14. Accounting and bookkeeping

Accounting contains elements of science and art. It is very difficult to find the right definition but we can say that accounting is concerned with the provision of information in financial terms concerning resource allocation, and the preparation of reports in financial terms describing the effects of the past resource allocation decisions.

Examples of resource allocation decisions are:

Should a bank manager lend money to a firm? How much tax should a company pay? Should an investor buy or sell shares?

As you can see, accounting is needed in any society requiring resource allocation and its usefulness is not confined to ‘capitalist’ or ‘mixed’ economies.

An accountant is concerned with the provision and interpretation of financial information. He does not, as an accountant, make decisions. When accountants are directly involved in decision-making, they perform a different function.

Accounting is also concerned with reporting on the effects of the past decisions. Knowledge of the past is relevant only if it can be used to help in making current and future decisions.

Although accounting is at least the second oldest profession in the world, it took tax collectors and merchants thousands of years to find a satisfactory general method of keeping a record of their affairs.

Any business may be pictured as a box. As the business buys and sells goods or services, the value of the contents of the box can decrease or increase, depending on whether the business makes a profit or loss. These changes in the value of contents must be equalled by changes in the value of claims on contents.

Such a list of contents (on the left) balanced by a list of claims (on the right) constitutes a simple balance sheet. Restating the original theory, with the picture of the business as a box, we can write in accounting terms:

ASSETS = EQUITY + LIABILITIES,

where assets are simply what is held in business, equity is the claim of owners, and liabilities are the claims of third parties. Bookkeepers usually deal with taxes and cash flow, which reflects business transactions of a company, such as sales and purchases, receipts and disbursements.

Bookkeepers first record figures in the books or Journals, which are nowadays computer files. At the end of each period bookkeepers put the totals of each book into the Ledger, which shows all the expenditures and the earnings of the company. On the basis of all the totals of each account in the Ledger, bookkeepers prepare a Trial Balance, which is drawn up every quarter.

I s there any difference between bookkeepers and accountants? As we have already said, bookkeepers are specialists who record business transactions and see if both sides of an account book match and accountants are specialists that keep, audit, and inspect the financial records of individuals or businesses and prepare financial and tax reports.

Comprehension:

1. What is accounting concerned with?

2. Give some examples of resource allocation decisions.

3. Do accountants make decisions or do they only provide and interpret financial information?

4. What do bookkeepers usually deal with?

5. What is the main difference between bookkeepers and accountants?

Text organization.

The statements below express the main ideas of the text. Number them so that they are in the same order as the ideas in the text. The first one is given for you:

True-false questions:

Viewpoint:

Do you agree that accountancy is equally important for all types of economic systems?