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Занятие №1 The purpose of accounting - страница №1/2
The purpose of accounting
accountant, liability, debt, adherence, equity, trial, ledger, income, requirement, internal, external, expenditure, issue, owe, receipt, disbursement, cycle, occur, ratio, tangible, depreciation, advance, charge.
Accounting is the process of systematically collecting, analyzing, and reporting financial information. All businesses need to keep financial records summarizing how well or how badly they are performing over time. These records include financial data on costs, the value of assets, debts, sales, and profit. The final accounts of an organization summarize this financial information at the end of each trading period. The main financial statements of a business are: balance sheet; profit and loss statement; cashflow statement.
It is normal to publish accounts on an annual «financial year» basis, over the previous 12-month trading period, the start of which will normally have been determined by the date at which the business started to trade. For example, if a firm started trading on 1 July 2003, it may keep financial records over each 12-month period from 1 July each year to the following 31 June. It is not necessary to produce accounts running from 1 January to 31 December each year. Some large companies may even publish accounts more than once each year, for example, on a quarterly basis.
Business organizations produce accounts for a number of reasons:
1. To monitor business performance. The final accounts provide a record of how well a business has performed over the last accounting period in terms of sales, cost control, and profits. These figures can be compared to those from earlier period to see how business performance has improved. If business performance has worsened, managers can take actions they think are appropriate to turn the fortunes of their organization around, for example, by cutting product prices, launching a new advertising campaign, streamlining the workforce, or employing new equipment.
2. To secure and maintain finance. All businesses need capital to buy or hire assets such as premises, machinery, and land. Most business organizations raise capital from external sources such as banks and finance companies. These providers of finance will wish to use the accounts to judge whether or not the business will be in a position to repay loans. Similarly, before private investors are willing to buy shares in the ownership of a limited company, they will wish to know if the company is profitable and is able to pay its shareholders healthy dividends.
3. To meet legal requirements. All firms must provide financial records to the Inland Revenue so that it can calculate corporation tax or income tax liabilities on their profits. The Customs and Excise Department will also need to check VAT liabilities. Limited companies are required by law to provide annual accounts to their shareholders and on request to the general public.
It is the job of the accountant to keep records, and to turn these into a form that can be understood by business managers and other users of accounting information. Businesses usually employ two kinds of accountants:
Financial accountants are responsible for the production of final account in accordance with the various Companies Acts, in order to provide interested parties, such as the owners of the company, with an accurate picture of the firm’s progress and financial position.
Management accountants produce and use accounting information for internal management purposes. The management accountant may, for example, produce budgets and various forecasts in order to assist management in planning and controlling the business. Whereas the work of the financial accountant is made public in the annual report and accounts, the management accountant is usually for confidential use only within a business.
By law, company accounts must be checked by independent accountants to ensure that they provide a «true and fair view» of the position of the company. These independent accountants, called auditors, are hired to audit or check the company accounts before they are published. This is an important safeguard in helping to ensure that accurate information is presented to shareholders and other interested parties in the published accounts.
1. What is accounting?
2. Why do firms keep accounts?
3. What are the main financial documents of any business?
4. Who is accounting information used by?
5. Why do most business organizations produce accounts?
6. How often do companies publish accounts?
7. What do accountants do?
8. What is the difference between financial accountants and management accountants?
9. What do auditors do?
10. Why is auditing important?
1. Accounts summarize records of business transactions and performance over each accounting period, usually of 12 months duration.
2. By law, the accounts of all companies must be checked by independent politicians before publication.
3. Accounting information is used primarily by management, but it is also demanded by creditors, suppliers, shareholders, and government agencies.
4. The final accounts of a business are usually produced by the tax authorities.
5. Today, it is impossible to manage a business without accurate and up-to-date accounting information.
счет, отчетность, бухгалтер, аудит, аудитор, счетоводство, счетовод, активы, обязательства, амортизация, расходы, проводка, аванс, плата, кредит, дебит.
auditor, debit, credit, balance, operator, reporter, investor, finance, journal, collection, analysis, record, dividend, calculation, legal, accurate, budget, progress, position, publication, data, method, procedure.
Accounting can be viewed as a system for transforming raw financial data into useful financial information. Let’s see how such a system operates.
The Accounting Equation
The accounting equation is a simple statement that forms the basis for the accounting process. It shows the relationship among the firm's assets, liabilities, and owners' equity. Assets are the resources that a firm owns - cash, inventories, land, equipment, buildings, patents, and the like. Liabilities are the firm's debts and obligations - what it owes to others. Owners' equity is the difference between a firm's assets and its liabilities - what would be left over for the firm's owners if its assets were used to pay off its liabilities. The relationship among these three terms is almost self-evident: owners' equity = assets - liabilities. By moving terms algebraically, we obtain the standard form of the accounting equation: assets = liabilities + owners' equity.
