Venture Trading

The next stop on our journey is the trading centers of medieval Italy, which developed partly as a result of the Crusades from the 11^th to the 13^th centuries. Literacy is more widespread, Arabic numerals are beginning to be used, an international banking system exists, and the use of credit is prevalent. Banks are also business enterprises operating as service firms, which exist to provide services such as loaning money and performing other services for their customers.

At this time, it is commonplace for a partnership to be formed for a single venture. A partnership is a business owned by two or more individuals who agree to share both the risks and rewards of the business. How would you conduct business in such an environment? First you must find a partner. Then, each of you would contribute goods to be traded with others in foreign countries. Note that your personal belongings are still at risk if the business fails, but now you share this risk with one or more additional individuals.

Next, you hire an agent to ship the goods to the foreign land. When the ship returns from trading, it is loaded with goods of the foreign land, which you and your partner divide between yourselves. How do you determine the proper allocation of the goods acquired? You need a partnership agreement, which stipulates (оговаривать) the rights and obligations of each partner and describes how to divide the goods (partnership profits).

Then, your accounting system provides the information to help you determine your individual share of the goods received by the partnership. The accounting system also reflects the information to hold the trading agent accountable for making a profitable trade. However, your accounting records do not distinguish between business and personal affairs, so at the end of each individual trading venture, it is necessary to terminate (прекращать, завершать) the business and divide the goods between the partners.

Growth of Commerce

Gradually, such one-venture partnerships gave way to business organized with the idea of continuing for more than one venture. In addition, businesses grew in size and became more geographically dispersed as the population became more mobile. At that time accounting systems were required to (1) measure each partner's share of the ongoing business and (2) control business in remote locations.

At this point, we begin to see the development of two very important accounting concepts (theories): (1) the business entity concept and (2) the going concern concept. The business entity concept requires that an accounting system reflects information that identifies and summarizes only those economic events that pertain to a particular entity. That is, business and personal affairs should be kept separate. This concept is particularly important so that each partner can receive the correct share of the business's profit.

The going concern concept assumes that, absent any information to the contrary, the business will continue into the foreseeable future. That is, the business does not terminate at the end of a venture. This concept is important because it allows business records to continue from one venture and time period to another.

Pacioli and the Method of Venice

Next, we venture to 15^th century Venice, Italy, where business is commonly conducted using currency rather than barter (goods). The Arabic number system is widely used, enabling addition and subtraction to be done easily, and illiteracy is greatly reduced, allowing more people to become involved in business. The double-entry accounting system – in which for every “debet dare” there is a “debet habere” − has evolved to the point where it is very much like the present-day system. Debet dare and debet habere are Latin terms meaning “should give” and “should have”, respectively.

The first published work on the double-entry accounting system occurs in 1494 when several chapters concerning accounting are included in a mathematics book written by Luca Pacioli who is commonly called the father of accounting. Pacioli is well respected in Italy and his book is one of the first printed works using movable type (подвижные литеры)

Pacioli does not invent double-entry accounting. Rather, he reports what merchants are commonly doing. This accounting method becomes known as the method of Venice. Because movable type allows easy reproduction, the availability of Pacioli’s work encourages the use of the double-entry system throughout Europe.

At this point, two other important accounting concepts emerge: (1) the monetary unit concept and (2) the periodicity concept. The monetary unit concept asserts that money is the common measurement unit of economic activity. The concept is crucial to accounting because it enables records to be kept based on a common denominator (мера, мерило, знаменатель). For example, rather than recording the number of cows and sheep available for trade, the accounting system reflects the monetary value of the livestock, whether it is lira, pesos, francs, yen, or another designated monetary unit. This makes determination of profit easier because monetary values unlike sheep and cattle or other bartered goods that differ, can be added and subtracted.

The periodicity concept requires that the profits of the business be determined at regular intervals throughout the life of the business. This means the business does not have to end before determining its profits. This concept makes admission of new business partners and departure of old partners easier because business profits are calculated at regular intervals. Thus, partners and potential partners can evaluate the success of the business while the business remains in operation.

Advent of the Corporation

Now we travel to the end of the 18^th century when important economic and institutional changes have taken place. The Industrial Revolution, which started during the latter part of the 18^th century in England, has been responsible for technological developments that eventually lead to changes in the systems of production, marketing, and financing.

