Accountancy firms to merge

Ø 1) In the article the writer uses these words and phrases: accountancy firm Farrell Grant Sparks, a general practice firm, personal and corporate tax matters, a niche market, tax-based financing. What do they mean?

Accountancy firm Farrell Grant Sparks has announced a merger with Eamonn Griffin & Company. Griffin is a general practice firm which specializes in personal and corporate tax matters. Over the years it has developed a niche market in relation to tax-based financing of property, computer software and films.

Ø 2) Answer the questions:

a) What did accountancy firm Farrell Grant Sparks announce?

b) What does Eamonn Griffin & Company specialize in?

c) What is the main accomplishment of Eamonn Griffin?

d) What kind of company is Griffin?

ACCOUNTING

6.32.1 HISTORY OF ACCOUNTING

Ø 1) Before reading the text answer the questions:

a) What is accounting? Choose from the following:

– a system of government

– the work of someone who prepares financial records and methods they use

– a way of calculating personal income

– attention in mass media.

b) When did accounting begin?

Accounting has a history which reaches back to the beginning of civilization, and archaeologists have found accounting records which date as far back as 4,000 B.C., well before the invention of money. Nevertheless, it was not until the 15^th century that the separation of the owner’s wealth from the wealth invested in a business venture was recognized as necessary. This arose from the use of paid managers or stewards to run a business who were required to render accounts of their stewardship of the funds and assets. Consequently, the “capital” invested in the business represented not only the initial assets of the business but a measure of its indebtedness to the owner. This principle remains enshrined in modern financial accounting and the owner is shown as entitled to both the “capital” which he has invested in the business, and also the profits which have been made during the year. The accounting and legal relationship between the business and its owner is shown on the balance sheet, which states the firm’s assets and liabilities and hence indicates its financial position and wellbeing.

The practice of keeping daily records of accounting events in a diary or rough book dates from the early history of accounting. The practice of keeping a daily journal was recommended by Paciolo in 1494 for the purpose of enabling the businessman to check daily the records kept by his clerk. Once agreed, they could be entered into the ledger. It became a golden rule in accounting that no entry should appear in the ledger which has not first been entered in the journal.

Both trade and accounting existed before the invention of money, which we know began to circulate in the 6^th century B.C. Its role as a common denominator, by which the value of assets of different kinds could be compared, encouraged the extension of trade. By Roman times, money had become the language of commerce, and accounts were kept in money terms. Hence, there is an accounting tradition which dates back some 2,000 years of keeping the records of valuable assets and of transactions in monetary terms. It is not surprising; therefore, that accounting information today reflects the long-time practice of dealing only with matters capable of expression in money.

Ø 2) Answer the questions:

a) What was recognized as necessary in accounting in the 15th century?

b) What was the duty of a paid manager who ran a business?

c) What main principle still remains in modern financial accounting?

d) How is the relationship between business and its owner shown?

e) What does the balance sheet show?

f) What is the golden rule in accounting?

g) What terms have the accounting been kept in during the last 2,000 years?

6.32.2 ACCOUNTING AS A SOCIAL SCIENCE

Ø 1) Read the heading and the subheadings and say what this text is about.

Ø 2) Skim the text (read it quickly) and say if these questions are covered in it:

a) how the principle of double-entry bookkeeping was formulated,

b) the name of the initiator of the Limited Liability Act 1855,

the reason for the appearance of a new trend in the development of accounting at the end of the 20^th century,

c) the essence of management accounting,

d) access to large amounts of capital for the industrial expansion in the early part of the 19^th century,

e) the new trend in accounting development in the 21^st century.

The history of accounting reflects the evolutionary pattern of social developments and, in this respect, illustrates how much accounting is a product of its environment and at the same time a force for changing it. There is, therefore, an evolutionary pattern which reflects changing socio-economic conditions and the changing purposes to which accounting is applied.

From today’s perspective, we may distinguish four phases which may be said to correspond with its developing social role.

