1.

What particular skills and personal qualities do you think an accountant needs?

2.
1.

What do you think the term "creative accounting" means?

In which paragraph can you find the information about the two fundamental concepts

that accountants are guided by?

2.

When liabilities have been deducted from assets, what is the remainder called?

3 . In how many groups is the asset section of the balance sheet divided into?

The nature of accounting

Accounting is the system a business uses to measure its financial performance by recording and
classifying sales, purchases, and other transactions. It also provides ways to present this
information that make it possible to evaluate a company's past performance, present condition,
and future prospects.
In all their work with financial data, accountants are guided by two fundamental concepts: the
accounting equation and double-entry bookkeeping. Both were developed centuries ago but
remain central to the accounting process.
For thousands of years, businesses and governments have kept records of their assets - valuable
things they own, like gold and wheat - and their liabilities - what they owe to others. Wealth
does not consist of assets alone; it is what remains after liabilities have been deducted from
assets. That remainder is called owners' equity:

Assets
Owners' Equity

$100,000
-30.000
$70,000

This simple observation is the basis for the all-important accounting equation:

The company's liabilities are placed before owners' equity in the accounting equation because
creditors have first claim on assets. After liabilities are paid, anything left over belongs to the
owners or, in the case of a corporation, to the shareholders.
To keep the accounting equation in balance, companies use a double entry system that records
every transaction affecting assets, liabilities, or owners' equity. No matter what kinds of
transactions are made, the accounting equation remains in balance if the transactions are
properly recorded. Double-entry bookkeeping requires a two-part, "give and get" entry for
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every transaction.
After a few months, the transactions recorded by a bookkeeper will accumulate, making it
difficult for management to sort out what is going on. To simplify the picture, accountants
prepare financial statements that summarize the transactions. Two of the most important are the
balance sheet and the income statement (US) or profit and loss account (GB).
A balance sheet, also known as a statement of financial position, is a kind of "snapshot" of
where a company is, financially speaking, at one moment in time. It includes all the elements in
the accounting equation, showing the balance between assets on the one hand and owners' equity
on the other. Every company prepares a balance sheet at least once a month, most often at the
end of the calendar year, covering from January 1 to December 31. However, many business
and government bodies use a fiscal year, which may be any 12 consecutive months.
Most often, the asset section of the balance sheet is divided into three types of assets - current,
fixed, and intangible - listed in order of the ease which the assets can be turned into cash.
Current assets include cash and other items (stocks, bonds, amounts due from customers,
services paid for but not yet used...) that will or can become cash within the following year, and
they are always listed first. Fixed assets are not expected to be converted into cash and comprise
property, land and equipment. They have a useful life of more than one year. Intangible assets
include the costs of organizing the business, patents on a process or invention, copyrights on
written material, and trademarks. Least tangible of all but no less valuable is goodwill, which
consists mainly of a company's reputation, especially in its relations with customers.
Liabilities may be current (obligations that will have to be met within a year of the date of the
balance sheet), and long-term (obligations that fall due a year or more after the date of the
balance sheet).
The income statement (profit and loss account) reflects the results of operations over a period
of time. If the balance sheet is a "snapshot", the income statement is a "movie". It summarizes all
revenues (or sales), the amounts that have been or are to be received from customers for goods
and services delivered to them, and all expenses, the costs that have arisen in generating
revenues. It then subtracts expenses from revenues to show the actual profit or loss of a
company, a figure known as net income - profit or the "bottom line".
The other two most important financial reports are cash flow statement and statement of changes
in shareholder equity. The cash flow statement describes how much cash was used in corporate
operating, investment, and financing activities over a period of time. It shows how the company
is paying for its operations and future growth, by detailing the "flow" of cash between the
company and the outside world; positive numbers represent cash flowing in, negative numbers
represent cash flowing out. The statement of changes in shareholder equity reconciles the
difference between the equity at the two different points in time.

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Auditing, a related but separate discipline, has two sub-disciplines: internal and external
auditing. External auditing is the process whereby an independent auditor examines
anorganisation's financial statements and accounting records in order to express an opinion about
the truth and fairness of the statements and the accountant's adherence to Generally Accepted
Accounting Principles (GAAP). Internal auditing is an examination in which management, and
not the external public, is the main beneficiary. It is carried out usually by auditors employed by
the company, but sometimes by external service providers.
The Big 4, sometimes written as the Big Four, is a group of international accountancy and
professional services firms that handles the vast majority of audits for publicly traded companies
as well as many private companies. The members of the Big 4 are PricewaterhouseCoopers,
Deloitte Touche Tohmatsu, Ernst & Young and KPMG.

1.

What is accounting?

2.

Explain the concepts of the accounting equation and double-entry bookkeeping.

3.

What are the three types of assets?

4.

What types of liabilities do you know?

5.

What are the two most important financial statements? What is the difference between
them?

6.

What is net income?

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A. Match the words from the text with their explanations.

1.

2.
3.
4.

purchas

evaluate
prospect
fundam
ental
5.
owe
6.
affectin
g
7.
properly
8.
accumul
ate
9.
sort out
10. fiscal
11. consecu
tive
12. intangib
le
13. subtract
14. reconcil
e
15. benefici
ary
16. adhere

a) financial
b) having an
influence . c)
correctly
d) heap up
e) find out value of smth.
f)smth.. expected or hoped for
g) following continuously
h) buy
i) which cannot be measured
j) be in debt to smbd.
k) of great importance
l) arrange in groups
m) deduct
n) obey
o) balance
p) user