Manufacturing firms that produce products from raw materials for sale to consumers are commonplace and distribution systems for these products are increasingly sophisticated. The development and use of machinery allow for mass production of inexpensive goods. Revolutions in transportation such as railroads, create access to new markets for the goods. These changes precipitate the need for additional sources of funds, and financial institutions grow to meet this need. More elaborate accounting systems evolve in order to respond to the requirements of management and owners as well as those of the financial institutions that provide funds to the business.

As business increases it is possible to accumulate wealth and have funds available for investment purposes. Corporations emerge to provide opportunities for investing in businesses without the obligation to oversee the day-to-day business operations. A corporation is a business entity that is legally separate and distinct from its owners. Corporations are attractive business ventures because they provide investors with limited liability, that is, the investors are not personally liable for the debts of the business. If the business fails, the most an investor can lose is the amount of his or her investment.

The advent of the corporation places additional requirements on the accounting system because investors, called shareholders or stockholders, have invested primarily for the return (profit) that the business operations generate. Thus, there is a need for frequent, periodic reporting on the status of the business and its operations since it is nor feasible for investors to personally oversee operations. Therefore, investors must rely on the information generated by the accounting system to hold the managers accountable.

The evolution of the corporation also firmly entrenches (закреплять) the concepts of business entity, going concern, and periodicity because the corporation is legally separate and distinct from its owners. Furthermore, as the number and size of corporations grow, it becomes necessary to standardize external reporting practices – those communicated outside the organization – to ensure that all investors have access to information that allows comparisons among different investment alternatives.

Standardization of Accounting

The last leg of our journey brings us to the 20^th century when two principal events propel standardization of accounting in the United States: (1) the Sixteenth Amendment to the Constitution in 1913 and (2) the stock market crash of 1929.

The Sixteenth Amendment establishes a system of federal income taxation, which requires the periodic determination of income by individuals and businesses. It has a profound effect on the accounting profession because it requires records to support the determination of taxable income, which essentially makes accounting system mandatory (обязательный). It propels standardization in accounting because it limits the number of reporting options to make income determination more uniform (единообразный) across companies. However, it conflicts in many ways with generally accepted accounting practices of the time. For example, it requires businesses to report income on a calendar-year basis, which conflicts with the acceptability of reporting income on a fiscal-year basis in the accounting profession. A fiscal year is a yearlong period that encompasses a natural business cycle and allows a business to prepare its required accounting information during its slowest business period. All businesses must compute and report income for tax purposes; however, only corporations are actually taxed on business income. Sole proprietorship and partnership income is taxed at the individual owner’s level.

The stock market crash of 1929, followed by the Depression of the 1930s, leads to federal regulation of the securities market. Such regulation appears in the form of the Securities and Exchange Act of 1933, which requires that all companies issuing capital stock (акции) to the public must register with the Federal Trade Commission (FTC) and file and disclose to the public certain financial information. The Securities and Exchange Act of 1934 requires the submission of annual financial information for all publicly owned corporations to a new commission called the Securities and Exchange Commission (SEC). This regulation requires full disclosure of financial results so that investors can compare companies. In general, the SEC allows the accounting profession to determine accounting rules for businesses.

2. Using your notes of the text, fulfill the following test.

1) In ancient Babylonia bookkeeping functions were performed by

a. merchants

b. professional bookkeepers

c. scribes

2) To record business transactions Babylonians used

a. accounts

b. clay tablets

c. journals

3) The common form of venture in medieval Italy was

a. a corporation

b. a partnership

c. a single proprietorship

4) With the rise of partnerships as a business form the role of the accounting system was

a. to help divide the goods between the partners

b. to distinguish between business and personal affairs

c. to determine the amount of income taxes

5) The business entity concept meant that

a. business and personal affairs should be kept separate

b. the business will continue into the foreseeable future

c. business should be terminated at the end of the venture

6) The greatest achievement in the evolution of bookkeeping that occurred in the 15^th century was

a. the introduction of the going concern concept

b. the introduction of accounting standards

c. the description and spread of the double-entry system

7) One of the accounting concepts that emerged in the 15^th century was

a. the business entity concept

b. the monetary unit concept

c. the going concern concept

8) The 18^th century development of crucial economic and historical significance was

a. the Agricultural Revolution

b. the Information Revolution

c. the Industrial Revolution

9) The new form of business entity that developed with the rise of manufacturing firms and accumulation of wealth was

a. a single proprietorship

b. a corporation

c. a partnership

10) The standardization of accounting in the USA was started

a. in 1913 with the adoption of the 16^th Amendment to the Constitution

b. in 1933 with the Securities and Exchange Act

c. in 1973 with the Financial and Accounting Standards Board (FASB) establishing accounting standards and principles.