In addition to assets, liabilities, and owners' equity, two additional accounts also affect the accounting equation. Revenues are the dollar amounts received by a firm. For most firms, revenues result from the sale of merchandise or services and increase the owners' equity account. Expenses are the costs incurred in operating a business. Typical expenses include wage expense, utility expense, delivery expense, and rent expense. The opposite of revenues, expenses always decrease the owners’ equity account. Implementation of this equation begins with the recording of raw data – that is, the firm’s day-to-day financial transactions. It is accomplished through the double-entry system of bookkeeping.
The Double-Entry Bookkeeping System
Double-entry bookkeeping is a system in which each financial transaction is recorded as two separate accounting entries to maintain the balance shown in the accounting equation.
The Accounting Cycle
In the typical accounting system, raw data are transformed into financial statements in five steps. The first three - analyzing, journalizing, and posting - are performed on a continual basis throughout the accounting period. The last two - preparation of the trial balance and of the financial statements - are performed at the end of the accounting period.
Analyzing Source Documents. The basic accounting data are contained in source documents, which are the receipts, invoices, sales slips, and other documents that show the dollar values of day-to-day business transactions. The accounting cycle begins with the analysis of each of these documents. The purpose of the analysis is to determine which accounts are affected by the documents and how they are affected.
Journalizing the Transactions. Every financial transaction is then recorded in a journal - a process called journalizing. Transactions must be recorded in the firm's general journal or in specialized journals. The general journal is a book of original entry in which typical transactions are recorded in order of their occurrence. An accounting system may also include specialized journals for specific types of transactions that occur frequently. Thus a retail store might have cash receipts, cash disbursements, purchases, and sales journals in addition to its general journal. Today, large, medium-sized, and even small businesses use a computer when journalizing accounting entries.
Posting Transactions. Next the information recorded in the general journal or specialized journals is transferred to the general ledger. The general ledger is a book of accounts containing a separate sheet or section for each account. The process of transferring journal entries to the general ledger is called posting.
Preparing the Trial Balance. A trial balance is a summary of the balances of all general ledger accounts at the end of the accounting period. To prepare a trial balance, the accountant determines and lists the balances for all ledger accounts at the end of each accounting period. If the trial balance totals are correct and the accounting equation is still in balance, the accountant can proceed to the financial statements. If not, a mistake has occurred somewhere, which the accountant must find and correct before proceeding.
Preparing Financial Statements and Closing the Books. The firm's financial statements are prepared from the information contained in the trial balance. This information is presented in a standardized format to make the statements as accessible as possible to the various parties who may be interested in the firm's financial affairs.
Once these statements have been prepared and checked, the firm's books are «closed» for the accounting period. A new accounting cycle is then begun for the next period.
1. What is the accounting equation?
2. What are revenues?
3. What are expenses?
4. What is the double-entry bookkeeping system?
5. What are the five steps of the accounting period?
1. Accounting is a system for transforming raw vegetables into juices.
2. All transactions must be recorded in the firm's general journal or in specialized journals.
3. The general ledger is a book of wonderful fairy tales.
4. To prepare a trial balance, the accountant determines and lists the balances for all ledger accounts at the end of each accounting period.
5. The firm's financial statements are prepared from the information contained in the trial balance.
счета к получению, счета к оплате, бухгалтерская книга, план счетов, текущий счет в банке, счет расчетов с поставщиками, бухгалтерский учет, управленческий учет, финансовый учет, балансовый отчет, отчет о прибылях и убытках, отчет об изменениях капитала, примечания к отчетности, оборотные средства, основные средства, нематериальные активы, репутация фирмы, двойная бухгалтерская запись, уравнение баланса, главный журнал учёта, главная бухгалтерская книга, пробный баланс, денежные средства, кассовая книга, денежная наличность в кассе, деньги на счете в банке.
loan, debenture, collateral, mortgage, share, venture, insurance, cash, debtor, overdraft, retain, fund, plough, fixture, raise, fee, repayment, lease, redeem, intermediary, borrower, endowment, property, withdraw, defer, outlay, installment, bearer, maturity, floatation, capital, investment, finance, dividend, list, creditor, liquid, principal, reserve, deficit, factor, bank, interest, default, method, rent, discount, expansion.
Capital refers to money introduced into a firm by its owners to purchase assets, such as land, buildings, machinery, vehicles, and office equipment. Businesses need capital to finance business start-ups, to expand, to pay for research and product development, and to finance the introduction of new technology. Capital can be described in a number of ways, depending on how it is used by an organization.