Stewardship accounting has its origins in the function which accounting served from the earlier times in the history of our society of providing the owners of wealth with a means of safeguarding it from stealing and in the fact that wealthy men employ “stewards” to manage their property. These stewards rendered periodical accounts of their stewardship, and this notion still lies at the root of financial reporting today. Essentially, stewardship accounting involves the orderly recording of business transactions, and although accounting records of this type date back to as early as 4500 B.C., the keeping of these records, known as “bookkeeping,” remained primitive until fairly recent times. Indeed, the accounting concepts and procedures in use today for the orderly recording of business transactions have their origin in the practices employed by the merchants of the Italian City States during the early part of the Renaissance. The main principles of the Italian Method, as it was then known, were set out by Luca Aioli in his famous treatise “Summa de Arithmetica, Geometrica, Proportioni et Proportionalita” which was published in Venice in 1494. The Italian Method, which became known subsequently as “double-entry bookkeeping” was not generally used in Western Europe until the early part of the 19^th century.

Financial accounting has a more recent origin, and dates from the development of large-scale businesses which were made possible by the Industrial Revolution. Indeed, the new technology not only destroyed the existing social framework, but altered completely the method by which business was financed. The industrial expansion in the early part of the 19^th century necessitated access to large amounts of capital. This led to the advent of the joint stock company, which enables the public to provide capital in return for “shares” in the assets and the profits of the company.

An earlier experience of the joint stock form of trading which had resulted in a frantic boom in company flotation, culminating in the South Sea Bubble of 1720, had instilled public suspicion of this form of trading. Nevertheless, the Joint Stock Companies Act 1844 permitted the incorporation of such companies by registration without the need to obtain a Royal charter or a special Act of Parliament.

In 1855, however, The Limited Liability Act permitted such companies to limit the liability of their members to the nominal value of their shares. This meant that the liability of shareholders for the debts incurred by the company was limited to the amount which they had agreed to subscribe £1, and, once he had paid that £1, he was not liable to make any further contribution in the event of the company’s insolvency.

The concept of limited liability was a contentious point in the politics of the mid-19^th century. The Limited Liability Act 1855 made the disclosure of information to shareholders a condition attached to the privilege of joint-stock status and of limited liability. This information was required to be in the form of annual profit and loss accounts and balance sheets.

We may say briefly, however, that the former is a statement of the profit or loss made during the year of the report, and the balance sheet indicates the assets held by the firm and the monetary claims against the firm. Financial accounting is concerned with those two accounting statements as vehicles for the disclosure of information to shareholders in limited companies. The legal importance attached to financial accounting statements stems directly from the need of a capitalist society to mobilize savings and direct them into profitable investments. Investors, be they large or small, must be provided with reliable and sufficient information in order to be able to make efficient investment decisions. Herein lies one of the most significant social purposes of financial accounting reports. In a changing society, increased recognition that employees have a legitimate right to financial information is evident in the legislation passed or proposed in several European countries.

Management accounting is also associated with the advent of industrial capitalism, for the Industrial Revolution of the 18^th century presented a challenge to the development of accounting as a tool of industrial management. In isolated cases there were some, notably Josiah Wedgwood, who developed costing techniques as guides to management decisions. But the practice of using accounting information as a direct way to management was not one of the achievements of the industrial revolution: this new role for accounting really belongs to the 20^th century.

Certainly, the genesis of modern management with its emphasis on detailed information for decision making provided a tremendous impetus to the development of management accounting in the early decades of the 20^th century, and in so doing considerably extended the boundaries of accounting. Management accounting shifted from recording and analyzing financial transactions to using information for decisions affecting the future. In so doing, it represented the biggest surge forward in seven centuries. The advent of management accounting demonstrated once more the ability and capacity of accounting to develop and meet changing socio-economic needs. Management accounting has contributed in a most significant way to the success with which modern capitalism has succeeded in expanding the scale of production and raising standards of living.

