UNIT 1: INTRODUCTION TO ACCOUNTING

A. READING

What is accounting? Accounting is the process of identifying, measuring, and interpreting

financial activity. Many people think of accounting as a highly technical field that can be
understood only by professional accountants. Nearly everyone practices accounting in one
form or another almost daily. Whether you are preparing a household budget, balancing
your cheque book, preparing your income tax return, or running a company, you are
working with accounting concepts and information.

Accounting has often been called the “language of business.” Since a language is a means
of social communication, it is logical that a language should reflect changes in our
environment, our lifestyles, and our technology. Also, accounting is a means of social
communication in which changes and improvements are continually being made to
communicate business information more efficiently.

We live in an era of accountability. Although accounting has made its most dramatic
progress in business, the accounting function is vital to every unit in our society. An
individual must account for his or her income and file income tax returns. Often an
individual must supply personal accounting information to buy a car or home, qualify for
a college scholarship, secure a credit card, or obtain a bank loan.

Large corporations are accountable to their shareholders, government agencies, and the
public. The state and local governments and school districts must use accounting to control
their resources and measure their accomplishments. Accounting is equally essential to the
successful operation of a business, a university, a social program, or a city.

In every election, the voters must make decisions at the ballot box on issues involving
accounting concepts; therefore, some knowledge of accounting is needed by all citizens if
they are to act intelligently in meeting the challenges of our society.

The Purpose and Nature of Accounting

The underlying purpose of accounting is to provide financial information about an

economic entity. The economic entity which we shall be concentrating upon is a business
enterprise. Managerial decision-makers need the financial information provided by an
accounting system to help them plan and control the activities of the economic entity.
Financial information is also needed by outsiders - owners, creditors, potential investors,
the government, and the public - who have supplied money to the business or who have

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some other interest in the company that will be served by information about its financial
position and operating results.

A System for Creating Accounting Information

In order to provide valuable financial information about a business enterprise, we need

some means of keeping track of the daily business activities and then summarizing the
results in accounting reports. The accounting system comprises the methods used by a
business to keep records of its financial activities and translate these activities into periodic
accounting reports.

The first function of an accounting system is to create a systematic record of daily business
activity in terms of money. For example, goods and services are purchased and sold, credit
is extended to customers, debts are incurred, and cash is received and paid out. These
transactions are typical of business events which can be expressed in monetary terms and
must be entered into accounting records. The mere expression of intent to buy goods or
services in the future does not represent a transaction. Transaction refers to a completed
action rather than an expected or possible future action.

Of course, not all business events can be measured and described in monetary terms.
Therefore, we do not show in the accounting records the appointment of a new chief
executive, the signing of a labour contract, or the appearance of a new competing business
on the scene.

In addition to compiling a narrative record of events, we classify transactions and events into
related groups or categories. Classification enables us to reduce a mass of detail into compact
and usable forms. For example, grouping all transactions in which cash is received or paid
out is a logical step in developing useful information about the cash position of a business
enterprise.

To organize the accounting information in a proper form, we summarize the classified

information into accounting reports designed to meet the information needs of business
decision-makers.

These three steps we have described – recording, classifying, and summarizing – are the
means of creating accounting information. It is crucial, however, to recognize that the
accounting process is not limited to the function of building information. It also involves
communicating this information to interested parties and interpreting accounting
information related to specific business decisions. For example, you may want to compare
the financial statements of Company A with those of Company B to determine which

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company is the more profitable – which is financially more robust – and which offers the
better chance of future success. You can benefit personally by making this kind of analysis
of a company you are considering working for or investing in.

Users of Accounting Information

Users of accounting information may be divided into two major categories: external users
and internal users. External users are groups of individuals who are not directly concerned
with the entity's day-to-day operations but are indirectly related to it. These users include
owners, lenders, suppliers, potential investors and creditors, employees, tax authorities, etc.
Internal users have all levels of management personnel within an entity responsible for
planning and controlling operations.

Several branches of accounting have evolved to meet the needs of these groups. Two
essential components have been identified: financial accounting and managerial
accounting. Financial accounting systems are primarily designed to provide financial
statements to external users for their decision processes. However, internal users also have
access to the statements and use them in many of their decisions. Managerial accounting
systems are primarily designed to supplement the financial accounting information for
internal users, thus assisting them in reaching certain operating decisions. As businesses
have become more complex, the availability of relevant information provided on a timely
basis has become highly important to both classes of users.

The Distinction between Accounting and Bookkeeping

Persons with little knowledge of accounting may also fail to understand the difference
between accounting and bookkeeping. Bookkeeping means the recording of transactions,
the record-making phase of accounting. The recording of transactions tends to be
mechanical and repetitive; it is only a small part of the accounting field and probably the
most straightforward part. Accounting includes the design of accounting systems,
preparation of financial statements, audits, cost studies, development of forecasts, income
tax work, computer applications to accounting processes, and the analysis and
interpretation of accounting information as an aid to making business decisions. A person
might become a reasonably proficient bookkeeper in a few weeks or months; however, to
become a professional accountant requires several years of study and experience.