Venture capital is often used to describe money used to finance new business start-ups, mainly of private limited companies.
Investment capital is money used to buy new fixed assets, such premises, machinery and other equipment that have relatively long productive lives.
Working capital is money used to pay day-to-day running expenses of a business, such as raw materials, electricity, telephone bills, insurance, loan repayments, etc.
Working capital can be held in the form of the following current assets, which are used up by a business over a relatively short period of time:
cash «in hand» and in bank;
liquid assets, such as stocks and work in progress which can be sold quickly to raise cash;
debtors – people and firms who owe money to the business.
Working capital is equal to the value of current assets less any current liabilities, namely any outstanding bills yet to be paid or bank overdrafts which will reduce the amount of cash available to a business.
Let’s now consider the ways in which firms can «raise capital».
Internal Sources of Asset Finance
A business organization may already have some capital of its own to contribute to asset and working capital finance. The main sources of internal finance are:
1. Personal savings. The use of personal savings remains an important, and often principal, source of finance for many small firms, especially sole traders and partnerships.
2. Retained profits. Ploughed-back or retained profit amount to around 50% of the total finance used by companies. It is a cheap source of finance because the funds are not borrowed and no interest need be paid for their use. In small businesses, including sole trades and partnerships, it is unlikely that there will be enough retained profit to use as a source of finance. Limited companies are more likely to make sufficient profits to provide reserves for the future. However, because all profit after tax belong to the business owners, any profits retained by managers must be justified to them.
3. Asset management. A firm may raise funds by selling off some of its existing assets such as machinery or fixtures and fittings. Because asset sales tend to reduce the ability of a firm to trade, this is a fairly drastic means of raising finance.
4. Management of working capital. By careful planning, it is possible to manage the flow of cash into and out of a firm so as to avoid the need for short-term finance. A surplus of cash one month can be saved, to cover a deficit later on, when outflows of cash exceed inflows – for example, when a large bill for electricity or deliveries of materials has to be paid.
External Sources of Finance
Most firms will be unable to finance all their asset and working capital requirements from internal sources. They will therefore raise the money they need from external sources, such as banks and other financial institutions. Charities will rely on gifts, donations and membership fees.
In order to raise external finance, it is usually necessary for a business to produce a plan detailing how exactly it intends to use the finance raised. It is good financial practice to match the source of finance with the kind of asset required. For example, it would not be a good idea to purchase a large piece of capital equipment which will pay for itself over ten years, with an overdraft requiring repayment in six months!
Because fixed assets, such as building and machinery, remain productive for a long time, a company will often be willing to pay for them over many years, and will seek sources of long-term finance. In contrast, short-term finance is available from a variety of sources to fund working capital requirements and enable firms to meet day-to-day bills and debts. As a rule of thumb, short-term finance is normally repaid within three years while medium- to long-term finance is repaid over many more.
There are two main sources of long-term external finance. These are:
1. Loan capital. This is any money borrowed over a period of time which has to be repaid by an agreed date, usually with interest, either as a lump sum or in regular installments.
2. Share capital. Limited companies are able to sell shares to raise finance. The sale of shares can raise very large amounts of money. Unlike a loan, share capital is permanent capital because it is not normally redeemed, i.e. a firm never has to repay shareholders’ money. To get their money back, a shareholder must sell their shares to someone else.
1. What is capital?
2. Why do businesses need capital?
3. What’s the difference between investment capital and working capital?
4. What forms can working capital be held in?
5. What are the main sources of internal finance?
6. What external sources of finance are there?
7. Does the choice of the source of finance depend on the assets required?
1. Businesses need capital for a wide variety of reasons including business start-up, expansion, introducing new technology, and R&D.
2. Capital is used by business owners to provide a long and prosperous life on a remote island.
3. Working capital is used for the purchase of items to be consumed over a short period of time, such as materials, financing for work in progress and stocks of finished goods, and for paying off loans.
4. Some sources of finance might be better for financing assets, and others for providing working capital.
5. Capital to finance business assets can also be raised externally from the sale of shares to investors, or via loan capital.
