All businesses need to maintain financial records in order to find out if they are making a profit. These records exist in several forms. In daily business operations recordings of business transactions are first made in a journal. This journal is sometimes called the book of original entry. In the journal, bookkeepers record sales, uses of raw materials, and purchases. Periodically, bookkeepers transfer figures from the journal to ledgers. This activity is known as posting. The ledger is a book containing all the accounts of a company. An account is a financial record which contains information about a group of similar transactions. For example, all sales activities are recorded in one account. Another account may be a record of all the costs of raw materials.
Once, bookkeeping served as a good method of determining whether or not a company was making profits and whether or not it owed any taxes. Small business owners could keep their own books and make business decisions based on the information found there. Nowadays, a more sophisticated system of accounting is needed. The design, maintenance, and interpretation of the information recorded in accounts is referred to as accounting. Accountants use the information in accounts to construct financial statements. These statements are analyzed by management and used as a basis for business decisions such as allocation of financial resources, development of new products, and expansion of operations. The most important of these financial statements are the balance sheet and the statement of income and expenses. These statements are also used for determining income tax liabilities. Income-expense statements for different types of businesses vary greatly. This lesson will discuss only the balance sheet, which is more standard in form.
The balance sheet is a financial statement which indicates the condition of a company on a specific date. It is called a balance sheet because it expresses the basic accounting formula: Assets = Liabilities + Owners’ Equity. (Owners’ equity is sometimes referred to as net worth.)The left side of the balance sheet itemizesthe firm’s assets. Assets are anything of value to a company. On a balance sheet the value is always expressed in terms of money. Companies have different types of assets. They are usually divided into two groups: current assets and fixed assets.
Current assets are either cash or items which will be turned into cash during the current business period, such as merchandise to be sold and payments to be received. In addition to cash, inventories and receivables, companies sometimes have stocks and bonds. These are referred to as securities. All of these assets, such as cash or those readily turned into cash, are known as liquid assets. If a company needs to have more cash for one reason or another, it can liquidatesome of its stocks and bonds. On the other hand, merchandise which is not selling quickly because there is not much demand is not very liquid, even though it is considered as current assets.
Fixed assets are those that will be kept and used for a long time. Fixed assets are usually itemized according to their use to the firm. New machinery and production equipment are valued at their cost. As the equipment is used, its value decreases. This decrease in value is called depreciation. Used equipment is therefore carried on the books at original cost less depreciation. Depreciation is usually calculated on a yearly basis by dividing the total cost of the equipment by a number of years of useful life. For example, a taxicab may cost $12,000 when new. The taxicab owner may use it for three years and then he will have to purchase a new one. The depreciation on the taxicab is $4,000 per year. Therefore, after one year the value of the taxicab on the balance sheet would be $12,000 - $4,000 = $8,000. After two years it would be $12,000 - $8,000 = $4,000. There are various formulae and methods used for calculating depreciation. The depreciation schedule may be part of the income tax laws of a country.
Other fixed assets are furniture and fixtures. Fixtures refer to equipment that is attached to the building. There are light fixtures and plumbing fixtures. Fixtures would also include items such as shelves and air-conditioning and heating equipment. Buildings are another fixed assets. On the balance sheet the value of fixtures and buildings would also indicate accumulated depreciation. Land is also a fixed asset, but its value does not decline, and so it shows no depreciation.
The opposite side of the balance sheet shows the liabilities. These are amounts which the company owes. Companies owe money to banks who supply credit to employees whom they haven’t yet paid, to governments for taxes, and to other companies who have sold them goods which they haven’t yet paid for. Liabilities, like assets, are divided into two groups. Current liabilities are debts which must be paid during the current business cycle. They would include accounts payable, taxes payable, accrued wages payable, and interest on borrowed money. Companies also have long term liabilities. These are debts which do not have to be repaid for perhaps ten, twenty, or thirty years. Companies usually have to pay interest on long term debts. The debts may be in the form of bonds, which are securities sold to banks or other investors, or a mortgage, which is money borrowed from banks for the purpose of purchasing property or equipment. The payment of bonds is usually guaranteed by the reputation of the company. Mortgages, on the other hand, are guaranteed by the value of the mortgage property.
