The accounting equation

Date: 2015-10-07; view: 667.

Text B

Accounting is at least the second oldest profession in the world. But while earlier professionals rapidly got to grips with basic techniques and even introduced refinements, it is remarkable that generations of tax collectors and merchants staggered on for thousands of years before finding a satisfactory general method of keeping a record of their affairs.

This should serve as a warning. The problem is common sense but the answer is not. It is highly contrived and in some respects still imperfect. It begins with a particular way of looking at a business which we present in the next section.

A business may be pictured as a box. The box has contents and by virtue of owning the box, the owner has a claim to the value of the contents. Others also may have a claim on the contents, by virtue of having lent money to the business or of having supplied goods or services to the business for which they have not yet been paid. These are the creditors of the business.

As the business buys and sells goods and services, so the value of the contents of the box will increase or decrease, depending on whether the business makes a profit or a loss. These changes in value of contents must be equalled by changes in value of claims on contents. Specifically the claims of the owners will vary so that the total value of claims is always equal to the value of the contents.

Now we may list the value of the contents of the business box at any time, say down the left side of a piece of paper. On the right side we may list the value of claims on those contents. The claims of third party creditors will be known. The claims of the owners will amount to whatever is necessary to make the total value of claims equal to the total value of contents.

Such a list of contents (on the left) balanced by a list of claims (on the right), constitutes a simple balance sheet. A balance sheet is a presentation of the state of affairs of a business in a succinct, systematic and recognizable format.

Restating the original theory, with the picture of the business as a box, we can write

£ contents = £ claims on contents.

In accounting terms, this becomes

(1) ASSETS = EQUITY + LIABILITIES

where assets are simply what is held in the business, equity is the claim of the owners, and liabilities are the claims of third parties.

By transferring liabilities to the other side of the equation we may write

ASSETS - LIABILITIES = EQUITY

or, using a technical term

(2) NET ASSETS = EQUITY

Finally we may split equity into the capital originally put into the business and reserves. Reserves represent profits which have been reserved or kept in the business. The equation now becomes

(3) NET ASSETS = CAPITAL + RESERVES

1, 2 and 3 above are forms of the fundamental accounting equation.

'Management in English Language Teaching', White, R. et al.

(Cambridge University Press, 1991)

I. Vocabulary notes:

II. Choose the proper words and answer the following questions:

1. What was said about accounting as … ?

a) claim b) profession c) affair d) method

2. Who got to … with basic techniques?

a) respect b) record c) way d) grips

3. What was remarkable before a satisfactory method of … a record of affairs was found?

a) finding b) staggering c) refining d) keeping

4. What should … as warning?

a) serve b) keep c) get d) find

5. What can be said about the … ?

a) question b) problem c) answer d) sense

6. How may a … be pictured?

a) claim b) service c) change d) business

7. Who has a claim to the … of the contents?

a) money b) value c) service d) business

8. What will the value of the … of the box increase or decrease and what does it depend on?

a) business b) contents c) claims d) value

9. What must the changes in value of contents be … by?

a) varied b) constituted c) equalled d) kept

10. What are 1, 2 and 3 forms of the … accounting equation?

a) fundamental b) succinct c) pithy d) imperfect

11. What constitutes a … balance sheet?

a) systematic b) simple c) complex d) original

12. How does a balance sheet present the state of … of a business?

a) theory b) terms c) affairs d) formats

III. Translate the following words and word combinations:

принаймні; перші професіонали; рішуче взятись; вводити удосконалення; покоління торговців; йти вперед, не дивлячись на труднощі; первинна теорія; здоровий глузд; бухгалтерська збалансованість; збирачі податків; право на вміст; вимоги в термінах бухгалтерського обліку; основні засоби; капітал; зобов'язання; власник; третя сторона; рівність; розбивати капітал; прибуток; вартість вмісту; в який завгодно час; простий баланс; недосконалий; винаходити (придумувати); завдяки; стислий; задовільний загальний метод; зберігання записів справ; попередження; заборгувати гроші підприємству; кредитори підприємства; товари та послуги; прибуток і втрата; право власників.

IV. Fill in the blanks with proper prepositions or adverbs:

1. Accounting is … least the second oldest profession … the world.

2. The generations ... tax collectors and merchants staggered ... ... thousands ... years before finding a satisfactory general method ... keeping a record ... their affairs.

