Chapter I accounting as a career. The basic accounting concepts

The chapter describes the purpose and objectives of accounting.

After studying this unit you should be able to:

1. Define terminology related to accounting and bookkeeping.

2. Enumerate the stages of the accounting system.

3. Explain the difference between managerial and financial accounting, external and internal users.

4. Identify the differences in the work tasks of different accounting workers.

5. Understand the generally accepted accounting concepts.

Active vocabulary:

accountability – підзвітність, фінансова відповідальність

assessment – оцінка

caption – заголовок

consistent – послідовний

disclosure – розкриття інформації

going concern – концепція безперервності

interpreting – тлумачення

materiality – суттєвість

objective evidence – об’єктивний доказ

personal belongings – особисті речі

prudence – обачність

receipt – квитанція

relevant information – доречна, актуальна інформація

sales slip – товарний чек

sundry – різне

to keep records – вести бухгалтерський облік

to supplement – доповнювати

transaction – ділова операція.

Text a the field of accounting

What is accounting? Accounting is the process of identifying, measuring, interpreting financial activity. Many people think of accounting as a highly technical field which can be understood only by professional accountants. Actually, nearly everyone practices accounting in one form or another on an almost daily basis. Whether you are preparing a household budget, balancing you cheque book, preparing you income tax return, or running a company, you are working with accounting concepts and accounting information.

Accounting has often been called the “language of business”. Since a language is a means of social communication, it is logical that a language should reflect changes in our environment, our life-styles, and our technology. Accounting, too, is a means of social communication in which changes and improvements are continually being made in order to communicate business information more efficiently.

We live in era of accountability. Although accounting has made its most dramatic progress in the field of business, the accounting function is vital to every unit in our society. An individual must account for his or her income, and must file income tax returns. Often an individual must supply personal accounting information in order to buy a car or home, to qualify for a college scholarship, to secure a credit card, or to obtain a bank loan.

Large corporations are accountable to their shareholders, to government agencies, and to the public. The state and local government, the school districts: all must use accounting as a basis for controlling their resources and measuring their accomplishments. Accounting is equally essential to the successful operation of a business, a university, a social program, or a city.

In every election the voters must make decisions at the ballot box on issues involving accounting concepts; therefore, some knowledge of accounting is needed by all citizens if they are to act intelligently in meeting the challenges of our society.

The Purpose and Nature of Accounting

The underlying purpose of accounting is to provide financial information about an economic entity. The economic entity which we shall be concentrating upon is a business enterprise. The financial information provided by an accounting system is needed by managerial decision makers to help them plan and control the activities of the economic entity. Financial information is also needed by outsiders – owners, creditors, potential investors, the government and the public – who have supplied money to the business or who have some other interest in the business that will be served by information about its financial position and operating results.

A System for Creating Accounting Information

In order to provide useful financial information about a business enterprise, we need some means of keeping track of the daily business activities and then summarizing the results in accounting reports. The method used by a business to keep records of its financial activities and to summarize these activities in periodic accounting reports comprise the accounting system.

The first function of an accounting system is to create a systematic record of the daily business activity, in terms of money. For example goods and services are purchased and sold, credit is extended to customers, debts are incurred, and cash is received and paid out. These transactions are typical of business events which can be expressed in monetary terms, and must be entered in accounting records. The mere expression of an intend to buy goods or services in the future does not represent a transaction. The term transaction refers to a completed action rather than to an expected or possible future action.

Of course, not all business events can be measured and described in monetary terms. Therefore we do not show in the accounting records the appointment of a new chief executive, the signing of a labour contract or the appearance of a new competing business on the scene.

In addition to compiling a narrative record of events as they occur, we classify transactions and events into related groups or categories. Classification enables us to reduce a mass of detail into compact and usable form. For example, grouping all transactions in which cash is received or paid out is a logical step in developing useful information about the cash position of a business enterprise.

To organize the accounting information in a useful form, we summarize the classified information into accounting reports designed to meet the information needs of business decision makers.

These three steps we have described – recording, classifying, and summarizing – are the means of creating accounting information. It is important, however, to recognize that the accounting process is not limited to the function of creating information. It also involves communicating this information to interested parties and interpreting accounting information as it relates to specific business decisions. For example, you may want to compare the financial statements of Company A with those of Company B to determine which company is the more profitable – which is financially stronger – and which offers the better chance of future success. You can benefit personally by making this kind of analysis of a company you are considering to work for or invest in.

Users of Accounting Information

Users of accounting information may be divided into two major categories: external users and internal users. External users are those groups of individuals who are not directly concerned with the day to day operations of the entity, but who are indirectly related to it. These users include: owners, lenders, suppliers, potential investors and creditors, employees, taxing authorities etc. Internal users include all levels of management personnel within an entity who are responsible for the planning and control of operations.

