| Accounting is keeping financial records, recording | | | | creditors, etc.), the continuity or going-concern |
| income and expenditure, valuing assets and | | | | assumption (the business will continue indefinitely |
| liabilities, and so on. Accountants, unlike | | | | into the future), the unit-of-measure assumption |
| bookkeepers, analyze financial records, and decide | | | | (all transactions and other items to be accounted |
| how to present them. There are several types of | | | | for must be in a single, supposedly stable |
| accounting: | | | | monetary unit), the time-period or accounting |
| -Managerial accounting is preparing budgets and | | | | period assumption (financial data must be |
| other financial reports necessary for management. | | | | reported for particular period, which makes |
| -Cost accounting working out the unit cost of | | | | accrual and deferral necessary), the revenue or |
| products, including materials, labor and all other | | | | realization principle (revenue is realized at the |
| expenses. | | | | moment when goods are sold or when services |
| -Tax accounting calculating an individual’s or a | | | | are rendered). Consequently, the most common |
| company’s liability for tax. | | | | accounting system is historical cost accounting, |
| -Creative accounting uses all available accounting | | | | which records assets at their original purchase |
| procedures and tricks to disguise the true financial | | | | price, minus accumulated depreciation charges. |
| position of a company. | | | | Company law specifies that shareholders must be |
| And bookkeeping is writing down the details of | | | | given certain financial information. Companies |
| transactions (debits and credits). Bookkeepers | | | | generally include three financial statements in their |
| have to record every purchase and sale that a | | | | annual reports. The profit and loss account or |
| business makes, in the order that they take place, | | | | income statement shows revenue and |
| in journals. At a later date, these temporary | | | | expenditure. The balance sheet shows a |
| records are entered in or posted to the relevant | | | | company’s financial situation on a particular |
| account book or ledger. At the end of an | | | | date, generally the last day of the financial year. |
| accounting period, all the relevant totals are | | | | The third financial statement has various names, |
| transferred to the profit and loss account. | | | | including the source and application of funds |
| Double-entry bookkeeping records the dual effect | | | | statements, and the statement of changes in |
| of every transaction – a value both receives | | | | financial position. This shows the flow of cash in |
| and parted with. Payments made or debits are | | | | and out of the business between balance sheet |
| entered of the left-hand (debtors) side of an | | | | dates. Sources of funds include trading profits, |
| account, and payments received or credits on the | | | | depreciation provisions, sales of assets, borrowing, |
| right-hand side. Bookkeepers periodically do a trial | | | | and the issuing of shares. Application of funds |
| balance to test whether both sides of an account | | | | includes purchases of fixed of financial assets, |
| match. | | | | payment of dividends, repayment of loans, and |
| Actually, bookkeeping is only a part of accounting | | | | – in a bad year – trading losses. |
| - the record-making part. And accounting itself | | | | Companies generally include three financial |
| includes also analytic and interpretation part, it | | | | statements in their annual reports. |
| shows the relationship between the financial | | | | The profit and loss account or income statement |
| results and events, which have created them. | | | | shows revenue and expenditure. It usually gives |
| There are three main steps in making records in | | | | figures for total sales or turnover and costs and |
| bookkeeping: | | | | overheads. The first figure should obviously be |
| - Recording every purchase and sale that a | | | | higher than the second, i.e. there should be a |
| business makes | | | | profit. Part of the profit goes to the government |
| - Entering these temporary records in the ledger - | | | | in taxation, part is usually distributed to |
| a book of secondary, final entry, containing | | | | shareholders (stockholders) as a dividend, and part |
| individual accounts. | | | | is retained by the company. |
| - Transferring all the relevant totals to the profit | | | | The Balance Sheet is a document that shows the |
| and loss account. | | | | totals of money received and money paid out by |
| The main principle of bookkeeping is double-entry | | | | a company and the difference between them. |
| principle. It states that each transaction must be | | | | The balance sheet includes two parts: 1. Assets |
| recorded as two separate entries: a value both | | | | and 2. liabilities and share capital. Both parts should |
| received and parted with. Payments made or | | | | always be balanced. |
| debits are entered on the left-hand (debtor) side | | | | The item current assets include cash, marketable |
| of an account, and payments received or credits | | | | securities, accounts receivable and stock-in-trade. |
| on the right-hand (creditor) side. | | | | Thus these assets appear to be working assets. |
| One of the functions of accounting is valuing | | | | Current assets are the assets, which a company |
| assets, which are things of value or earning | | | | can convert quickly into cash, usually stock and |
| power to a firm. Assets can include cash, | | | | accounts receivable falling due within one year. |
| receivables, bank deposits, and trade investments: | | | | Cash includes bills, petty cash fund and money on |
| investments in other companies. Such assets are | | | | deposit. |
| called current assets. Assets including land, plant, | | | | Marketable securities are a short-term investment |
| buildings, and furniture, are called fixed assets. | | | | of surplus or temporary free assets. Normally |
