Part 1 Unit 6

ACCOUNTING AND BANKRUPTCIES

unit 6

accounting AND BANKRUPTCIES

Section 1 types of accounting and the basic accounting equation lead-in

Accountancy (profession) or accounting (methodology) is the measurement, disclosure or provision of assurance about information that helps managers and other decision makers make resource allocation decisions.

Financial accounting is one branch of accounting and historically has involved processes by which financial information about a business is recorded, classified, summarized, interpreted, and communicated.

Calculating an individual’s or a company’s liability for tax refers to tax accounting.

Managerial accounting involves preparing budgets and other financial reports necessary for management.

Working out the unit costs of products, including materials, labour and all other expenses refers to cost accounting.

Auditing, a related but separate discipline, is the process whereby an independent auditor examines an organization's financial statements in order to express an opinion - that conveys reasonable but not absolute assurance - as to the fairness and adherence to generally accepted accounting principles, in all material respects.

Accounting means keeping financial records, recording income and expenditure, valuing assets and liabilities with the view of creating accurate financial reports that are useful to managers, regulators, and other stakeholders such as shareholders, creditors, or owners.

The day-to-day record-keeping, writing down the details of transactions (debits and credits) involved in this process is known as bookkeeping.

When a company’s accounts are presented in a way that makes performance look better than it really is, the company may be accused of window dressing or creative accounting.

At the heart of modern financial accounting is the double-entry bookkeeping system. This system involves making at least two entries for every transaction: a debit in one account, and a corresponding credit in another account. The sum of all debits should always equal the sum of all credits. This provides an easy way to check for errors. This system was first used in medieval Europe, although claims have been made that the system dates back to Ancient Greece.

The subject of accounting is the calculation of the financial results of an economic entity’s business activity. Accounting can show the managers or owners of a business whether or not the business is operating at a profit, whether or not the business will be able to meet its commitments as they fall due.

In accounting, it is always assumed that a business is a going concern, i.e. that it will continue indefinitely into the future – which means that the current market value of its fixed assets is irrelevant, as they are not for sale. Consequently, the most common accounting system is historical cost accounting, which records assets at their original purchase price, minus accumulated depreciation charges. In times of inflation, this understates the value of appreciating assets such as land, but overstates profits as it does not record the replacement cost of plant or stock.

Assets such as machinery and equipment lose value over time because they wear out, or are no longer up-to-date. This is called depreciation or amortization. For example, when new computers are bought they are depreciated or amortized over a very short period, usually three years, and a charge for this is shown in the financial records: the value of the equipment is written down each year and written off completely at the end.

The value of a business’s assets under historical cost accounting – purchase price minus depreciation or amortization – is known as its net book value.

A company’s financial performance for a period is its results. Company law specifies that shareholders must be given certain financial information. Companies generally include three financial statements in their annual reports. They are: the balance sheet, the profit and loss account, cash-flow statement.