Text 8. The accounting equation

Accounting is at least the second oldest equation in the world. But while earlier professionals rapidly got to grips with basic techniques and even introduced refinements, it is remarkable that generations of tax collectors and merchants staggered on for thousands of years before finding a satisfactory general method of keeping a record of their affairs.

The problem of accounting is common sense but the answer is not, in some respects it is still imperfect. It begins with a particular way of looking at a business. A business may be pictured as a box. The box has contents and by virtue of owning the box, the owner has a claim to the value of the contents. Others also may have a claim on the contents, by virtue of having lent money to the business or of having supplied goods or services to the business for which they have not yet been paid. Those are the creditors of the business.

As the business buys and sells goods and services, so the value of the contents of the box will increase or decrease, depending on whether the business makes a profit or a loss. These changes in value of contents must be equaled by changes in value of claims on contents. Specifically the claims of the owners will vary so that the total value of claims is always equal to the value of the contents.

Now we may list the values of the contents of the business box at any time, say down the left side of a piece of paper. On the right side we may list the value of claims on those contents. The claims of third party creditors will be known. The claims of the owners will amount to whatever is necessary to make the total value of claims equal to the total value of contents.

Such a list of contents (on the left) balances by a list of claims (on the right), constitutes a simple balance sheet. A balance sheet is a presentation of the state of affairs of a business in a succinct, systematic and recognizable format.

Restating the original theory, with the picture of the business as a box, we can write:

£ contents = £ claims on contents.

In accounting terms, this becomes

(1) ASSETS = EQUITY + LIABILITIES

Where assets are simply what is held in the business, equity is the claim of the owners, and liabilities are the claims of third parties.

By transferring liabilities to the other side of the equation we may write ASSETS - LIABILITIES = EQUITY or using a technical term

(2) NET ASSETS = EQUITY

Finally we may split equity into the capital originally put into the business and reserves. Reserves represent profits which have been reserved or kept in the business. The equation now becomes

(3) NET ASSETS = CAPITAL + RESERVES

1. 2, 3 above are forms of the fundamental accounting equation.

Exercise 58 . Translate the following sentences into Ukrainian. Put questions to any two of them.

1. Accounting is at least second oldest equation in the worlds.  2. The problem of accounting is common sense, but the answer is not, in some respects it is still imperfect. 3. The problem of accounting begins with a particular way of looking at a business. 4. The basis for the accounting process is the accounting equation which shows the relationship among the firms assets, liabilities and owners equity.         5. Assets are the items of value that a firm owns – cash, inventories, land, equipment, buildings, patents, and the like. 6. Liabilities are the firms debts and obligations – what is owed to others. 7. A number of financial ratios can be computed from the information in two financial statements – the balance sheet and the income statement.

Exercise 59. Using the text match the technical accounting terms on the left with their correct definition on the right.

Accounting term	Definition
1. reserves	a) the things of monetary worth which a company owns.
2. liabilities	b) the value of a company's initial capital.
3. assets	c) profits which have not been paid out.
4. net assets	d) non-owner claims against the company
5. equity	f) owner's claims against the company.
6. capital	g) the company's worth minus its debts to external creditors.

Exercise 60. Look at how the words and phrases in the box below are used in the text and then match them with their correct definitions underneath the box. Try to do this exercise without using a dictionary.

 

got to grips with refinements	specifically
	constitutes
staggered on	succinct format
by virtue of

 

1. continued with difficulty 2. forms 3. to be exact 4. begin to deal with 5. system 6. brief 7. due to 8. improvements 9. artificial

 

Exercise 61.  Use the table below to make sentences, which are true according to the text. Match each sentence part on the left with its appropriate part on the right.

1. Whatever the total worth of a business 2. As the worth of a business increases or decreases 3. If someone is an unpaid supplier of money, goods or services to a business 4. If we imagine a business as a box of contents

a) the owner of that business has a part right to those contents’ value. b) the owner's and the creditor’s. rights to that amount will equal it. c) the owner's and creditor’s rights to the total value also do. d) there is a right to some of its contents.

 

Exercise 6 2 . Say whether the following statements are true or false according to the text

1. Other professions progressed at a similar rate to accounting. 2. Accounting's problem for a long time was how to record monetary transactions. 3. The problem which accountants faced was an artificial one. 4. Accounting method of keeping financial records is based on common sense.

Exercise 63. Read the text divide it into paragraphs and give the title to it. Make up a summary of essential facts.

Text 9

Historians consider 14th-century Italian merchants to have developed the practice of double-entry bookkeeping, which is used by modern accounting. The method was invented when investors looked for a way of recording the financial data of ventures that lasted for months or even years (for example, the commissioning of a merchant fleet), and in which many investors had shares. According to the Italian system the balance sheet consisted of two sections, one listing assets and the results of sales, purchases, investment in assets, while the other recording names and shares of shareholders and other liabilities incurred. If the venture were successful, the owners could receive their portion of the profit. Although the earliest double-entry books appeared in 1340 in Genoa, the first published book on bookkeeping was written in 1494 by a Franciscan monk Luca Pacioli. This work summarized the main accounting principles that have remained unchanged up to date. Additional accounting works were published during the 16th century in Italian, German, Dutch, French and English, these works including early formulations of the  concepts of assets, liabilities, and income. The Industrial Revolution and the development of trade required more complex financing system and further improvement of accounting techniques that had to be adequate to handle mechanization, factory-manufacturing operations, and the mass production of goods and services. The profession of accountant existed by the 18th cen­tury, and by the late 19th century the regulations controlling the accountant's activities were developed both in Europe and America. In the mid-19th cen­tury with the establishment of large public corporations owned by absentee stockholders and administered by professional managers, the public demand for accurate financial reports and for government regulations greatly increased. The rise of the multinational corporations also resulted in increased account­ing responsibilities, for it required exchange of foreign currency, keeping re­ports under different legal conditions, the adjustment of ownership and in­come reports in order to make less payments within various systems of taxes, tariffs and other government controls. Since the mid-20th century bookkeep­ing as an essential part of all accounting systems has been carried out by ma­chines. The introduction of computers broadened the scope of bookkeeping and the term "data processing" now often associates with bookkeeping.

