Topic 3: Bookkeeping as Part of Accounting Cycle
Text
For management of any company to be efficient, extensive and accurate information concerning receipts and payments, assets and liabilities, depreciation of assets and other data about company status are required. Such information being obtained mainly from different records, additional funds and time should be invested in bookkeeping and accounting system.
In general, accounting and bookkeeping mean identifying, measuring, recording economic information about any business, bookkeeping being considered the preliminary stage and part of the larger field of accounting.
The task of a bookkeeper is to ensure the record-keeping aspect of accounting and therefore to provide the data to which accounting principles are applied in the preparation of financial statements. Bookkeeping provides the basic accounting data by systematical recording such day-to-day financial information as income from the sale of products or services, expenses of business operations such as the cost of the goods sold and overhead expenses such as a rent, wages, salaries.
Accounting principles determine which financial events and transactions should be recorded in the bookkeeper's books. The analysis and interpretation of these records is the primary function of accounting. The various financial statements produced by accountants then provide managers with the basis for future financial planning and control, and provide other interested parties (investors, the government) with useful information about the company.
Modern accounting system is considered to be a seven-step cycle. The first three steps fall under the bookkeeping function, such as: 1) the systematic recording of financial transactions; 2) the transferring of the amounts from various journals to general ledger (also called "posting step"); 3) the drawing up of the trial balance.
Record keeping of companies is based on a double-entry system, due to which each transaction is recorded on the basis of its dual impact on the company's financial position. To make a complete bookkeeping record of every transaction in a journal, one should consider interrelated aspects of every transaction, and entries must be made in different accounts to keep the ins (receipts) and outs (payments) balanced.
A typical account is known to have two sides: the items on the left side are called debits, while the items on the right side are credits.
Thus, double-entry bookkeeping doesn't mean that the same transaction is entered twice, it means that the same amount of money is always debited to one account and credited to another account, each record having its own effect on the whole financial structure of the company. Certain accounts are increased with debits and decreased with credits, while other accounts are increased with credits and decreased with debits.
In the second step in the accounting cycle, the amounts from the various journals are usually monthly transferred to the company's general ledger — a procedure called posting. Posting data to the ledgers is followed by listing the balances of all the accounts and calculating whether the sum of all the debit balances agrees with the sum of all the credit balances. This procedure known as the drawing up of a trial balance and those that follow it usually take place at the end of the fiscal year. By making a trial balance, the record-keeping accuracy can be checked. The trial balance having been successfully prepared, the bookkeeping portion of the accounting cycle is completed.
The double-entry system of bookkeeping enables every company to determine at any time the value of each item that is owned, how much of this value belongs to creditors, the total profit and how much belongs to the business clear of debt. Thus, one advantage of the double-entry system is that its information is complete enough to be used as the basis for making business decisions. Another advantage is that errors are readily detected, since the system is based on equations that must always be in balance.
Vocabulary Exercises
I. Find in the text the nouns corresponding to the following verbs and adjectives:to record, to prepare, to pay, to receive, profitable, to disagree, to decide, to determine, to equal, to inform, to invest, to manage, to balance, to interpret, valuable, to analyze, to post, accurate.
II. Find the equivalents:
1.bookkeeping проводка рахунків
2.financial statements подвійний вплив
3.overhead expenses система бух. обліку з подвійним записом
4.trial balance фінансовий рік
5.posting пробний баланс
6.double-entry system дебетувати
7.dual impact грошова готівка
8.to debit to one account фінансова документація
9.fiscal year бухгалтерський облік
10.balance in hand накладні витрати
III. Match the terms with its definitions:
1.debit a. financial obligation.
2.credit b. an amount of money that has been or must be paid.
3.book-keeping c. anything owed by or owed to the company that is
either cash or can be turned into cash.
4.receipts d. a record showing amount of money paid, received
and owed.
5.payments e. money that a business, bank or government
receives as, for example, profit.
6.assets f. an entry in an account recording a sum owed.
7.liabilities g. the fall in value of an asset (such as factory machine-
ry) resulting from age, wear or other circumstances.
8.statement h. process of recording commercial transactions. These
records provide the basis for the preparation of accounts.
9.depreciation of assets i. an entry in an account recording receipts of the assets.
IV. Answer the questions:
1.What kind of information is of great importance for proper company management?
2.What role does bookkeeping play in the accounting cycle?
3.What kind of data is collected by a bookkeeper?
4.What is the difference between bookkeeping and accounting?
5.Who is interested in obtaining accurate accounting information?
6.What is the modern concept of the accounting system?
7.What tasks should a bookkeeper solve at the first three steps of the accounting cycle?
8.What does double-entry bookkeeping mean?
9.What data are recorded in the company’s general ledger?
10.When is the bookkeeping cycle considered to be completed?
11.What are the advantages of the double-entry system?
