Accounting

Accounting is recording, classifying, summarizing and interpreting financial transactions to provide management and other interested parties with information they need to make correct financial decisions. Accounting process consists of two parts: bookkeeping, that is, mechanical process of recording, classifying and posting financial entries into the ledger, and accounting itself, that is, interpreting of financial data, making financial statements, designing accounting information system within a business and advising management on financial matters. Accounting deals with accounts, that is, financial entries grouped together by common characteristics.

Assets are everything that a business owns. Buildings, equipment, machinery, land are fixed assets; money, cash, accounts receivable are current assets.

Liabilities are obligations, debts of a business, what it owes to creditors, banks, suppliers, investors, customers and so on.

Owner’s equity is the capital which the owner will receive if he sells all assets and pays all his liabilities. Owner’s equity is assets minus liabilities.

Revenues are incoming money or gross income or profit before taxes.

Expenses mean outgoing money including salaries and wages, rent, traveling and entertainment expenses.

The final products of accounting are financial statements: Balance Sheet that shows financial position of a business at a definite point of time, and Income Statement (G.B. - Profit and Loss Account) that shows financial position of a business over a definite period of time: month, quarter, year.

The system of bookkeeping is based on the principle of the double entry, which means that each transaction is entered twice, as a credit in one account and as a debit in another account. If we deposit $ 100 US with a bank, for example, the bank enters a debit for the receiver and a credit for the giver. The former represents an asset to the bank, since it is a sum of money at the bank’s disposal, as well as a liability, since one day it will have to be repaid.

Accounting is done by accountants. Highly qualified accountants (in the USA certified public accountant- CPA, in Great Britain chartered accountant- CA) can perform audit.

Auditing

Auditing is an accounting function that involves the review and evaluation of financial records and financial position of a company. Audits are performed by highly qualified accountants (auditors) ordered by the management of the company or by some state authorities (revision and control). Not so many years ago audits suggested that a company had financial difficulties or some irregularities in the records. At present audit is a normal and regular part of business practice.

There are two types of auditing: internal and independent.

Internal audit is a system of internal control against errors and misappropriations. Many companies employ their own accountants to maintain an internal audit. They continuously review operating procedures and financial records and report to management on the current state of the company’s fiscal affairs. They check the accounting records in regard to completeness and accuracy, making sure that all irregularities are corrected.

Independent auditing is done by certified accountants who are not employees of the organization whose books they examine. Independent auditors review the business’ operating activities; they examine financial statements, the accounting records and other business papers to determine the accuracy and completeness of the records. It is called fairness in the accounting terminology.

The accountant’s judgment or opinion on the fairness of the records is written in a document sent to the client upon completion of the audit. It consists of a letter addressed to the client that includes a scope paragraph (list of documents that he has examined and the standards that have been used for the audit), and the opinion paragraph (the auditor’s conclusions).

Auditors can help the business to set up a reliable accounting system; they can also discover whether non-existent transactions have been entered into the books. Even in a small business mistakes in the books of accounts can lead to a business failure.

Audit and control is a controlling function of some state authorities (e.g. State Treasury, Control and Revision Administration) that involves the review and evaluation of financial records and financial position of the business, as well as managerial skills of the management and financial health of the organization.