it has to anticipate the loss ~ take action in preparation for the loss happening, according to the conservatism principle. (See Unit 7) te will write off, or ahandon, the sum as.a bad debt, and make provisions by charging, a correspondling, amount against profits: that is, deducting the amount of the debe from the year’s profits. Valuation ‘Manufacturing companies generally have a stock of raw materials, work-in-progress — partially manufactured products —and products ready for sale. There are various ways of valuing stock or inventory, but generally they are valued ar the lower of cost or market, which means whichever figure is lawer: their cosr— the purchase price plus the value of any work done on the items — or the current marker price. This is another example of conservatism: even if the stock is expected to be sold at a profit, you should nor anticipate profits. Tangible and intangible assets Assets -an also he classified as tangible and intangible. Tangible assets are assets with physical existence things you can touch ~ such as property, plant and equi “Tangible assers are generally recorded at their historieal cost (see Unit 7) less accumulated depreciation charges ~ the amount of their cost that has already been deducted from profits, This gives their net book value. Intangible assets include brand names ~ legally protected names for a company’s products, patents ~ exclusive rights to produce a particular new product for a fixed period, and trade ‘marks ~ names or symbols that are put on products and eannor be used by other companies. Networks of contacts, loyal customers, reputation, trained staff or “human capital, and skilled management can also be consideced as intangible assets, Because it is difficule to give an accurate value for any of these things, companies normally only record tangible assets. For this reason, a going cancem should be worth more on the stock exchange than simply is net worth or net assets: assecs minus liabilities, Ila company buys mother one at above its net worth — because of its intangible assets ~ the difference in price js recorded under assets in the balance sheer as goodwill.12.1 12.2 12.3 Find words and expressions in A, 8 and C apposite with the following meanings. 1 atv amount of money that is owed but probably woa't be paid 2 the accounting value of a company assets minus liabilities) 3a legal right to produce and sell a newly invented product for a certain period of time the historical cost of an assec minus depreciarion charges the amount a company pays for another one, in excess of the nct value of its assers a legally protected word, phrase, symbol or design used to identify 2 product to accept that a debt will nor be paid to deduct money from profits because of debis that will aot be paid products that are roc complete or ready for ssle the amount of money owed by customers who have bought goods but not yet paid tor them Beer HH. March the two parts of the sentences, Look at A, 8 and C opposite (o help you. 1A company’s value on the stock exchange is nearly always 2 Brand names, trade marks, parents, customers, and qualified staff 3 Casi, money owed by customers, and inventory 4 Companies record invenaory at the cost of buying or making the items, 5 Companies writs off bad debes, and male provisions 6 Land, buildings, faccories and equipmicnt a are custent assets. bb are examples of intangible assets © ave examples of tangible, fixed assets. d by deducting the amount from profits. € higher than the valve of ies ner assets. £ or che current market price, whichever is lower Sort the following intu current, fixed and intangible assers. Took at A and help you. ipposite to buildings cash in the bank debtors, goncbwill Furman capital investmencs land. sepurarion Curcent assets Fined assets Intangible assetsBIE The balance sheet 3: liabilities Liabilities Liabilies are amounts of money that a company owes, and are generally divided into two types — long-term and current. Long-term liabilities or non-current liabilities include bonds. (See Unit 33) ‘Current hiabilities are expected to be paid within a year of the date of the balance sheet. They inelude: ereditors ~ largely suppliers of goods or services to the business who are not paid at the time of purchase planned dividends deferred taxes ~ mone payment does not have to be made now. Current liabilities Short-term debt Accounls payable Accrued expenses Total current liabilities Non-current liabilities Deferred income taxes Long-term debt Other non-cutrent tiabilties otal non-current liabilities Total liabilities Sharoholders’ equity Common stock Retained eamings Tolal Total liabilities and Shareholders’ equity BEMEED Accrucd expenses Because of the matching principle, under which transactions and other events are reported in the periods 10 which they relare and not when cash is received or paid, balance sheets ‘wsnally include accrued expenses. These are expenses that have accumulated or buile ap during the accounting year but will nor be paid uncil che following year, after the date of the balance sheet. So accrued expenses are charged against income — that is, deducted from profits ~ even though the bills have not yer been received o the cash paid. Accrued expenses could include caxes and usilicy bills, for example electricity and wares 4,555 5,049 8,593 15,197 950 3,402 4208 5.553 20,760 10,308 3,900 14209 34,989 Shareholders’ equity on the balance sheet Shareholders’ equity is recorded on the same part of the balance sheet as liabilities, because it is money belonging to the shareholders and nor the company. Shareholders’ equity includes the original share capi Units 29-30) al [money from stocks or share: that will have to be paid as tax in the future, although the sued by the company: see share premium: money made if the company sells shares at above their face value ~ the value written on chem retaitted earnings: profits from previous years thar have nor been distributed to shareholders reserves: funds sét aside from share capital and earnings, retained for emergencies or other future need AmE: BrE: share premium jaidin surplus13.1 13.2 13.3 Are the following statements truc or false? Find reasons for your answers in A, B and C opposite. 1 Accurrent liability will be paid hefore the date of the balance sheet. 2A liabilicy thac must be paid in L3 months time is classified as long-rerm., 3 A company’s accrued expenses are like money an individual saves to pay bills in the fueure 4 Shareholders’ equity consists of the money paid for shares, and retained earnings. 5 If companies retain part of their profits, this money no longer belongs to the owners. & Companies can sell shares at a higher value chan the one stated on them. Find words in A, B and C opposite with the following meanings. 1 money that will be paid in less than 12 months from he balance sheet dare 2 the money that investors have paid to buy newly issued shares, minus the shares’ face value 3 delayed, put off or postponed until a later time 4 built up or inereased over a period of rime Sort the following into assets and liabilities. Look ar A and B opposite 19 help you, You may ned to look at Unit 12. Accounts payable Land and buildings | Avcrued expenses Investments Dividends Cash and equivalents Inventory Deferred taxes ccoumts receivable Long-term debr Assets Liabilities