Handout 1 BIP Accounting September 4, 2012

Professional English in Use: Finance by Ian MacKenzie 1

Before reading the handout, discuss these following questions with your study-mates.
1. What three words can you associate with accounting?
2. What is the difference between accounting and accountancy?
3. What kind of job does a bookkeeper does?
4. What is the difference between accounting and auditing?




A. ACCOUNTING
Accounting involves recording and 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 of organizations who have lent money to a company).
Management accounting involves the use of accounting data by managers, for making plans and
decisions.

B. AUDITING
Auditing means examining a companys system 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 independent auditors: 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 resultusually an artificially high profit.
There is always more than one way of presenting accounts. The accounts of companies have to
give a 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 (SEC), a
government agency. In Britain, the rules, which are called standards, have been established by
independent organizations such as the Accounting Standard Board (ASB), and by the accountancy
profession itself. Companies are expected to apply or use these standards in their annual accounts
in order to give a true and fair view.
Companies in most English-speaking countries are largely funded by shareholders, both
individuals and financial institutions. In these countries, the financial statements are prepared for
shareholders. However, in many continental European countries, business are largely funded by
banks, so accounting and financial statements are prepared for creditors and the tax authorities.
Accounting and Accountancy
Handout 1 BIP Accounting September 4, 2012

Exercise 1
What type of work does each person do? Look at part A and B to help you.

1.


2.


3.



4.


5.




Exercise 2
Match the words in column A with column B. Look at part C to help you.

A B
1. In Britain a. Accounting rules are established by a government agency.
2. In most of continental Europe
and Japan
b. Companies are mainly funded by shareholders or stockholders.
3. In the USA c. Accounting rules are set by an independent organization.
4. In the USA and Britain d. The major source of corporate finance is banks.
5. In much of continental Europe e. Accounting rules are set by the government.






A. DOUBLE-ENTRY BOOKKEEPING
Zaheer Younis works in the accounting department of a trading company. Read about him.
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 accountthe 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 debita deductionin one account and a corresponding
creditan additionin another. For example, if a company buys some raw materialsthe substances
and components used to make productsthat 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 customers account. As this means the level of the
companys stockgoods ready for saleis reduced, it debits the stock account. There is a
corresponding increase in its debtorscustomers who owe money for goods or services
purchasedand the debtors or accounts payable account is credited. Each account
records debits on the left and credits on the right. If the bookkeeper does their work correctly, the
total debits always equal the total credits.
I record all the purchases and sales made by this department.
This month, I am examining the accounts of a large manufacturing company.
I analyze the sales figures from the different departments
and make decision about our future activities.
I am responsible for preparing annual balance sheet.
When the accounts are complete, I check them before
they are presented to the external auditors.
Bookkeeping
Handout 1 BIP Accounting September 4, 2012
Professional English in Use: Finance by Ian MacKenzie 3



B. DAY BOOKS AND LEDGERS
For accounts with a large number of transactions, like purchases and sales, companies often record
the transactions in day books 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 as nominal ledgers. Creditorssuppliers to whom the
company owes money for purchase made on creditare recorded in a bought ledger. They still use
these names, even through these days all the information is on a computer.

Note: In Britain, the terms debtors and creditors can refer to people or companies that owe or are
owed money, or the sums of money in an account or balance sheet.

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 the 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.

Exercise 1
Match the words in the box with the definition. Look at part A and B to help you.





1. An amount entered on the left-hand side of an account, recording money paid out
2. A book of accounts
3. Customers who owe money for goods or services not yet paid for
4. An amount entered on the right-hand side of an account, recording a payment received
5. Goods stored ready for sale
6. Suppliers who are owed money for purchases not yet paid for


Exercise 2
Complete the sentences. Look at part A, B, and C to help you.
1. ___________________ shows where the money comes from and where it goes: it is always transferred
from one ___________________ to another. Every event is entered twiceonce as a credit and once as a
___________________.
2. Most businesses record very frequent or numerous transactions in ___________________ or
___________________.
3. The main account books are called ___________________, and the book relating to creditors is called the
___________________.
4. In order to prepare financial statements, companies do a ___________________ which copies all the debit
and credit balances of different accountss onto a single page.



credit ledger debit
creditors stock debtors
Over to You
What qualities does a good bookkeeper need? Would you like to
work as a bookkeeper? Why/why not?