3. Scanning the relevant sections of the reading material again find the answers to the following questions.

1) Why did Babylonian scribes become the earliest bookkeepers?

2) Who was interested in accounting information about business in medieval Italy?

3) Why was it necessary to terminate business at the end of each trading venture in the Middle Ages?

4) What were the prerequisites of the spread of the double-entry system of bookkeeping?

5) What was the main idea of the double-entry system?

6) What is the idea underlying the monetary unit concept?

7) What does the periodicity concept mean and what does it enable to do?

8) What makes a corporation an attractive form of business venture?

9) Why did the requirements placed on accountants rise with the advent of corporations?

10) What were the implications of adopting the 16^th Amendment to the US Constitution and of the stock market crash of 1929 for the accounting profession in the USA?

DEVELOPING VOCABULARY

1. Replace the underlined words with their synonyms, choosing from those provided in the box. Make the necessary form adjustments.

acquire evolve emerge terminate integrity merchant rise annual loan mandatory accountable

1) The periodicity concept means that you don’t have to end your business before determining its profits.

2) We bought shares for £1.75 each.

3) Accounting computer software will continue to develop in response to users’ needs.

4) Banks are willing to lend large amounts of money to people starting up businesses.

5) In Babylonia a trader selling goods was supposed to give the buyer a sealed memorandum quoting prices.

6) Corporations as a form of business organization came into existence as a result of wealth accumulation.

7) Companies publish yearly reports to inform the public about the previous year’s activities.

8) The trading agent is held responsible for making a profitable trade.

9) No one doubted that the president of the company was a man of the highest honesty.

10) The Sixteenth Amendment required obligatory determination of income by individuals and businesses for tax purposes.

11) Our turnover grew last year but our profits dropped.

2. Complete the sentences supplying the missing prepositions.

1) He was involved … the negotiations up until the last minute.

2) As director, she knew she would be accountable … any budget deficit.

3) … the summer season, sales usually go up.

4) The company has operated from this site … five years.

5) Accountants have to prepare their major reports … the end of the fiscal year.

6) We were thinking of hiring another accountant but … the end decided to outsource accounting function.

7) Babylonian scribes were predecessors … the 20^th century accountants.

8) According to the periodicity concept business profits are calculated … regular intervals.

9) In Medieval Italy accounting records did not distinguish … business and personal affairs; so … the end of each individual trading venture, it was necessary to terminate the business and divide the goods … the partners.

10) The corporation is considered to be legally separate and distinct … its owners. 11) People found guilty of reckless driving may be liable … imprisonment or a fine. 12) Limited liability of the corporation means that the investors are not personally liable … the debts of the business.

13) All investors of the corporation need to have access … financial reporting information that allows comparisons among different investment alternatives.

14) The going concern concept assumes that the business will continue … the foreseeable future.

3. Make word partnerships by matching a verb on the left with the most suitable noun as an object on the right. Use the resulting collocations in the sentences of your own.

generate	a signature
oversee	transactions
issue	prices
record	profit
distribute	business
conduct	capital stock (shares)
affix	operations
quote	resources
allocate	goods

DISCOVERING LANGUAGE

Noun Compounds

A noun compound comprises one or more modifying nouns + ahead noun.

oil prices = prices of oil

news report = report of the news

accounting scandals = scandals about companies’ accounting practices Modifying noun as a rule remains in the singular, e.g.

cost reduction = reduction in costs

a service firm = a firm that provides services

but a sales manager = a manager who is responsible for sales

Noun compounds are common in business and science vocabulary as well as in newspaper headlines. Sometimes they can become rather long, e.g. North Sea oil rig accident

1. Find in the text for reading at least 10 noun compounds and translate them into Russian.

2. Rewrite the following phrases as noun compounds; the first has been done for you.

crash in the market that sells stock → stock market crash

the act about securities and exchange

a system of accounting that is based on double entry record keeping

advertisements about jobs

a course in accounting offered at the university

a guide to be a success in exams

new measures to insure health and safety for people

engineers that develop software for accounting

an analyst that specializes in emerging markets

3. Identify Participles II in the following sentences and render them into Russian with a focus on translating Participles.