The Accounting Profession and the Work of Accountants

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In terms of career opportunities, the field of accounting may be divided into three broad
areas: (1) public accounting, (2) private accounting, and (3) governmental accounting.

Public accounting: Public accountants are independent professional persons comparable

to attorneys or physicians who offer accounting services to clients for a fee. The
requirements regarding the right to practice public accounting vary among countries. The
three primary services rendered by public accountants are auditing, income tax services,
and management advisory services.

Private accounting: In contrast to the accountant in public practice who serves many
clients, an accountant in the private industry is employed by a single enterprise. The chief
accounting officer of a medium-sized or large business is usually called the controller in
recognition of the fact that one of the primary uses of accounting data is to aid in controlling
business operations. They are a part of the top management team charged with running the
business, setting its objectives, and seeing that these objectives are met.

The accountants in a private business must record transactions and prepare periodic
financial statements from accounting records. Within this area of general accounting, a
number of specialized phases of accounting have developed. Among the more important
are the design of accounting systems, cost accounting, financial forecasting, tax
accounting, internal auditing, and managerial accounting.

Government accounting: Government officials rely on financial information to help

direct their agencies' affairs. Many governmental accounting problems are similar to those
applicable to private industry. In other respects, however, accounting for governmental
affairs requires a somewhat different approach because the objective of earning a profit is
absent from public affairs. Universities, hospitals, churches, and other non-for-profit
institutions also follow a pattern of accounting similar to governmental accounting.
Governmental agencies employ accountants to prepare budgets and audit various
governmental departments' accounting records. Every agency of government at every level
must have accountants in order to carry out its responsibilities.

B. VOCABULARY

Find the equivalence of the 15 vocabulary terms in Vietnamese

1. Accounting: the process of identifying, measuring, recording, and communicating

economic transactions.

Brat has also worked as an economist in the Army and for the accounting firm Arthur
Andersen.

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2. Bookkeeping: the recording of all financial transactions undertaken by an individual or
organization.

Bookkeeping, on a scale requisite for all petty transactions, would be an immensely

intricate mechanism.

3. Accounting system: the system designed to record the accounting transactions and
events of a business and account for them in a way that complies with its policies and
procedures. The basic elements of the accounting system are concerned with collecting,
recording, evaluating, and reporting transactions and events.
4. Accountant: one that keeps, audits, and inspects the financial records of individuals or
business concerns and prepares financial and tax reports.
He took along his brother, Roberto, who was the cartel's accountant.
5. Bookkeeper: a person employed to keep the books of account for a business. A
bookkeeper is responsible for ensuring that all transactions are recorded in the correct
daybook, suppliers ledger, customer ledger and general ledger. The bookkeeper brings the
books to the trial balance stage. An accountant may prepare the profit and loss statement
and balance sheet using the trial balance and ledgers prepared by the bookkeeper.

I was fielding sales calls, trying to find passwords and other information to help the
bookkeeper, and going through mounds of papers.
6. Business entity: the unit for which accounting records are maintained and for which
financial statements are prepared.

7. Controller: the top managerial and financial accountant. The controller supervises the
accounting department and assists management in interpreting and utilizing managerial
accounting information.

Anderson- an owner of a mid-sized manufacturing company in Santa Monica has decided

that he needs to hire a corporate controller and is coming up with a job description.

8. Creditors: those to whom an organization or an individual owes money. The balance on

the creditors’ ledger control account is included in the balance sheet.

Both you and the creditor would have been better off with moderate inflation than an
outright breach.
9. Financial accounting: the branch of accounting concerned with classifying, measuring,
and recording the transactions of a business. Financial accounting is primarily concerned
with providing a true and fair view of the activities of a business to parties external to it.

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10. Managerial accounting: the branch of accounting which is mainly concerned with
providing information helpful to managers running a business.

11. Internal users: the whole staff of the company who is in charge of planning,
maintaining, and supervising its financial activity.

12. External users: those groups of individuals who are not directly concerned with the
day-to-day operations of the entity, but who are indirectly related to it (owners, lenders,
suppliers, potential investors and creditors, employees, tax authorities etc.).

13. Governmental accounting: used by government agencies, usually unprofitable

organizations, but which also need to record financial information.

14. Private accountant: an accountant who works in private industry and is employed by
a single enterprise.
15. Public accountant: an independent professional person who offers accounting services
to clients for a fee.

C. DISCUSSION

1. In broad and general terms, what is the purpose of accounting?

2. Why is the knowledge of accounting terms and concepts useful to persons other than
professional accountants?
3. What does the term accounting system mean? What are the main functions of the
accounting system?
4. What are the means of creating accounting information?
5. What does the accounting process involve?
6. What two main groups do users of financial information fall into?
7. What are the main branches of accounting?
8. What are the distinctions between accounting and bookkeeping?
9 What is the principal function of public accountants? What other services are commonly
rendered by public accounting firms?
10. What is the scope of private accounting?
11. What is the purpose of governmental accounting?

