Sequences N 0 : introduction

Objectives :
These courses are prepared for students of accounting to deal with different
accounting topics in order to be familiar with the meaning of accountancy terms. It
focuses on providing a basic vocabulary of terms used in accounting to help students
understand the basic concepts.
in these courses you find the following :

1. Business finance
2. Accounting concepts
3. Bookkeeping
4. Balance sheet 1(definitions and concepts)
5. Balance sheet 2 (assets)
6. Balance sheet 3 (liabilities)
7. Accounting assumptions and principles
8. Depreciation and amortization

References
- Books :
- Bill Mascull, Business Vocabulary in Use Advanced, Cambridge University
Press, 2002.
- Bill Mascull,Business Vocabulary in Use, Cambridge University Press, 2002.
- Ian MacKenzie, Professional English in Use Finance, Cambridge University
Press, July 2006.
- S.M.H. Collin, Dictionary ofAccounting, 4th edition,A & C Black Publishers
Ltd 2007.
Sequence N 1 : Business finance

A. Capital
When people want to set up or start a company, they need money, called
capital.
Companies can borrow this money, called a loan, from banks. The loan must
be paid back with interest: the amount paid to borrow the money. Capital can
also come from issuing shares or equities -certificates representing units of
ownership of a company.
The people who invest money in shares are called shareholders and they own
part of the company. The money they provide is known as share capital.
Individuals and financial institutions, called investors, can also lend money to
companies by buying bonds -loans that pay interest and are repaid at a fixed
future date.
Money that is owed -that will have to be paid- to other people or businesses is
a debt. In accounting, Companies debts are usually called liabilities. Long-
term liabilities include bonds; short-term liabilities include debts to suppliers
who provide goods or services on credit -that will be paid for later.
The money that a business uses for everyday expenses or has available for
spending is called working capital or funds.
B. Revenue
All the money coming into a company during a given period is revenue. Revenue
minus the cost of sales and operating expenses, such as rent and salaries, is known as
profit, earnings or net income. The part of its profit that a company pays to
shareholders is a dividend. Companies pay proportion of their profits to the
government as tax, to finance government spending. They also retain, or keep, some
of their earnings for future use.
share capital revenue dividends

capital company profits tax

debt (bonds and loans) expenses retained earnings

C. Financial statements
Companies give information about their financial situation in financial statements.
The balance sheet shows the companys assets -the things it owns; its liabilities -the
money it owes; and its capital. The profit and loss account shows the companys
revenues and expenses during a particular period, such as three months or a year.
 Sequence N 2 : Accounting concepts
A. Accounting

Accounting involves recording summarizing an organizations transactions or

business deals, such as purchases and sales, and reporting them in the form of
financial statements. In many countries, the accounting or accountancy profession
has professional organizations which operate their own training and examination
systems, and make technical and ethical rules: these relate to accepted ways of
doing things.
Bookkeeping is the day-to-day recording of transactions.
Financial accounting includes bookkeeping, and preparing financial statements for
shareholders and creditors (people or organizations who have lent money to a
company).
Management accounting involves the use of the accounting data by managers, for
making plans and decisions.

B. Auditing
Auditing means examining a companys systems of control and the accuracy or
exactness of its records, looking for errors or possible fraud: where the company may
have deliberately given false information.

An internal audit is carried out by a companys own accountants or internal

auditors.
An external audit is done by independentauditors: auditors who are not employees
of the company.

The external audit examines the truth and fairness of financial statements. it tries to
prevent what is called creative accounting, which means recording transactions and
values in a way that produces a false result -usually an artificially high profit.
There is always more than one way of presenting accounts. The accounts of British
companies have to give true and fair view of their financial situation. This means that
the financial statements must give a correct and reasonable picture of the companys
current condition.
C. Laws, rules and standards
In most continental European countries, and in Japan, there are laws relating to
accounting, established by the government. In the US, companies whose stocks are
traded on public stock exchanges have to follow rules set by the Securities and
Exchange Commission (ESC), a government agency. In Britain, the rules, which
called standards, have been established by independent organizations such as the
Accounting Standards Board (ASB), and by the accountancy profession itself.
Companies are expected to apply or use these standards in their annualaccountsin
order to give a true and fair review.
Companies in most English-speaking countries are largely funded by shareholders,
both individual and financial institutions. In these countries, the financial statements
are prepared for shareholders. However, in many continental European countries
businesses are largely funded by banks, so accounting and financial statements are
prepared for creditors and the tax authorities.
Modifi le: lundi 8 aot 2016, 12:57

Sequence N 3 bookkeeping

A. Double-entry bookkeeping
Ahmed Y. works in the accounting department of a trading company:
I began my career as a bookkeeper. Bookkeepers record the companys daily
transactions: sales, purchases, debts, expenses, and so on. Each type of transaction is
recorded in a separate account-the cash account, the liabilities account, and so
on.Double-entry bookkeeping is a system that records two aspects of every
transaction.
Every transaction is both a debit-a deduction- in one account and a corresponding
credit-an addition- in another. For example, if a company buys some raw materials -
the substances and components used to make products- that it will pay for a month
later, it debits its purchases account and credits the suppliers account. If the company
sells an item on credit, it credits the sales account, and debits the customersaccount.
As this means the level of the companys stock -goods ready for sale- is reduced, it
debits the stock account. There is a corresponding increase in its debtors -customers
who owe money for goods or services purchased- and the debtors or accounts payable
account is credited. Each account records debits on the left and credits on the right. If
the bookkeepers do their work correctly, the total debits always equal the total credits
B. Day books and ledgers
For accounts with a large number of transactions, like purchases and sales,
companies often record the transactions in daybooks or journals, and then put a daily
or weekly summary in the main double-entry records.
In Britain, they call the main books of account nominal ledgers. Creditors -suppliers
to whom the company owes money for purchases made on credit- are recorded in
boughtledger. They still use these names, even though these days all the information
is on a computer.
C. Balancing the books
at the end of an accounting period, for example a year, bookkeepers prepare a trial
balance which transfers the debit and credit balances of different accounts onto one
page. As always, the total debits should equal the total credits. The accountants can
then use these balances to prepare the organizations financial statements.
 Sequence N 4 : Balance sheet 1 (definitions and concepts )
A. Assets
An asset is something that has value, or the power to earn money. These include:

Current assets: money in the bank, investments that can easily be turned into
money, money that customers owe, stocks of goods that are going to be sold.
Fixed assets: equipment, machinery, buildings and land.
Intangible assets: things which cannot see. For example, goodwill: a companys
good reputation with existing customers, and brands: established brands have the
power to earn money.

If a company is sold as a going concern, it has value as a profit-making operation, or

one that could make a profit.
B. Depreciation
Joanna Cassidy is head of IT (Information Technology) in a publishing company:
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 we buy new computers, we depreciate the or amortize them 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 an asset at any time is its bookvalue. This isnt necessarily the amount
that it could be sold for that time. For example, land or buildings may be worth more
than shown in the accounts, because they have increased in value. But computers
could only be sold for less than book value.
C. Liabilities
Liabilities are a companys debts to suppliers, lenders, the tax authorities, etc. Debts
that have to be paid within a year are currentliabilities, and those payable in more than
a year are long-term liabilities, for example bank loans.
D. Balance sheet
A companys balancesheet gives a picture of its assets and liabilities at the end of a
particular period, usually 12-month period of its financialyear. This is not necessarily
January to December.
Sequence N 5 : Balance sheet 2 (assets)

D. Fixed and current assets

Mackenzie Inc, New York Balance Sheet 31 December N ($000)
Current assets
Cash and equivalents 3,415
Accounts receivable 8,568
Inventory 5,699
Other current assets 5,562
Total current assets 23,244
Non-current assets
Property, plant and equipment 4,500
Goodwill 950
Long-term investment 6,265
Total non-current assets 11,715
Total assets 34,959

In accounting, assets are generally divided into fixed and current assets. Fixed assets
(or non-current assets) and investments, such as buildings and equipment, will
continue to be used by the business for a long time. Current assets are things that will
probably be used by the business in the near future. They include cash -money
available to spend immediately, debtors -companies or people who owe money they
will have to pay in the near future, and stock.
If a company thinks a debt will not be paid, it has to anticipate the loss -take action in
preparation for the loss happening, according to the conservatism principle. It will
write off, or abundant, the sum as a bad debt, and make provisions by charging a
corresponding amount against profits: that is, deducting the amount of the debt from
the years profits.
E. Valuation
Manufacturing companies generally have a stock of raw materials, work-in-progress -
partially manufactured products- and products ready for sale. There are various ways
of valuing stock or inventory, but generally they are valued at the lower of cost or
market, which means whichever figure is lower: their cost -the purchase price plus the
value of any work done on the items- or the current market price. This is another
example of conservatism: even if the stock is expected to be sold at a profit, you
should not anticipate profits.
F. Tangible and intangible assets
Assets can also be classified as tangible and intangible. Tangible assets are assets with
a physical existence -things you can touch- such as property, plants and equipment.
Tangible assets are generally recorded at their historical cost less accumulated
depreciation charges -the amount of their cost that has already been deducted from
profits. This gives their net book value.
 Intangible assets include brand names -legally protected names for a companys
products, patents -exclusive rights to produce a particular new product for a fixed
period, and trademarks -names or symbols that are put on products and con not be
used by other companies. Networks of contacts, loyal customers, reputation, trained
staff or human capital, and skilled management can also be considered as intangible
assets. Because it is difficult to give an accurate value for any of these things,
companies normally only record tangible assets. For this reason, a going concern
should be worth more on the stock exchange than simply its net worth or net assets:
assets minus liabilities. If a company buys another one above its net worth -because of
its intangible assets- the difference in price is recorded under assets in the balance
sheet as goodwill.

Sequence N 6 : Balance sheet 3 (liabilities)

A. Liabilities
Liabilities are amounts of money that a company owes, and are generally divided into
two types: long-term and current. Long-term liabilities or non-current liabilities are
debts to be paid further into the future, for example long-term bank loans and bonds.
Current liabilities are debts which are expected to be paid within a year of the date of
the balance sheet. They include:

Creditors: they are largely suppliers of goods or services to the business who are
not paid at the time of purchase. (Money owed to suppliers).
Planned dividends.
Deferred taxes: money that will have to be paid as tax in the future, although the
payment does not have to be made now. (Tax payable)
Overdrafts: when the company spends more money than it has in its bank accounts.
Interest payment that have to be paid in the short term.

B. Accrued expenses
Because of the matching principle, under which transactions and other events are
reported in the periods to which they relate and not when cash is received or paid,
balance sheets usually include accrued expenses. These are expenses that have
accumulated or built up during the accounting year but will not be paid until the
following year, after the date of the balance sheet. So accrued expenses are charged
against income -that is deducted from profits, even though the bills have not yet been
 received or the cash paid. Accrued expenses could include taxes and utility bills, for
example electricity and water.
C. Shareholders equity on the balance sheet
Shareholders equity is recorded on the same part of the balance sheet as liabilities,
because it is money belonging to the shareholders and not the company.
Shareholders equity includes:

The original share capital (money from stocks or share issued by the company.
Share premium: money made if the company sells shares to above their face value
the written on them.
Retained earnings: profits from previous years that have not been distributed to
shareholders.
Reserves: funds set aside from share capital and earnings, retained for emergencies
or other future needs.