Topic 4: Auditing
TEXT
The profession of the auditor is considered to be one of the most prestigious and well-paid ones. Auditors are accountants who analyze financial statements of the company and their responsibility is to express an opinion as to whether the accuracy of the company's financial reporting meets the requirements imposed by the government. In general, auditors deal more with operating efficiency and managerial effectiveness than with the accuracy of the accounting data.
Internal auditors are known to be hired by the company in order to help to identify accounting weakness and correct them before significant errors occur. They are often analytically minded people who make flowcharts of accounting systems and evaluate these flowcharts to suggest improvements in division of labour, paper flow, cash control, or other accounting responsibilities.
Independent (external) auditors are employed by a company's board of directors to supply the stockholders with the results of checking the financial statements, in order to prove that annual reports are fair representations of the financial position of the company. Performing his work the auditor should follow several principles and assumptions: the company's accounts must represent a true financial position; generally accepted accounting principles have been used at all accounting steps and accounts can be compared with those of similar companies; the proper amount of information is disclosed in the financial statements. As a result, the auditor's opinion should be based only on facts and it must be objective. Auditors are expected to maintain a relationship of strict independence and professionalism with the companies for whom they work, so they mustn't hold shares in these companies. On the one hand, the auditor should respect the client's confidence, so having access to some private information, the auditor must not spread it outside. On the other hand, he should think of public interests, that is why he must publish his opinion in a standard form and the information is to be clear to the stockholders. But he must always carry out his duties under the law and inform authorities about fraud.
Vocabulary Exercises
I. Match the synonyms:
to do an audit, proportion, to support, manufacture, to provide, share, to estimate, to control, to evaluate, a part, to manage, production, to maintain, to inspect, percentage, to supply.
II. Match the antonyms:
to increase, assets, expends, to save, to purchase, profit, private, debit, to spend, to lend, liabilities, to sell, public, revenues, direct, to borrow, to decrease, loss, indirect, credit.
III. Find the equivalents:
1.auditor a. that part of the capital of a company held by a member.
2.auditing b. a detailed record of all money that a person receives and
spends.
3.accuracy c. a person who carries out an audit.
4.efficiency d. owner of investment holdings in a corporation.
5.stockholder e. the inspection of an organization’s annual accounts.
6.account f. duty
7.responsibility g. production of a desired or satisfactory results.
8.share h. be compiled without error, with exactness and correctness.
IV. Joint the halves:
1. Both profit and non-profit organizations … .
2. Public accountants are those who … .
3. To do an audit, there must be information in a … .
4. The final stage in the audit process is … .
5. The function of accounting is to provide certain types of … .
6. Auditing is the process of recording, classifying and summarizing economic … .
a. serve the general public and collect professional fees for their work.
b. the audit report.
c. quantitative information that management can use to make decisions.
d. verifiable form and some standards by which the auditor can evaluate the information.
e. events in logical manner for the purpose of providing financial information for decision-making.
f. deal with budgets, payrolls, rent payments, and the like.
V. Answer the questions:
1.What is an auditor?
2. What do auditors deal with?
3. What is the difference between internal and external auditors?
4. What main concepts should be considered by the auditor?
5. Why is it necessary to receive an independent auditor’s opinion?
SELF-STUDY WORK
TEXT A
Translate the text in written form. Give the title to the text and to its parts. Define the key-sentence of each paragraph.
Accounting is shaped by the government in which it operates. Just as nations have different histories, values, and political systems, they also have different patterns of financial accounting development. In a number of countries accounting information is directed primarily toward the needs of investors and creditors, and “decision usefulness” is the overriding criterion for judging its quality. Financial accounting in the US and Great Britain has had such an orientation for many years. Moreover, these countries have large and developed stock exchanges and bond markets. As a result, a great deal of information is disclosed in companies’ financial reports; and determining profitability is an objective of financial accounting. However, in other countries, financial accounting has a different focus and performs other roles. For example, in some countries financial accounting is designated primarily to ensure that the proper amount of income tax is collected by the national government. This is the case in most South American countries. In other countries financial accounting is designated to help accomplish macroeconomic policies, such as achieving a predetermined rate of growth in the nation’s economy. Whether income tax and economic policy information are also useful to individual investors and creditors is somewhat beside the point. In such countries as Switzerland, Germany, and Japan the environment is characterized by a few, very large banks that satisfy most of the capital needs of business. Ownership also tends to be concentrated. The information needs are satisfied in a relatively straightforward way – through personal contacts and direct visits. Not surprisingly, the financial reports tend not to contain as much information as US companies’ reports. And since banks are the primary source of capital, financial accounting is oriented toward creditor protection. France and Sweden offer still another orientation of financial accounting. National government plays a strong role in managing the country’s resources. Governments also actively ensure that businesses have adequate capital and will lend or even invest in companies if necessary. Financial accounting is oriented toward decision making by government planners.