 

Exercise 64 . Translate into Ukrainian.

Double-entry bookkeeping, a way of recording the financial data of ventures, to receive the portion of the profit, recording names and shares of shareholders and other liabilities incurred, to summarize the main accounting principles, the regulations controlling the accountant’s activities, the further improvement of accounting techniques, the public demand for accurate financial reports, the public demand for government regulations, keeping reports under different legal conditions, to make less payments within various systems of taxes, tariffs and other government controls, to broaden the scope of bookkeeping.

Exercise 65 . Complete the following sentences using text 8.

1.  The profession of accountant is believed ... . 2. The Italian merchants are said ... . 3. The record-keeping method was ... . 4. A Franciscan monk is likely ... . 5. The first concepts of assets and liabilities were ... .  6. The role of the accounting system has greatly increased due to ... . 8.  Computers are sure ... .

 

Exercise 66 . Name the people or professions that correspond to the following definitions.

1 .A person or a company that offers the same or better goods and services as another one and therefore tries to attract more buyers.              2. A person who records the financial transactions. 3. A professionally trained person whose job is to keep and check the financial records of   a company or to advise people on income, spending, tax, etc.  4. A person possessing property. 5. A person who puts money into business, real estate, stocks, bonds for the purpose of obtaining an income. 6. A person hired by another person or by a business firm to work for wages or salary. 7. A person or sometimes a company that hires one or more persons to work for wages or salary. 8. The one who obtains dividends from the company. 9. A person who officially examines the accounts of             a company, a person who performs an audit. 10. A person or organization that promotes and sells products and services in a certain market.

Exercise 67 . Use the verb in the appropriate form. Pay attention to the type of conditional sentences.

1. Consumers will use the new software unless it (to be) too expensive. 2. Unless current assets exceed liabilities, the company probably (to dissolve) due to its debts. 3. If a worker were fired for poor work effort, he (cannot) (to obtain) a good wage elsewhere.       4. Computer networks would have been used more widely if they (not to be) a secret technology for a long time. 5. If the owner's equity had increased, the net assets (to increase) to the same extent. 6. If anything owned by a company, for example copyright, (not to have) a physical form, it will be referred to intangible assets. 7. The bookkeeper wouldn't use separate overhead rates for these machines, unless machines (to differ) in power consumption, maintenance costs, depreciation.             8. Provided the company didn't have enough money to begin the recon­struction, it (to be able) (to borrow) it from a bank. 9. More young people would be able to use the Internet for educational purposes if the price for the Internet access (to be) not so high. 10. Provided a country (to run) a trade deficit with the rest of the world, the country as a whole would have had to sell off some assets to foreigners to pay for this deficit.

 

Exercise 68. Learn the following words and word combinations.

auditing	– аудит, проведення ревізії
audit	– аналіз господарської діяльності, аудит, аудиторська перевірка, перевірка фінансових операцій, ревізія
framework	– основа (основи), структура, рамки
underlying	– основний , який лежить в основі
disclosure	– розкриття, відкриття, виявлення
evidence	– доказ, дані, факти
footnote	– примітка, виноска
a priori assumptions	– попередні припущення
evidential matter	– доказовий, оснований на очевидних фактах
sampling	– вибірковий метод, вибірковий контроль, вибіркове дослідження
financial accounting	– фінансова звітність
personnel	– персонал, штат
in operation	– в дії
integrity	– чесність, цілісність
firsthand	– особистий
jeopardize	– наражати на небезпеку, ставити під загрозу
facilities	– обладнання, будівлі, виробничі потужності
inquiries	– довідки, дослідження, опитування
novel	– новий, невідомий
scope	– масштаб, простір, компетенція
lease	– здавати в оренду
operate	– керувати, управляти
tax	– податок
insurance	– страхування
gross sale	– валовий продаж
a graduated	– такий, що постійно змінюється
catering services	– послуги громадського харчування
receipts	– платежі грошові надходження
billing	– виручка, виписування рахунку
schedule	– розписувати, призначати
comprehensively	– вичерпно, всебічно
corroborating	– підтверджуюча, підкріплююча
retrace	– відтворити в пам’яті, просліджувати
reconcile	– узгоджувати
compilation	– компіляція, компілювання, збирання (даних)
ratio	– коефіцієнт, пропорція, відношення, відсоток, доля
foregoing	– вищезгаданий
engagement	– домовленість, контракт
to undertake	– розпочати, брати на себе зобов’язання, гарантувати

Exercise 69. Read, translate and give the gist of text 10.

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