TEXT 1
What іs accounting?
The study of accounting begins with the understanding of the way in which accountants see the business enterprise. Accountants frequently refer to a business organization as an accounting entity or a business entity. A business entity is any business organization such as a hardware store or grocery store that exists as an economic unit. As an economic unit, the business enterprise acquires, organizes and transforms factors of production in its activity of producing goods and services. This activity may be presented as the following.
the input factors (land,
buildings, equipment, material, labour)
are combined and transferred into
an output flow of goods and services
The accounting interpretation is an abstraction of the reality portrayed above. The business enterprise is viewed as a system of monetary flow, instead of a system of physical flows. In accounting, business activities are associated with transactions and, indeed, are limited to transactions. Thus, unless there is a transaction there is no observable business activity.
A transaction occurs whenever the firm enters into a legal contract for the acquisition of means of production or the sale of goods and services. Business activities which do not lead to transactions remain unrecognized in accounting. Transactions involving the acquisition of factors of production lead either to an outflow of money immediately or an obligation to pay money at a later date. Transactions by which the firm sells goods or services lead to an inflow of money or the right to receive money at a future date. The accounting interpretation of business activities leads to further analysis of these transactions.
First, transactions between the firm and its markets – both its supply markets and its selling markets – are defined as “external transactions”. The totality of “external transactions” forms the subject matter of financial accounting. General purpose of financial statements (reports) is to provide most of the information needed by external users of financial accounting. These financial statements are formal reports providing information on a business entity’s financial position (solvency), cash inflows and outflows, and the results of operations (profitability). Financial accounting information is historical in nature, reporting on what has happened in the past. Hence, the external users rely on relevant and reliable financial statements to make present decisions about future events.
Second, transactions within the firm, consisting of the exchanges which occur between the various departments are defined as “internal transactions”. The totality of “internal transactions” forms the subject matter of cost or managerial accounting. Managerial accounting information provides special information for the managers of a business entity. The kind of information used by managers may range from very broad, long-range planning data to detailed explanation of why actual costs varied from costs estimates. The purpose of managerial accounting is to generate information that a manager can use to make sound internal decisions.
TEXT 2
THE DEVELOPMENT, PURPOSE AND FUNCTION OF ACCOUNTING
The maіn objectives of accounting can be stated as follows:
To understand the principles of recording financial transactions in the ledger system.
To recognize the need for several ledgers as the business expands.
To be aware of the source documents for financial information (for example, invoices, credit notes, statements) for entry to the day books and ledgers.
To recognize the need of the cash book for cash transactions.
To prepare a bank reconciliation statement to cross-check the cash book with the bank statements.
To prepare a petty cash book for minor cash payments.
To be aware of the importance of the computer for the recording of financial information.
By keeping records of accounts it is possible to know more accurately and efficiently the state of affairs of a business. It is essential to know the exact balances of accounts because when the time comes to, say, pay a creditor or collect money from a debtor, accurate figures must be available to ensure the right amount is paid at the right time.
In a small business of a sole-trader or partnership, the keeping of formalized accounts may be absent. Financial record-keeping may be restricted to the basic and simple: for example, a book for receipts and payments of money (cash book); the processing of documents like the invoice and credit note relating to sales and purchases and the filing of all bills relating to the business.
In larger business enterprises, the paper work expands as the business expands and becomes more complex. The financial accounts of the enterprise must be prepared in a more formalized way. Accurate records must be kept in order to provide the business with day-to-day information. Relevant information can then be extracted from the records and passed on to those persons who need to use it. Suppliers' accounts can then be paid at the right time and customers’ can be chased up if their accounts are overdue.
One of the most important functions of accounting is to summarize financial information periodically in order to prepare profit and loss reports and balance sheets for owners and management and other interested parties such as the Inland Revenue. From these records, the performance of the business can be evaluated, giving those interested parties vital information on which to base their decisions.
In this section, the ledger is the key to the recording process. It is based on the principle of double-entry which simply means that each transaction has a dual-aspect and each aspect must be recorded in an account in the ledger.
The recording of accounts in the ledger system enables the business to be better organised and controlled.
Large businesses have several ledgers for the purpose of organising their accounts more efficiently. Sales ledgers are used to record debtors only, purchase (bought) ledgers for creditors only, cash ledgers for cash transactions, and a general ledger for other groups of accounts. In this way, accounting serves the needs of the organisation, providing a framework for the collection and recording of financial data.
TEXT 3
THE ROLE OF THE ACCOUNTANT
The accountant's work is often varied and interesting, as well as far reaching. Many people think they have a boring job to do, recording figures all day long and checking the work of others.
Accountants do this of course as part of their work but more importantly, they are managers of finance whether they work in private practice or in an organization where accounting is one of a number of departments like sales, marketing, production and personnel. Not only are they concerned with recording financial information, they are also interested in planning and forecasting results. They are financial consultants helping other managers to decide the way ahead, playing a critical part in evaluating business problems and being part of a team which plans, controls and takes decisions in an organization.
Accountants, when qualified, may take on different roles. There are four main accounting qualifications:
The Institute of Chartered Accountants (letters ACA);
The Chartered Association of Certified Accountants (letters ACCA);
The Chartered Institute of Public Finance and Accountancy (letters CIPFA);
The Chartered Institute of Management Accountants (letters АCMA).
An ACA may work in a private practice, providing auditing and financial accounting services, such as preparing annual accounts for clients, and advising on taxation matters. In fact, the large professional firms of accountants engage in a whole range of Financial Consultancy work. Many ACAs work as Senior Accountants in Industry and Commerce. An ACCA may similarly work in a private practice, and is qualified to audit and provide the same services as an ACA. Probably, a higher proportion of ACCA qualified accountants work in industry and commerce than do so in private practice. A CIPFA accountant will mainly work for local authorities, where specialist knowledge of public sector financial accounting is required. An ACMA is not qualified to audit, consequently most ACMAs work in industry and commerce as Management Accountants, concerned with assisting management to assess business performance and cost-effectiveness. However, some ACMAs are employed in private practice as Management Consultants. Much of the Management Accountant's work is involved with assessing future performance.
The role of the accountant either in private practice or working in an organization may be listed as:
The collection and recording of financial data.
The organization of financial data into books of account.
The control of cash resources.
The preparation of financial statements, such as profit and loss account and balance sheet.
The assessment of financial performance through the analysis and evaluation of accounting reports.
The examination of accounts in the role of auditor.
The preparation of budgets to forecast estimation of expenditure against income for planning, control and evaluation of trading performance.
(h) The preparation of costing estimates including marginal costing and
break-even.
(i) The preparation of cash flow to ensure that sufficient cash is available to
meet day-to-day expenditure,
(j) The arrangement and negotiation for raising capital including loans or
overdraft facilities.
(k) The role of financial advisor or consultant.
TEXT 4