1) An account of small cash sums received over a few days at the fort of Vindolanda circa 110 CE shows that the fort could compute revenues in cash on a daily basis, perhaps from sales of surplus supplies or goods manufactured in the camp, items dispensed to slaves, as well as commodities bought by individual soldiers.

2) When medieval Europe moved to a monetary economy in the 13th century, merchants depended on bookkeeping to oversee multiple transactions financed by bank loans.

3) One important breakthrough took place around that time: the introduction of double-entry bookkeeping, defined as any bookkeeping system in which there was a debit and credit entry for each transaction.

4) The historical origin of the use of the words ‘debit’ and ‘credit’ in accounting goes back to the days of single-entry bookkeeping in which the chief objective was to keep track of amounts owed by customers (debtors) and amounts owed to creditors.

5) The Messari accounts contain debits and credits journalised in a bilateral form, and contains balances carried forward from the preceding year.

6) Pacioli's "Summa de Arithmetica…” represents the first known printed treatise on bookkeeping widely believed to be the forerunner of modern bookkeeping practice.

FOCUS ON FUNCTION

Defining Things

Academic texts in any subject contain a lot of definitions which as a rule have the following structure:

1	2	3	4
The thing defined	a link verb is/are/was/were	a class or category	specification
A sole proprietorship	is	a business	that is owned by one person.
Luca Pacioli	was	a monk	who was the first to describe the double-entry system.

Give the definitions of the following; consult the text if necessary:

a partnership

a corporation

the going concern concept

the business entity concept

the Industrial Revolution

the Sixteenth Amendment

the Securities and Exchange Commission

LISTENING

You are going to watch a video film “Bookkeeping”.

1. Before you watch check if the following words are familiar to you.

owe v – быть должным

handy a – легкодоступный, «под рукой»

devise v – разрабатывать, изобретать

quill pen n – гусиное перо

occurrence n – эпизод, случай, событие

balance sheet – балансовый отчет, баланс

enter into lists – вписывать, вносить в списки, реестр

entry n – запись

fixed assets – основные средства

current assets – оборотные средства, текущие средства

bill of exchange - вексель

mortgage n – закладная, ипотечная ссуда

receivables n – дебиторская задолженность, ожидаемые поступления

bank balance – остаток счета (в банке), банковское сальдо

cash in hand – кассовая наличность

equity capital – собственный капитал

debit – дебет (левая сторона бухгалтерской книги)

credit – кредит (правая сторона бухгалтерской книги)

gross profit – валовая прибыль

allocation of funds – распределение фондов

2. Watch the program for the first time. As you watch, find out the information necessary to answer the following questions

● What time do basic bookkeeping methods go back to?

● What is the basic method applied in bookkeeping?

● What is the purpose of good bookkeeping?

● What does a housewife do when making purchases at the market?

● What is the main function of the double-entry bookkeeping in commercial accountancy?

2. Watch the video fragment again and take notes of the definitions of the following notions.

stock taking

fixed assets

current assets

double-entry bookkeeping

3. Identify the following statements as either True or False according to the contents of the video episode.

1. The bookkeeping methods have undergone great changes over 500 years.

2) The double-entry bookkeeping was devised in Ancient Egypt.

3) Buildings, machinery, furniture belong to the company’s current assets.

4) Current assets also include the company’s financial assets.

5) In double-entry bookkeeping, for every entry on the one side there must be a balance in entry on the other.

6) Liabilities include mortgages, loans, etc.

7) In the double-entry bookkeeping fixed assets are entered on the one side and current assets on the other side.

4. Explain the essence of the double-entry bookkeeping, illustrate your explanation with the example from the video.

SPEAKING

1. Get ready for a tutorial on the topic “History of Accounting”; prepare a brief account of developments in the accounting area at every stage of business evolution.

2. Characterize three basic legal forms of business.

3. Explain the meaning of the major accounting concepts and establish the succession in which they historically evolved.

WRITING

1. Cloze Test

In the text below about every seventh word is omitted. Supply the missing words which may belong to any part of speech – a noun, a verb, a preposition or an article. Variants are possible.