The social welfare viewpoint of accounting is an entirely new phase in accounting development which owes its birth to the social revolution which has been underway in the Western world in the end of the 20^th century. One aspect is social responsibility accounting which widens the scope of accounting by considering the social effects of business decisions as well as their economic effects. The demand for social responsibility accounting stems from an increasing social awareness of the undesirable by-products of economic activities, and in this connection, one may point to the attention given to environmental problems over the last years. Increasingly, management is being held responsible not only for the efficient conduct of business as expressed in profitability, but also for what it does about an endless number of social problems. Hence, with changing attitudes, the time-honored standards by which performance is measured have fallen into disrepute. There is a growing consensus that the concepts of growth and profit as measured in traditional balance sheets and profit and loss accounts are too narrow to reflect what many companies are trying, or are supposed to be trying, to achieve.

Ø 3) Give your own examples to the main ideas expressed in the text.

Ø 4) Make up a brief outline of the text.

6.32.3 BASIC ACCOUNTING CONCEPTS

Ø 1) Look at the heading and the words in the table in the text and say what this text is about. Have you ever come across any of these ideas in your profession or life?

Ø 2) Match the concepts and their definitions:

Concepts	Definitions
1. assets 2. liabilities 3. capital 4. revenue 5. expenses 6. profit 7. transactions	a) the excess of assets over liabilities b) events which require recognition in the accounting records c) things of value which are possessed by a business d) results from the total revenue of a business for a certain period e) the amounts owned by the business f) expenses g) money earned by a business

Ø 3) Answer the questions:

a) What do the assets of a business comprise?

b) What assets are not mentioned in balance sheets?

c) When do liabilities arise?

d) What is the difference between revenue and profit?

The establishment of concepts is very important to the development of a theoretical framework. Accounting concepts are used to describe the events that comprise the existence of business of every kind. For this reason accounting is often characterized as “the language of business.” The basic concepts listed in the table below provide the essential material of accounting theory.

Basic concepts	Accounting conventions	Accounting procedures
Assets Liabilities Capital Revenue Expenses Profit Transactions	Entity Money measurement Going concern Cost Realization Accrual Matching Periodicity Consistency Prudence	Recording transactions Classifying transactions Summarizing transactions Reporting transactions Interpreting reports

Assets are things of value which are possessed by a business. In order to be classified as an asset the money measurement convention demands that a thing must have the quality of being measurable in terms of money. The assets of a business comprise not only cash and such property as land, buildings, machinery and merchandise, but also money which is owed by individuals or other enterprises (called debtors) to the business.

Often the major asset of a highly successful firm is the knowledge and skill created as a result of teamwork and good organization. This asset will not appear in the accounts, since the firm has paid nothing for it, except in terms of salaries which have been written off against yearly profits. So, the value of the human assets of the firm is not mentioned in balance sheets. However, it is universally recognized that the firm’s human assets are its chief source of wealth. Yet, it is only recently that accountants have begun to recognize this fact, and efforts are now being made to find ways in which information on the value of human assets may be most appropriately presented.

There are other important assets of which no mention is made in financial accounting statements, for example, the value of the firm on the market and the value of the firm’s own information system, which affects the quality of its decisions.

Liabilities are the amounts owned by the business. Most firms find it convenient to buy merchandise and services on credit terms rather than to pay cash. This gives rise to liabilities known as trade creditors. Liabilities arise also when a firm borrows money as a means of supplementing the funds invested by the owner. The reason why amounts of money owed to the creditors by a business are known as liabilities is that the business is liable to them for the amounts owed.

Capital is the excess of assets over liabilities and represents the owner’s investment in the business. The assets of a business must always be equal to the liabilities and the owner’s capital. This is the result of double-entry bookkeeping, whereby each transaction has a two-fold effect.