Several branches of accounting have evolved to meet the needs of these groups. Two of the most important branches have been identified as financial accounting and managerial accounting. Financial accounting systems are primarily designed to provide financial statements to external users for their decision processes, although internal users also have access to the statements and use them in many of their decisions. Managerial accounting systems are primarily designed to supplement the financial accounting information for internal users, thus assisting them in reaching certain operating decisions. As businesses have become more complex, the availability of relevant information provided on a timely basis has become highly important to both classes of users.

The Distinction between Accounting and Bookkeeping

Persons with little knowledge of accounting may also fail to understand the difference between accounting and bookkeeping. Bookkeeping means the recording of transactions, the record-making phase of accounting. The recording of transactions tends to be mechanical and repetitive; it is only a small part of the field of accounting and probably the simplest part. Accounting includes the design of accounting systems, preparation of financial statements, audits, cost studies, development of forecasts, income tax work, computer applications to accounting processes, and the analysis and interpretation of accounting information as an aid to making business decisions. A person might become a reasonably proficient bookkeeper in a few weeks or months, however, to become a professional accountant requires several years of study and experience.

The Accounting Profession and the Work of Accountants

In terms of career opportunities, the field of accounting may be divided into three broad areas: (1) public accounting, (2) private accounting, and (3) governmental accounting.

Public accounting. Public accountants are independent professional persons comparable to attorneys or physicians, who offer accounting services to clients for a fee. The specific requirements regarding the right to practice public accounting vary among different countries. The three primary types of services rendered by public accountants are: auditing, income tax services, and management advisory services.

Private accounting. In contrast to the accountant in public practice who serves many clients, an accountant in private industry is employed by a single enterprise. The chief accounting officer of a medium-sized or large business is usually called the controller, in recognition of the fact that one of the primary uses of the accounting data is to aid in controlling business operations. He or she is a part of the top management team charged with the task of running the business, setting its objectives, and seeing that these objectives are met.

The accountants in a private business must record transactions and prepare periodic financial statements from accounting records. Within this area of general accounting, a number of specialized phases of accounting have developed. Among the more important of these are: design of accounting systems, cost accounting, financial forecasting, tax accounting, internal auditing, managerial accounting.

Government accounting. Government officials rely on financial information to help them direct the affairs of their agencies. Many governmental accounting problems are similar to those applicable to private industry. In other respects, however, accounting for governmental affairs requires a somewhat different approach because the objective of earning a profit is absent from public affairs. Universities, hospitals, churches, and other non-for-profit institutions also follow a pattern of accounting that is similar to governmental accounting. Governmental agencies employ accountants to prepare budgets and to audit the accounting records of various governmental departments. Every agency of government at every level must have accountants in order to carry out its responsibilities.

Key terms.

Accounting – бухгалтерський облік – the process of identifying, measuring, recording, and communicating economic transactions.

Bookkeeping – бухгалтерія, рахівництво – the recording of all financial transactions undertaken by an individual or organization.

Accounting system – система бухгалтерського обліку – the system designed to record the accounting transactions and events of a business and account for them in a way that complies with its policies and procedures. The basic elements of the accounting system are concerned with the collecting, recording, evaluating, and reporting transactions and events.

Accountant – бухгалтер-експерт, кваліфікований бухгалтер – one that keeps, audits, and inspects the financial records of individuals or business concerns and prepares financial and tax reports.

Bookkeeper – бухгалтер – a person employed to keep the books of account for a business. A bookkeeper is responsible for ensuring that all transactions are recorded in the correct daybook, suppliers ledger, customer ledger and general ledger. The bookkeeper brings the books to the trial balance stage. An accountant may prepare the profit and loss statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.

Business entity – суб’єкт господарювання – the unit for which accounting records are maintained and for which financial statements are prepared.

Controller – головний бухгалтер – the top managerial and financial accountant. The controller supervises the accounting department and assists management in interpreting and utilizing managerial accounting information.

Creditors – кредитори – those to whom an organization or an individual owes money. The balance on the creditors’ ledger control account is included in the balance sheet.

Financial accounting – фінансовий облік – the branch of accounting concerned with classifying, measuring, and recording the transactions of a business. Financial accounting is primarily concerned with providing a true and fair view of the activities of a business to parties external to it.

Managerial accounting – управлінський облік – the branch of accounting which is mainly concerned with providing information helpful to managers running a business.

Internal users – внутрішні користувачі – the whole staff of the company who is in charge of planning, maintaining, and supervising its financial activity.

External users– зовнішні користувачі – those groups of individuals who are not directly concerned with the day to day operations of the entity, but who are indirectly related to it (owners, lenders, suppliers, potential investors and creditors, employees, taxing authorities etc.).

Governmental accounting – облік у державних установах – used by government agencies, usually unprofitable organizations, but which also need to record financial information.

Private accountant – штатний бухгалтер – an accountant who works in private industry and is employed by a single enterprise.

Public accountant – незалежний бухгалтер – an independent professional person who offers accounting services to clients for a fee.