финансы, ссуда, лизинг, факторинг, ипотека, инвестирование, залог, бюджет, облигация, долг, банк, банкир, банкротство, дивиденд, финансовый менеджмент, финансы частной компании, государственные финансы, финансовые расчеты, нераспределенная прибыль, банковский кредит, покупка в рассрочку, товарный кредит, превышение кредита в банке, венчурный капитал, инвестиционный капитал, оборотный капитал, фондовая биржа, долговое обязательство, ценные бумаги, гарантированные ценные бумаги, заемный капитал, акционерный капитал, собственный капитал, регистрация ценных бумаг на бирже, доля заемного капитала, финансирование, чистая прибыль, коммерческий банк, финансовый посредник, заемные средства, финансовый отчет, финансовое обязательство, денежные ресурсы.
bond, gearing, loan capital, trade credit, gilt-edged securities, stock exchange, overdraft, working capital, leasing, debenture, budget, bank loan, share capital, hire purchase, venture capital, retained profits, investment capital, finance, financial management, collateral, factoring, mortgage, listing, share, investment.
1. Financial Intermediation
It is the task of finance intermediaries, such as banks and building societies, to match the needs of savers who want to lend money, with people and firms who need funds. A number of financial institutions hold the savings of people and firms, and pay them interest. In turn, they make these funds available to borrowers, who are charged a rate of interest and in some cases an arrangement fee. Some financial intermediaries specialize in medium- to long-term finance, while others concentrate on short-term loans of money.
2. Securing Finance
Loans may be secured or unsecured. Some finance institutions may insist on security or collateral against a loan, especially when the amount of money involved is large. This refers to an asset, or assets, of value equal to the amount borrowed, which is tied to the loan. In the event of non-payment or default, the lender is legally entitled to take possession of the secured assets, and to sell them to obtain their money. Assets most likely to be accepted as security for a loan include: property; money saved in endowment and life insurance policies; shareholdings. Assets which lose their value quickly or are difficult to sell – for example, specialized machinery – are unlikely to be accepted by banks and other lenders as suitable forms of security.
3. The Money Market
Short-term finance is available on the money market. This is made up of people and firms who want to borrow money for relatively short periods of time, and those people and organizations willing and able to provide it. The supply of short-term finance is dominated by the major commercial banks, also known as clearing banks, such as Lloyds, Barclays, Midland, and the Cooperative Bank. These lend money to firms in the same way as they lend money to private individuals. Short-term finance is available in the form of a bank loan or overdraft. The major banks can also arrange, often through specialized companies which they own, other methods of finance, such as leasing and factoring services, and commercial mortgages.
4. Methods of Short-term Finance
The most common methods of short-term finance used by businesses are:
Overdraft. Overdrafts are frequently used to ease cashflow problems associated with working capital requirements in many business organizations. Under an overdraft agreement, a bank allows a business to make payments or withdrawals in excess of the amount held in its account, up to a specified limit. Banks normally insist that overdrafts are paid off relatively quickly. Interest is charged on the amount of the overdraft on a daily basis, and is normally slightly lower than the rate charged on loans.
Bank loan. Banks can advance loans to businesses, to be repaid in regular fixed monthly installments over an agreed period of time. Loan terms can be anything from six months to ten years, but most tend to be relatively short. Interest is charged on the total amount of the loan, and is fixed from the outset. A borrower is locked into that rate, even if interest rates fall during the period of the loan.Loans and overdrafts can be an expensive way of borrowing, but they are one of the most popular forms of short-term finance available to sole traders and partnerships.
Credit cards. Visa, Access, American Express, and Diners Club are examples of credit card companies. Depending on the credit card, users can pay bills and make purchases, and defer payment until up to eight weeks later. Each month, users receive a statement of their transactions. They can then decide whether to pay the balance in full or in part. If payment is made in full, no interest is charged. Interest is charged only on the outstanding balance, but can be quite high.
Hire purchase. This is a popular method of finance, often used by smaller firms to buy plant and machinery. A hire purchase agreement will normally require a firm to pay a deposit on equipment purchased, and then to pay off the balance, with interest, in regular installments over a few months or several years. Hire purchase can be arranged through a bank or, more often, through a finance house. Because finance houses tend to be less selective in granting loans, their rates of interest tend to be higher. The finance house will buy the equipment for the buyer, and will be the legal owner of it until the last payment has been made. If the buyer is unable to pay the agreed installments, the finance house can legally repossess the equipment.
Leasing. Leasing is a way of paying rent for the loan of equipment for a fixed period. At the end of the period, the equipment is returned to its owner. The advantage is that businesses can get expensive equipment such as computer systems without making a large capital outlay. During the period of the lease, maintenance and servicing of equipment are the responsibility of the owner of the equipment rather than the lessee. Once the period of the lease is over, the firm can return the old computer system and lease a more up-to-date version. Over a long period of time, leasing can be more expensive than buying equipment outright. Leasing is, however, an increasingly popular means of obtaining equipment.