D. PRACTICES

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I. Fill in the missing words in the sentences below. You will need to use each word
more than once.

NOTE. Accountancy (noun) is the theory of keeping financial records. Accounting

(noun+ adjective) refers to the activity of keeping financial records. Account (noun) is a
record of money received and spent. An accountant (noun) is a person who keeps and
works with financial records.

account; accounts; accountant; accounting; accountancy.

1. Can you check that the figures have been entered correctly into the bank account?

2. He’s at university studying __________.

3. The management of the company has not yet decided on their ___________ policies.

4. A bookkeeper writes details of financial transactions in the ________.

5. Most people in the profession read __________ magazines and journals in order to stay
informed.

6. She’s been working as an ________ with this firm for several years now.

7. The directors of the company approve the__________ at the end of the ________ year.

8. The chief ____________ has completed the draft __________ for this year.

9. Each branch maintains its own full __________ system.

10. They have opened an __________ for the consignment to Glasgow.

11.__________ is really not an exact science.

12. A business manager needs some ______________ knowledge in order to understand

what he reads in the company ____________.

II. The word account is now used in everyday English to form phrases with different
meanings. Guess the meaning of the phrases in bold in the sentences (1-10) below.
Choose the correct definition (a-j) on the right.

1. How do you account for the sudden fall in the stock value? a) people say

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 2. Agents buy and sell goods on their own accounts. b) report

3. They gave the solicitor a detailed account of the customer’s c) under no

business deals in the last year. circumstances

4. The draft accounts had to be adjusted on account of the d) consider

discovery that a major debtor had gone bankrupt.

5. Raw materials account for 30% of the manufacturing cost. e) explain

6. They are regular customers in this shop and are able to buy on f) big
account. customers

7. On no account should these figures be released before the g) for

board meeting. themselves

8. When making decisions for the future the managers have to h) because of
take this year’s poor performance into account.

9. By all accounts, they will benefit greatly if the deal goes i) on credit
through.

10. The advertising company has won two new accounts in j) represent
South Africa.

III. Match the terms to their definitions.

1. Accountants a) the work or skill of keeping account books or systematic records

of money transactions (distinguished from accounting).

2. Accounting b) the phase of accounting that is concerned with providing

information to managers for use in planning and controlling
operations and in decision-making.

3. Bookkeeping c) persons who are responsible for collecting, recording, and

communicating financial information and the preparation of
analyses for decision-making purposes.

4. A business d) the phase of accounting that is concerned with providing

entity information to the stockholders and others who are outside of an
organization for use in evaluating operations and current financial
condition.

5. Controller e) the theory and system of setting up, maintaining, and auditing the
books of the firm; the art of analyzing the financial position and

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 operating results of a business house from a study of its sales,
purchases, overhead, etc.

6. Financial f) the unit for which accounting records are maintained and for
accounting which financial statements are prepared.

7. Managerial g) an organization’s chief accounting officer, who is responsible for

accounting establishing and maintaining the organization’s accounting system.

IV. Fill in the blanks with the proper words and phrases given below

non-profit organizations; accounting records; accounting information;

owners; accounting training; making decisions;
business decisions; bankruptcy

Managers and owners of both large and small profit-making organizations use ______(1)
to answer important questions. Are profits sufficient? Should selling prices be increased or
decreased? How many workers should be employed? etc.

Persons responsible for non-profit organizations also need accounting information as the
basis for ______(2).______(3), such as churches, social clubs, and city governments must
keep spending within the money available.

Business managers and ______(4) need good financial information to make good business
decisions. Orderly records of a business' financial activities are called ______(5).
Inaccurate accounting records often contribute to business failure and ______ (6). Failure
to understand accounting information can result in poor ______ (7) for either profit or non-
profit businesses and organizations. ______ (8) helps managers and owners make better
business decisions.

V. Fill in each blank with the correct word

1. This is name for buildings machinery, money in the bank and money owned by
customers: _________________
2. The loss of value of the things in number one: _________________
3. Money which is borrowed: _________________
4. The extra money a company or person pays for borrowing money: ________________
5. The total sum of money which is supplied by the owners of a company to set it up:
_________________

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6. Cash or goods which the owner takes from the company for his own private use:
_________________
7. These are bought by people wishing to invest in the company: _________________
8. The extra amount which is paid for a company above the value of its assets:
_________________
9. The purchase of another company: _________________
10. An official examination of the accounts: _________________
11. A financial plan for the future: _________________
12. A statement of the financial position the company: _________________
13. The official books for keeping accounts: _________________
14. A reduction in the price which is offered to customers: _________________
15. This company has supplied goods but has not received any money for them yet:
_________________
16. Goods which has the company has available to sell: _________________
17. Customers who have received goods but not paid for them yet: _________________
18. This is the name of the difference between the credit and debit side of a account:
_________________
19. Companies make this when they sell their goods for more than it costs: ___________
20. Companies make this when they sell their goods for less than it costs: ____________

E. WRITING

Write an essay of 300 words explaining the role of accounting in the business world.

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