After a company subtracts its debts from its assets, the figure arrived at is the net worth of the company or its owners’ equity. Depending upon the type of company, there are different types of owners. A corporation is owned by stockholders, and so equity will be shown as the value of the stock. This value is the book value. It may or may not be equal to the value of the stock on the stock exchange or market value. Companies whose stock is selling at prices considerably below book value are likely to be taken over by other companies. The owners’ equity of a partner-ship is allocated according to the articles of co-partnership. For a sole proprietor, there is only one owner and the owner’s equity is the value of the business to him.
1. Why is merchandise regarded as a current asset?
2. What do companies often do with extra cash?
3. What effect do slow sales have on liquidity?
4. How would machinery and production equipment be listed on the balance sheet?
5. What is the difference between calculating the value of land and the value of a building?
6. What is similar between the classification of liabilities and the classification of assets?
7. Where do companies list the interest they must pay?
8. What is the main difference and a similarity between a bond and a mortgage?
9. How does a company determine its net worth?
10. Why would a company want to take over another company whose stock was trading at much less than its book value?
Use of English
Read the text below on cash flow. Write a word or phrase from the box to fill each of the gaps.
assets capital creditors factor interest tied up
bills cash debtors flow profitable working
The movement of money through a firm is called cash (1)……….. . The company may be successful and (2)…….. and may own valuable fixed(3)…….. , but if, at the end of a month, there are (4)……… to be paid and no cheques have come in, its financial position may be weak. On the other hand, if the accountant allows a large amount of (5)……… to stay in the bank, when it should be invested and earning (6)…….. , the board of directors will not be pleased. Control of cash flow is a key (7)………. in financial management. Managers complain that (8)……….. are slow to pay and (9)………. Want to be paid at once. New firm are often short of (10)………. .early success can be dangerous. If Partrick Flynn gets a lot of office-cleaning contracts, he will have to buy stock and take on staff. This will cost money, so his (11)……….. capital will increase, and it will be (12)……… in things like vacuum cleaners which will not show a return for several weeks or even months.
Translate the following text into English paying special attention to standard use of terms and clarify of expresion
Một trong các vấn đề cơ bản và cũng gây nhiều tranh cãi nhất trong kế toán là việc xác định trị giá bằng tiền các loại tài sản của doanh nghiệp, nhất là các tài sản dùng để tạo ra thu nhập. Quan điểm kế toán đang thịnh hành cho rằng các tài sản đó phải ghi chép ở giá phí. Ở bảng tổng kết kế toán, chúng được ghi ở giá phí nguyên thủy. Số tiền này có thể sẽ khác xa với giá trị mà ta sẽ phải trả để mua nó ngày hôm nay để thay thế chính nó. Chính sách kế toán tài sản theo giá phí được gọi là nguyên tắc kế toán theo giá phí.
Một số lý do ủng hộ áp dụng giá phí thay vì giá thị trường trong kế toán tài sản là:
- các sản nghiệp được mua sắm về để dùng chứ không phải để bán lại, và doanh nghiệp lại đang hoạt động liên tục, “DN hoạt động”
- yêu cầu về một cơ sở xác định và thực tế để đánh giá. Người ta gọi các sự đánh giá có thực tế mà các nhà chuyên môn độc lập có thể kiểm tra được là nguyên tắc khách quan.
Với thời gian, giá trị thường của tài sản có thể sẽ rất khác với giá phí đã ghi sổ. Có nhiều đề nghị điều chỉnh giá trị bằng tiền để phản ánh sự trượt giá đồng tiền cũng đã được nghiên cứu từ nhiều năm nay. Tuy nhiên, ngày nay cơ sở kế toán tài sản trên giá phí vẫn là phương thức được chấp nhận rộng rãi.