Revenue is earned by a business when it provides goods and services to customers. Whereas a trading business will derive revenue mainly from the sale of merchandise, a business which renders services, such as a solicitor, will derive revenue as a result of charging for the service. It is not necessary for a business to receive cash before recognizing that revenue has been earned. The accrual convention recognizes revenue which arises from the sale of goods or services on credit.

Expenses are incurred in earning revenue. Examples of expenses are wages and salaries paid to employees and rent paid to the landlord. If expenses are not paid when they are incurred the amount is recorded as a liability.

Profit results when the total revenue of a business for a certain period, such as a year, exceeds the total of the expenses for that period. Profit accrues to the owner of the business and increases his investment. The increase is reflected in the owner’s capital, being a liability due to him.

Transactions are events which require recognition in the accounting records. They originate when changes in basic concepts are recorded. A transaction is financial in nature and is expressed in terms of money.

Accounting conventions determine the rules which are applied to accounting procedures. Accounting conventions are continually being adapted to meet the changing demands of business, and at any point in time there may be more than one accepted way of treating a particular class of transaction. A thorough knowledge of these conventions is necessary for a complete understanding of financial statements.

If accountants as a group wish to change some of their conventions, they are free to do so. The term “accounting conventions” serves to underline the freedom accountants have enjoyed in determining their own rules.

6.32.4 ACCOUNTING AS AN INFORMATION SYSTEM

Ø 1) Look at the phrases, taken from the text: a series of activities, collecting, recording, analyzing, communicating information, data organized for a special purpose, decision making, to transform, to influence, a social science, input, processing, output, to facilitate. What do they mean?

Ø 2) Name the statements that are true:

a) accounting is a series of steps such as collecting, recording, analyzing and communicating information,

b) accounting has the typical activities of systems: input, processing and output,

c) data are used for decision making,

d) accounting is a social science,

e) application of systems analysis is extremely rare in accounting.

Accounting is often analyzed as a series of activities which are linked and form a progression of steps, beginning with observing, then collecting, recording, analyzing and finally communicating information to its users. We may say, therefore, that accounting information has a special meaning in that it is data organized for a special purpose, that is, for decision making. The task of the accountant is to transform raw data into information. Data itself is simply a collection of facts expressed as symbols and characters which are unable to influence decisions until transformed into information. Conventions existing among accountants for the treatment of data give a distinctive character to accounting information.

Accounting is a social science which lends itself easily to analysis as an information system, for it has all the attributes of a system. It has a basic goal, which is to provide information, and it has clear and well-defined elements in the form of people and equipment. Moreover, accounting has the typical activities of systems, consisting of input, processing of input and output.

The application of systems analysis to the treatment of accounting facilitates the study of accounting as a social science, and enables to examine its various activities in terms of the relevance of its output for decision-making purposes.

6.32.5 CASH

Ø 1) Do you prefer to keep cash on hand or in a bank? Why?

Ø 2) Read the text and answer the questions:

a) Why do firms bank large sums of money daily?

b) What do they use for the settlement of debts?

c) Who is usually entrusted with a petty cash box?

d) What is a petty cash voucher?

e) Who signs a petty cash voucher?

For security reasons, few firms like to keep large sums in cash about their premises and cash takings are banked daily. Moreover, it is sound practice to use cheques for the settlement of debts, so that there is generally no need to keep cash on hand beyond relatively small sums. All firms, therefore, tend to have a petty cash box to meet any immediate need for cash for example, enabling a secretary or porter to take a taxi to deliver a document, or to buy a small article which is urgently required. The cashier is usually entrusted with a petty cash box and any payments must be claimed by means of a petty cash voucher signed by an authorized person, who is usually a head of department. The cashier is given a petty cash float which may be, say, £50 and pays out petty cash only against petty cash vouchers, which he retains. As the petty cash float decreases, so petty cash vouchers of an equivalent value accumulate in the petty cash box. In due course, the vouchers are checked or audited and the petty cash paid out is refunded to the cashier, thereby restoring the petty cash float to its original sum.

UNIT 7

LAW

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