Accounting and Accountancy

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-Accounting involves recording and summarizing an organization’s transactions or business deals, such as purchases and sales, and reporting them in the form of financial statements.

-Bookkeeping is the day-to-day recording of transactions.

 -Financial accounting: includes bookkeeping and preparing financial statements for shareholders and creditors (people or organizations who have lent money to the company).

 -Management accounting:  involves the use of the accounting data by managers, for making plans and decisions.

 -Auditing:  means examining a company’s 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 company’s own accountants or internal auditors.

 -An external audit: is done by independent auditors (auditors who are not employees of the company).

An 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 result –usually an artificially high profit.

 There is always more than one way of presenting accounts. The accounts of British 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 company’s current condition.

 -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 as the Accounting Standards 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   businesses are largely funded by banks, so accounting and financial statements are prepared for creditors and the tax authorities.

  

 Exercise One :

 this is home work 1 to be done before 11.11.2024

What type of work does each person do, and what is the name of each job?

1). I record all the purchases and sales made by this department.

2). This month, I’m examining the accounts of a large manufacturing company.

3). I analyse the sales figures from the different departments and make decisions about our future activities.

4). I am responsible for preparing our annual balance sheet.

5). When the accounts are complete. I checked before they are presented to the external auditors.

 

key answers:

 1). Bookkeeper

2).Auditor

3). Financial Analyst

4). Accountant

5). Internal Auditor

 Exercise Two:

 this is home work 2 to be done before 11.11.2024

Read the following email on creative accounting, and then say if the statements below are true or false:

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Subject: Creative accounting
From: Rupert Greene r.greene@intep.de
To: Javier Estrada j.estrada@intep.es

Hi Javier,

At our meeting yesterday you asked me to send you some background info on creative accounting, and in particular off-balance-sheet accounting.

Basically, there’s quite a bit of flexibility in the way we can interpret the standards and principles of accounting. For example, we may want to report bigger profits so that we can attract investors on the capital markets. On the other hand, smaller profits may be better so that we pay less tax. The problem is that the line between truthful and misleading representation of figures is sometimes very thin, and this is where people get into trouble.

Off-balance-sheet accounting is seen by some as one type of creative accounting. (People have been arguing about it for years, though!) The key point to remember is that the accounting treatment of legitimate business transactions can vary greatly. For example, many companies are involved in leasing for business reasons, and the question for the accountants is how to present the financial implications of such leases in the accounts. In theory, the idea is that leasing an asset (instead of buying it) allows the company to exclude the liability from its accounts.

Hope this helps – give me a call if you have any more questions.

Best wishes,
Rupert

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1). Creative accounting is sometimes used to try and attract more investors. 

2). Leasing is actually illegal.

3). When a company leases an asset, the accountant does not have to include it in the accounts. 

4). Off-balance-sheet accounting is one way of creative accounting-there are others. 

5). Big profits mean paying less tax.

6). Accountants agree that creative accounting is a good thing. 

7). Accountants are allowed some flexibility in the way they present accounts.

 

 key answers:

1). True

2). False

3). False

4). True

5). False

6). False

7). True