3. A business may be pictured ... a box.

4. The box has contents and ... virtue ... owning the box, the owner has a claim ... the contents.

5. As the business buys or sells goods or services ... the value ... the contents of the box will increase or decrease, depending ... whether the business makes a profit or loss.

6. The changes ... value ... contents must be equalled ... changes in value of claims ... contents.

7. The total value ... claims is always equal ... the value of the contents.

8. ... the right side we may list the value ... claims ... those contents.

9. Such a list ... contents (... the left) balanced ... a list of claims (... the right) constitute a simple balance sheet.

10. ... transfering liabilities ... the other side ... the equation we may write ASSETS – LIABILITIES = EQUITY.

11. We may split equity ... the capital originally put ... the business and reserves.

V. Think over and answer or choose the suitable point:

1. In the first line of the text the author says “Accounting is ... the second oldest profession”. Can you think what “the oldest profession” might be?

2. Are these statements true or false according to the text?

a) Other professions progressed at a similar rate to accounting.

b) Accounting's problem for a long time was how to record monetary transactions.

c) The problem which accounts faced was an artificial one.

d) Accounting's method of keeping financial records is based on common sense.

3. Use the table below to make sentences which are true according to the text. The first oart of each sentence should come from box A and the second part from box B. Identify the lines in the text which agree with your sentences.

4. In the following equations supply the missing elements according to the text:

VI. Using the text, match the technical accounting terms on the left with their correct definitions on the right.

VII. In pieces of writing pronouns (e.g. “it”, “them”, “that”) are used to refer to something mentioned earlier in the piece or to something which will be mentioned later. Understanding what pronouns are referring to in any kind of writing is very important for seeing the logical structure. To practise this skill say what the following pronouns in “The Accounting Equation” refer to. Give line references for your answers (Remember pronouns can refer forward as well as backward).

1. “It” (line 3) refers to _____ in line(s) _____.

2. “Their” (line 5) refers to _____ in line(s) _____.

3. “This” (line 6) refers to _____ in line(s) _____.

4. The first “It” in line 7 refers to _____ in line(s) _____.

5. The second “It” in line 7 refers to _____ in line(s) _____.

6. “They” (line 14) refers to _____ in line(s) _____.

7. “These” (line 14) refers to _____ in line(s) _____.

8. “We” (line 21) refers to _____ in line(s) _____.

VIII. Look at how the words and phrases in the box below are used in the text and then match them with their correct definitions underneath the box. Try to do this excercise without using a dictionary:

1) continued with difficulty

2) brief

3) to be exact

4) began to deal with

5) system

6) act

7) forms

8) due to

9) improvements

10) artificial

IX. Complete the following table with derivatives, if any:

X. Complete the following table with synonyms and antonyms, if any:

XI. Analyse the grammatical forms and constructions in italics (Gerund, Participle, Verbal Noun, Passive Constructions, Modal Constructions, etc.):

1. The generations of tax collectors and merchants staggered on for thousands years before finding a satisfactory general method of keeping a record of their affairs. This should serve as a warning.

2. A business may be pictured as a box.

3. Other owners also may have a claim on contents, by virtue of having lent money to the business or of having supplied goods or services to the business for which they have not yet been paid.

4. The changes in value of contents must be equalled by changes in value of claims of contents.

5. The claims of third party creditors will be known.

6. A list of contents (on the left) balanced by a list of claims (on the right), constitutes a simple balance sheet.

7. Restating the original theory, with the picture of the business as a box we can write £ contents = £ claims on contents.

8. By transferring liabilities to the other side of the equation we may write ASSETS – LIABILITIES = EQUITY or using a technical term NET ASSETS = EQUITY.

9. Finally we may split equity into the capital originally put into business and reserves.

10. Reserves represent profits which have been reserved or kept in the business.

XII. Memorize the following idioms and make a dialogue:

XIII. Memorize the words in italics with their correct explanations. Make a dialogue.

1. Then we got down to the nitty-gritty (important business).

2. It left something to be desired (It was a bit unsatisfactory).

3. That puts a different complexion on things (things seem different now).

4. I think they are rather dragging their feet (going slowly).

5. I think we can take that as read, can't we? (agree without discussion).

6. I think we were taken for a ride last time (cheated).

7. He's up to something (doing something I don't know about).

8. They are bending over backwards for us (helping us as much as possible).

9. I'll put in a word for you (try to help you).

10. I think they are trying to string us along (delay things).

Unit 3

Accountants and their work