Trade credit. Many businesses rely on their creditors as a form of short-term finance. Because most suppliers allow their customers to take somewhere between one and three months to pay for goods supplied, the debtor company can use what is effectively an interest-free loan of up to 90 days to pay other bills. Creditors will often give incentives in the form of cash discounts if payment is made earlier, but by delaying payment, the debtor can use money owed to finance other current assets.
Factoring. Late payment of invoices for goods delivered can cause considerable financial hardship for creditors. Debt factoring involves a specialist company, known as a factor, paying off the unpaid invoices of supplies. It is common for a factoring company to agree to pay 80% of the amount of the invoice on issue, paying the remaining 20% when the debtor settles the invoice with the factor. This provides the creditor with early payment of debts and leaves the chasing-up of payments to the factoring company. The profit of the factoring is the difference between what they have paid to the supplier to settle the invoice and the full amount of the invoice eventually paid by the debtor.
5. What is the Capital Market?
The capital market brings together people and firms who want to borrow a lot of money for long periods of time with those who are willing and able to supply funds on this basis. Borrowers tend to be limited companies seeking to fund large-scale replacement of fixed assets or expansion.
6. Methods of Long-Term Finance
The most common methods of long-term finance used by businesses are:
Mortgages. A commercial mortgage is a long-term loan, typically over 25 years, of up to approximately 80% of the purchase price of a business property. Business owners may also remortgage their existing premises in order to raise finance for use elsewhere in the business. The business premises provide security for the loan, and, in the event of a failure to repay regular installments, the lender can take possession of the property. Mortgages are available from building societies and banks.
Venture capital. Start-up funds for new limited companies are available from specialist venture capital companies. These are commercial organizations specializing in loans to new and risky businesses who might otherwise find it difficult to raise finance. These firms usually lend in return for shares in the ownership of the company (or equity stakes), hoping for an eventual capital gain on the value of their shares, rather than for interest or dividends. Merchant banks also provide venture capital. These are financial institutions specializing in advice and financial assistance to limited companies, for example, to fund business expansion, takeovers of other companies, or management buyouts. The venture capital industry in the UK has grown very quickly, providing a valuable source of finance to small firms and high-risk enterprises.
Loan stocks. These are certificates issued for sale by limited companies, which acknowledge that the bearer has lent a company money and is to be repaid at a specified future date, known as maturity. Government is also able to borrow money by issuing loan stocks for sale to the general public. Loan stocks are sold to raise finance. They offer holders a fixed rate of interest each year until the loan is repaid by the issuing company. If, during the period of the loan, the holder wishes to get their money back, the loan stock can be sold to another person or company. Loan stocks can be in the form of: debentures issued by public limited companies; local government bonds issued by local authorities; gilt-edged securities issued by central government, normally lasting 25 years. A debenture may be secured or unsecured on specific property owned by the company. When debentures are issued, the company agrees to repay the loan with interest on maturity.
7. The Stock Exchange
The capital market is dominated by the Stock Exchange in London. The main function of the Stock Exchange is to provide a market where the owners of loan stocks and shares can sell them to other people and firms who want to buy them. The total market value of all stocks and shares (collectively known as securities) traded on the Stock Exchange is called the market capitalization. The people and organizations that provide companies with capital by buying shares in them are called investors. Most shares traded in the UK are bought by investment trusts, unit trusts, pension funds, and insurance companies. These companies accept people’s savings and use the money to invest in shares and government stocks. Dividends, interest on stocks, and capital gains in the value of shares are passed on, in part, to savers.
8. Raising Share Capital
A share is simply part of a company offered for sale. The price printed on the front of a share certificate is its face value, that is, the price at which it was first sold by the company. Selling shares in the ownership of a company is the usual way of raising money for private and public limited companies. Private limited companies can only sell shares to people connected with the business in some way, such as family, friends, workers, etc. This limits their ability to raise finance through the issue of shares. However, a company that «goes public», i.e. becomes a public limited company, will obtain a listing on the Stock Exchange and be able to advertise and sell a new issue of shares to members of the public from all over the world. The launch of a company’s shares on the Stock Exchange is known as a flotation. Before an organization can offer its shares for sale, the Council of the Stock Exchange will investigate it to ensure it is trustworthy and meets certain standards of practice and size. For example, a company must have authorized share capital of at least £50,000, of which it must sell at least a quarter. People will then buy shares in return for a share of any profits made, called a dividend. Once a share is sold, the company does not have to return the money to the shareholder. If shareholders want their money back, they can sell the shares to somebody else. If they are able to sell them for more than they paid, they will make a capital gain. The Stock Exchange provides a market for so-called «second-hand securities».
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