Accounting and Finance

I) The need for finance

The chief aim of firms is to make a profit for their owners or shareholders. But companies
also need finance to pay for running costs, salaries, materials and rent, new premises or
equipment to develop new products, to cover the need for working capital and to provide
cash-flow. This may be obtained from either internal or external sources.

How successful the business is in making a profit depends upon how efficiently the capital
or assets - which are the things owned - are employed. It is possible to get an idea of how
healthy a firm is by examining the financial facts and figures which show how efficiently
the assets are being used.

A balance sheet provides a basic for understanding the financial position of the firm. It
shows where the capital used in the business comes from and what it has been spent on.
It also indicates the financial position of a company at any particular moment in time.

It is basically made up of two lists:

- one showing all sorts of property a company owns, the assets (= Fr.: actif): current assets
such as stocks, and fixed assets such as manufacturing equipment, and

- one which shows who the company is responsible to for various sums of money, i.e.
liabilities (= Fr.: passif): items owed by the firm: current liabilities such as bank loans,
capital and reserves, profits, provisions for restructuring or bad debts, etc. The assets
are placed in order of liquidity, the most liquid, which means the most easily or quickly
turned into cash, being at the bottom. From the lists, we can classify the capital used by
the firm in various ways.

Internal finance

It comes from the company’s revenue, or turnover, which theoretically brings in net profit
after amortization and taxes. Turnover refers to the gross income, or sales, of an
enterprise over the financial year. Turnover can show how active a firm has been in a
given period. In general, the greater the turnover the more business the company is
doing, although this is not always the case. The net profit is then retained in cash reserves
or paid as dividends to shareholders.

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External finance

It comes from outside sources such as through borrowing from banks, issuing shares on
the stock exchange or to private investors such as venture capitalists, government
subsidies…

II) Bookkeeping

It consists in keeping records of all transactions and entries, invoices or bills, payroll, bank
drafts, etc, and also in doing the stock taking. The chief accountant is thus provided with
information for advising the board of directors about financial matters and for preparing
the firms three annual financial statements which give a full picture of the company. They
are presented according to various accounting standards (principles, methods) in Britain
and America.

1) The balance sheet

Please see above

2) The profit and loss account (P&L)

It reflects the operations and performance of the company during the past fiscal year. If
operating costs and other expenses for marketing, R&D, overheads, depreciation and so
on exceed revenue, the balance shows a deficit instead of a profit. It is in deficit or “in the
red”.

3) The source and application of funds

It shows the policy of the company, where its main financial resources, e.g. profits, asset
sales, loans, come from, and how these resources are used: dividends to shareholders,
investment in capital goods, settlement of debts, bonuses to staff, etc. All these accounts
are “consolidated” if they include those of majority-owned subsidiaries.

4) Auditing

Every year, the accounts of joint-stock companies are checked by independent auditors
who then certify that all transactions have been honest and legal (=clean). This sector is
dominated by some giant accounting firms, the largest ones being American or British
often referred to as the Big Four:

 Deloitte
 Ernst and Young
 KPMG
 PricewaterhouseCoopers