Accounting and Financial Statements

In accounting, it is always assumed that a business is a going concern, i.e. that it will continue indefinitely into the future, which means that the current market value of its fixed assets is irrelevant, as they are not for sale. Consequently, the most common accounting system is historical cost accounting, which records assets at their original purchase price, minus accumulated depreciation charges. In times of inflation, this understates the value of appreciating assets such as land, but overstates profits as it does not record the replacement cost of plant or stock (GB) or inventory (US). The value of a business's assets under historical cost accounting – purchase price minus depreciation – is known as its net book value. Countries with persistently high inflation often prefer to use current cost or replacement cost accounting, which values assets (and related expenses like depreciation) at the price that would have to be paid to replace them (or to buy a more modern equivalent) today.

Company law specifies that shareholders (GB) or stockholders (US) must be given certain financial information. Companies generally include three financial statements in their annual reports.

The profit and loss account (GB) or income statement (US) shows revenues and their sources and expenses and their sources. It shows profit or loss for the period and usually gives figures for total sales or turnover and costs and overheads. The first figure should obviously be higher than the second, i.e. there should be a profit. Part of the profit goes to the government in taxation, part is usually distributed to shareholders / stakeholders as a dividend, and part is retained by the company.

The balance sheet shows a company's financial situation on a particular date, generally the last day of the financial year. It lists the company's assets, its liabilities, and shareholders' (stockholders') funds or equity. A business’s assets include debtors (GB) or accounts receivable (US) as it is assumed that these will be paid. Liabilities include creditors (GB) or accounts payable (US), as these will have to be paid. Negative items on financial statements, such as creditors, taxation and dividends to be paid, are usually enclosed in brackets.

To help insure that accounting records are correct, record-keepers and accountants use a double-entry method of recordkeeping. This is a technique for entering every transaction twice in such a way that the sum of all of the first entries will equal the sum of all the second entries if the records are complete and accurate. In accordance with the principle of double-entry bookkeeping (that all transactions are entered as a credit in one account and as a debit in another), the basic accounting equation is Assets = Liabilities + Owners' (or Shareholders') Equity. This can be rewritten as Assets – Liabilities = Owners' Equity or Net Assets. This includes share capital (money received from the issue of shares), share premium (GB) or paid-in surplus (US) (any money realized by selling shares at above their nominal value), and the company’s reserves, including the year’s retained profits. Shareholders’ equity or net assets are generally less than a company’s market capitalization (the total value of its shares at any given moment, i.e. the number of shares times their market price), because net assets do not record items such as goodwill.

The third financial statement has various names, including the source of an application of funds, and the statement of changes in financial position. It is also calleda funds statement or cash flow statement. This shows the flow of cash in and out of the business between balance sheet dates. Sources of funds include trading profits, depreciation, sales of assets, borrowing, and the issuing of shares.

Applications of funds include purchases of fixed or financial assets, payments of dividends, repayment of loans, and – in a bad year – trading losses.

Note: .a going concern – дело на полном ходу; доходное предприятие

Ex. 1. Match up the definitions with the words below:

1. a company’s owners;

2. all the money received by a company during a given period;

3. all the money that a company will have to pay to someone else in the future, including taxes, debts, and interest and mortgage payments;

4. the amount of business done by a company over a year;

5. anything owned by a business (cash investments, buildings, machines, and so on);

6. the reduction in value of a fixed asset during the years it is in use (charged against profits);

7. sums of money owed by customers for goods and services purchased on credit;

8. sums of money owed to suppliers for purchases made on credit;

9. (the value of) raw materials, work in progress, and finished products stored ready for sale;

10. the various expenses of operating a business that cannot be charged to any one product, process or department.

______________________________________________________________ Assets; depreciation; liabilities; turnover; shareholders/stockholders; creditors (GB) or accounts payable (US); debtors (GB) or accounts receivable(US); overheads (GB) or overhead (US); revenue or earnings or income; stock (GB) or inventory (US).

Ex. 2. Complete the sentences using the information from the text.

1. There are two types of accounting systems. They are....

2. Historical cost accounting records assets ….

3. Current cost accounting values assets….

4. There are three types of financial statements. They are ….

5. The balance sheet lists ….

6. The main accounting equation is ….

7. The double entry bookkeeping is used to ensure that ….

8. The profit and loss account (GB) or income statement (US) shows.....

9. The cash flow statement shows....

Ex. 3. Speak on:

1. The difference between historical cost accounting and current cost accounting.

2. The main business statements and their components.

Text 3

Before reading, take a few minutes to preview the text for a general overview of its main ideas. After reading the text get ready to speak on:

– general classification of accountants and their functions;

– ethical behaviour of accountants.