topic / Accounting and Bookkeeping

Accounting and Bookkeeping

Accounting shows a financial picture of a firm. It is the process of measuring and recording economic information about an organization. Accounting principles are applied in the preparation of financial documents. Bookkeeping is the first step of accounting. It deals with the record-keeping aspect. The analysis of these records is the primary function of accounting. Different financial statements prepared by accountants provide managers with the basis for further planning and control.

The main three parts of accounting are: 1) systematic recording of financial operations; 2) “posting” – transferring information from different journals to one general ledger; 3) the making up of a balance-sheet.

Personal record-keeping uses a single-entry system. All amounts of money (sums) are recorded in a column form. Record-keeping of an organization is based on a double-entry system. A typical account has two sides – the left side is called debit, the right side is called credit.

The most important financial document is the balance-sheet. It reflects the activity of a company, its assets and liabilities. Assets are economic resources of the organization. The assets may be current and long-lived ones. Current assets include cash, goods, stocks and bonds (short-term investments). Long-lived assets include land, buildings, equipment and intangibles – trademarks and patents. The liabilities are the debts of the company. They may be current and non-current. Current ones include salaries, wages, and taxes. Non-current ones are such debts as mortgages and long-term loans.

Another important accounting document is the income statement, which is often known as a profit-and-loss account. It is prepared for a well-defined period of time - three months or one year. It reflects the inflow (revenues) and outflow (expenses) of a company.

Accounting information can be classified into two main categories: financial accounting or public (open) information, and managerial accounting or private (secret) information. The first is more general and distributed outside the company it is for stockholders, creditors, suppliers, customers. The second is more specific and is distributed inside the company it is for department heads, directors, and supervisors of the firm. There are also three specialized areas of accounting: auditing, taxation and accounting in non-business organizations.

Auditing is the examination of financial data of the firm in order to attest to the accuracy of its financial statements.

Income taxation means preparation of income tax form by collecting information and presenting data in a certain order. Both individuals and firms often hire accountants to determine their taxes.

Accounting for non-business organizations differs from accounting in commercial firms. Such organizations as universities, hospitals, schools, churches, charitable institutions do not have a profit orientation. If they earn any money, their profit is usually reinvested in their organizations. As a result, they have differences in record-keeping and in financial statements.

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Answer the questions.

1. What does accounting show?

2. Where are its principles applied?

3. What does book-keeping deal with?

4. Name the main three parts of accounting.

5. Where is a single-entry system and a double-entry system used?

6. What are the main two financial documents?

7. What are the assets and liabilities?

8. How is the income statement prepared?

9. Does the financial accounting differ from the managerial one?

10. What are specialized three areas of accounting?

11. Profit in a non-business organization is usually reinvested, is not it?