VIII. Check your grammar.

State the function of the verbs “should” and “would” and translate the sentences.

1. It would be difficult for us to prepare a balance sheet.

2. Financial information should be used for assessing a firm’s profitability.

3. The accountant stated that the firm’s profit would double in a year.

4. Should the accounts are prepared, you may check their fairness.

5. If the income statement were prepared, it would be checked by an auditor.

6. You should consult your manager, if you have some difficulties.

IX. Using the information from the text

1. Name two internal and two external users of financial information. How do they use it?

2. Explain the difference between profit and profitability.

3. Prove that a firm’s liquidity is more important than its profitability.

Unit VII Steps in the Accounting Cycle

Part I

Grammar: the Gerund

Wordlist

accounting cycle	обліковий цикл	учетный цикл
accounts payable	кредиторська заборгованість	кредиторская задолженность
assemble	збирати	собирать
assign	визначати, закріплювати	определять, закреплять
capture	охоплювати	охватывать
cause	визивати, спричиняти, причина	вызывать, быть причиной
credit (“Cr”)	кредит, кредитова сторона рахунку	кредит, кредитовая сторона счета
cumulative	сукупний, накопичений	совокупный, накопленный
debit (“Dr”)	дебет, дебетова сторона рахунку	дебет, дебетовая сторона счета
effect	дія, вплив	действие, влияние
event	подія (господарчого життя)	событие (хозяйственной жизни)
expense accounts	витратні рахунки	расходные счета
in excess of	понад, більш ніж	сверх, больше чем
involve	включати в себе, передбачати	включать в себя, предполагать
general journal	бухгалтерський журнал	бухгалтерский журнал
general ledger	головна книга бухгалтерського обліку	главная книга бухгалтерского учета
maintain	зберігати, містити	сохранять, содержать
source document	первинний документ	первичный документ
transfer	акт перенесення, записувати, відраховувати	акт перенесения, записывать, отчислять
trial balance	пробний баланс	пробный баланс

I. Read the text and describe the first two steps in the accounting cycle.

The accounting cycle is usually defined as the formal process by which companies record accounting information, transfer it to specific accounts, and assemble it for the preparation of financial statements.

1 Analyze source documents (sales slips, travel records, etc.)

2 Record transactions in journal

3 Transfer (post) journal entries to ledger

4 Take a trial balance

5 Prepare income statement and balance sheet

6 Analyze financial statements

The first two steps in the cycle are called the gen­eral journal and the general ledger. These records are often referred to as the books of the business, a term that has its origin in the past when virtually all journals and ledgers consisted of sheets of paper that were found together in a book format. Although this is not always true today, especially with computerized ac­counting systems, accounting records are still generally referred to as the books of the business.

Accountants must identify and analyze accounting events, and then record them in a way that enables users to determine the cause and effect of each individual event. This is the first step in the cycle.

To capture both the cause and effect of the event, the accounts to be debited and credited are initially recorded (or journalized) in a general journal as illustrated in the Figure Part (a). This journal is a chronological record of accounting events, and includes a place to record the date of the transaction, the account titles to be debited and credited, as well as room for a brief explanation which generally includes a description of the event being journalized and any calculations involved, as well as the initials of the individual who prepared the journal entry. The preparer’s initials are helpful in identifying and assigning responsibility for any errors that may be made in the recording process.

There are two separate columns for the amount of the debit and credit entries.

The Figure Part (a) shows the journal entry to record the purchase of $250 of supplies on account. Accounts to be debited are always listed first, followed by accounts to be credited. Also, although this is not always the case, names of accounts to be debited are usually listed to the left of the names of accounts to be credited, in keeping with the notion that debits belong on the left and credits on the right side of an account. The entry gives a clear and complete picture of the transaction for future reference, but each entry in the journal shows only the effect of the individual transaction. It does not show the resulting balance of the Supplies or Accounts Payable accounts needed for the preparation of reports. That is the role of the general ledger.

The general ledger is the place where all accounts are maintained. If prepared manually, a general ledger usually includes a separate page for each account. In a computerized accounting system, each account might be maintained in a separate data file. Refer to the Figure Part (b), which shows what these accounts might look like.

The general ledger includes a column to record the date of the transaction, a column for an explanation, a reference column, debit and credit columns, and a final column to show the cumulative balance in the account.

The normal balance of any account is a positive balance, and is therefore determined by the type of entry-debit or credit-made to increase that account. For all asset and expense accounts, the normal balance is a debit balance, indicating that cumulative debit entries to that account exceed cumulative credit entries. For all liability, revenue, and owners’ equity accounts, the normal balance is a credit balance, resulting from cumulative credits in excess of total debits. If the balance is negative, it will be shown in brackets.