TEXT B
Translate the text in written form and answer the questions given below.
Accounting Steps
Each time an item is purchased or sold, a bookkeeper performs the first three steps of cycle and passes on the information to the accountant who carries out the last four steps such as:
1)calculate adjustments;
2)prepare adjusted trial balance;
3)prepare financial statements;
4)close entries.
The most common reasons the accountant should consider preparing adjustments are the following: increased revenue (for example, interest earned but not yet received); any government taxes or employee salaries that have not been yet paid; the value of the office supplies that have not been used (electricity, water, etc); depreciation of the assets; changes in the inventory, etc. As to inventory, it involves the physical measurement, counting and evaluation of items for sale. Inventory evaluation is subject to a variety of accounting methods, since many inventory items cannot be specifically calculated. The grain in a grain elevator, for example, comes from different sources and may have been bought at several prices. An accountant must choose between one of several methods for valuing the grain; each will provide a slightly different value figure.
On the fifth step when the adjustments are calculated, the accountant prepares an adjusted trial balance that combines the original trial balance with the effects of the adjustments. The balances in the accounts are the data that make up the organization’s financial statements as a balances sheet and an income statement. The preparation of these statements is considered to be the main purpose of the sixth step. The final step comprises a series of bookkeeping debits and credits to transfer sums from income statement accounts into owner’s equity accounts, thus into capital. Such transfers reduce to zero the balances of all accounts, therefore the accounting books will be ready for the next accounting period.
Comments:
1.close entries – закрити рахунки
2.inventory – товарно-матеріальні цінності
3. evaluation – оцінка
Answer the questions:
1.Why is it necessary to make adjustments in a balance sheet?
2.What does the term “inventory” mean for an accountant?
3.Is the balance sheet considered to be the final important financial document of the company?
4.What account does closing entries affect?
TEXT C
Write the annotation of the text:
Fiscal Policy
Fiscal policy is an instrument of demand management which is used to influence the level of economic activity in an economy through the control of taxation and government expenditure.
The government can use a number of taxation measures to control aggregate demand or spending: direct taxes on individuals (income tax) and companies (corporation tax) can be increased if spending has to be reduced by increasing indirect taxes: an increase in the VAT on all products or excise duties on particular products such as petrol and cigarettes will result in lower purchasing power.
The government can change its own expenditure to affect spending level as well: a cut in purchases of products or capital investment by the government can reduce total spending in the economy.
If the government is to increase spending, it creates a budget deficit, reducing taxation and increasing its expenditure.
A decrease in government spending and an increase in taxes (a withdrawal from the circular flow of national income) reduce aggregate demand to avoid inflation. By contrast, an increase in government spending and/or decrease in taxes – an injection into the circular flow of national income stimulates aggregate demand and creates additional jobs to avoid unemployment.
In practice, however, the effectiveness of fiscal policy can be reduced by a number of problems. Taxation rate changes, particularly changes in income tax, take time to make; considerable proportion of government expenditure on, for example, schools, roads, hospitals and defense cannot easily be changed without lengthy political lobbying.
TEXT D
Write the annotation of the text:
Depreciation of Assets
In accounting, the process of allocating in a systematic and rational manner the cost of certain items of assets (these are mainly capital assets) over the period of its useful life is known as depreciation. There are three main types of depreciation causing the decrease in value of an asset: 1) physical depreciation, 2) moral depreciation, 3) deterioration.
In the process of production the capital assets gradually wear out, thus after a definite period of time they have to be replaced. This is known as their physical depreciation.
However, capital assets are also subject to moral depreciation, that is after serving for some period of time, they may become obsolete before they are physically worn out and have to be replaced by more up-to-date means of production. Such obsolescence of the assets is caused by technological changes and by the introduction of new and better machinery and methods of production. Obsolescence can also be caused by the commodity produced by the asset, for example, if it goes out of fashion. In the latter case, the degree of obsolescence will depend on the specific nature of the asset. Sometimes assets can be easily adapted to alternative uses while others may have only one application.
Deterioration means a change in value of an asset because of the effects of nature, for example, for machinery this might be rust, for building it is connected with decadence, for farm land it is caused by erosion.
In accounting, it is important to know depreciation of the capital assets as it increases the company’s expenses, so two main methods are used by accountants in calculating periodic depreciation. The most widely used is the straight-line method, in which the rate of depreciation is constant for the entire working life of the capital assets. According to the second method known as accelerated depreciation method, the depreciation rate in the first years of asset use is greater than in the later years.
Comments:
1.deterioration – пошкодження, зношення
2.obsolescence – зношеність
3.decadence – погіршення
4.rust – іржа
5.straight-line method – метод рівномірного обчислення зношення
6.accelerated depreciation method – прискорений метод обчислення
зношення
Для нотаток