| Assets such as plant and equipment that over | | | | these assets are allocated into commercial |
| time wear out or become outdated are said to | | | | securities or federal bonds. As securities can be |
| depreciate. A charge must be made for this | | | | required at short notice they are to be easily |
| depreciation or amortization in calculating a | | | | realized and be subject to price fluctuations as |
| business’s profitability: the assets are | | | | little as possible. The balance sheet shows their |
| depreciated or amortized by an amount each | | | | nominal cost, their market value is given in |
| year. Also there are intangible assets, which may | | | | brackets. |
| include such things as patents owned by the | | | | Account receivables are amounts owed to a |
| company, and goodwill, the value of the company | | | | business by suppliers of goods and services. |
| as a functioning business or going concern with a | | | | Usually customers are allowed a 30, 60 or 90 |
| client base, experienced management, and other | | | | day’s period of time within which they are to |
| benefits that a start-up may not have. | | | | effect a payment. However. Some customers |
| All the money that a company will have to pay to | | | | are not able to pay owing either to financial |
| someone else in the future, including taxes, debts, | | | | difficulties or contingency. Hence, the amount is to |
| and interest and mortgage payments is called | | | | be reduced for the reserve allowance for bad |
| liabilities. Long-term debts are long-term liabilities. | | | | debt. |
| The ratio of a firm’s debt to equity is its | | | | Stock-in-trade includes raw materials to be used |
| gearing or leverage; a firm with a high proportion | | | | for production and semi-finished goods. The |
| of debt in relation to equity is highly geared or | | | | stock-in-trade value is defined either by its cost |
| highly leveraged. Short-term debts and debts to | | | | or cost market value. The preference is given to |
| suppliers are among its current liabilities. | | | | a lower one. |
| In accordance with the principle of double-entry | | | | Capital assets include property, premises, plant |
| bookkeeping, the basic accounting equation is | | | | and machinery, and equipment. They are not |
| Assets = Liabilities + Owners’ | | | | meant for sale but for the goods production, |
| (Stockholders’) Equity. This can be rewritten | | | | storage and transportation. This category |
| as Assets – Liabilities = Owners’ Equity or | | | | comprises land, buildings, machinery, equipment, |
| Net Assets. This includes share capital (money | | | | furniture and vehicles. Thus, net capital assets |
| received from the issue of shares); share | | | | reflect the volume of investment made into |
| premium or paid-in surplus (any money realized by | | | | property, plant and machinery, and equipment. |
| selling shares at above their nominal value), and | | | | Capital assets lose their value with age and use. |
| the company’s reserves, including the | | | | The real cost of capital assets may gradually lose |
| year’s retained profits. Stockholders’ or | | | | their value as a result of obsolescence of |
| shareholders’ equity or net assets are | | | | machinery. New modern technologies make the |
| generally less than a company’s market | | | | old equipment obsolescent. Thus, depreciation is a |
| capitalization, because net assets do not record | | | | gradual loss in the value of something, such as a |
| items such as goodwill. | | | | vehicle, a machine or any asset that wears out |
| The amount of business done by a company | | | | with use and age. The land cannot be depreciated; |
| over a year is called turnover. The reduction in | | | | its value stays unchanged year after year. |
| value of a fixed asset during the years it is in use | | | | Prepayments and deferred charges include, for |
| (charged against profits) is called depreciation. | | | | instance, insurance against fire prepayment or |
| Debtors or account receivable are the sums of | | | | lease prepayments etc. |
| money owed by customers for goods or | | | | Deferred charges are similar to prepayments. For |
| services purchased on credit. And sums of money | | | | instance, a manufacturer allocates money into |
| owed to suppliers for purchases made on credit | | | | research work, positive results of which and profit |
| are called creditors or accounts payable. The | | | | will be seen many years later. So costs are to be |
| inventory includes the value of raw materials, | | | | discounted within the years to follow. |
| work in progress, and finished products stored | | | | Intangibles like patents, goodwill and trademarks |
| ready for sale. The various expenses of operating | | | | are not physical substances and are differently |
| a business that cannot be charged to any one | | | | evaluated by various companies or may not be |
| product, process or department are called | | | | evaluated at all. |
| overheads. | | | | The third financial statement has various names, |
| There are various possible ways of recording | | | | including the source and application of funds |
| debits and credits, valuing assets and liabilities, | | | | statement, and the statement of changes in |
| calculating profits and losses, etc. But there are | | | | financial position. This shows the flow of cash in |
| about a dozen generally accepted “accounting | | | | and out of the business between balance sheet |
| principles” that accountants must follow in | | | | dates. Sources of funds include trading profits, |
| order to present “a true and fair view” of | | | | depreciation provisions, sales of assets, borrowing, |
| a company’s finances. | | | | and the issuing of shares. Applications of funds |
| The principles are the separate-entity or | | | | include purchases of fixed or financial assets, |
| accounting entity assumption (an enterprise is an | | | | payment of dividends, repayment of loans, and |
| accounting unit separate from its owners, | | | | – in a bad year – trading losses. |