Section 2: Accounting Basics - Part 1: FOUNDING A COMPANY

 "with 'creative accountancy', who needs cheating?"

KATHARINE WHITEHORN

A: I really can't bear to look at it, Alex.

    What dreadful results a few days of panicky decisions can have...

B: Try to be positive, Clive. At least the index seems to be levelling of now.

A: It's not that.

   It reminds me that I cancelled my ski-ing holiday for nothing.

2.1 Comapy Law

2.1.1 TYPES OF BUSINESS

     The simplest form of business is the individual proprietorship or sole trader for example, a shop (US =  store) or a taxi owned by a single person. If several individuals wish to go into business together they can form a partnership; partner generally contribute equal capital, have equal authority in management, and share profits or losses. In many countries, lawyers, doctors and accountants are not allowed to form companies, but only partnerships with unlimited liability for debs - which should make them act responsibly.

      But a partnership is not a legal entity separate from its owners; like sole traders, partners have unlimited liability: in the case of bankruptcy, a partner with a personal fortune can lose it all. Consequently, the majority of businesses are limited companies (US = corporations), in which investors are only liable for the amount of capital they have invested. If a limited company gose bankrut, its assets are sold (liquidated) to pay the debts; if the assets do not cover the debts, theyremain unpaid (i.e. creditors do not get their money back.).

     In Britain, most smaller enterprises are private limited companies with cannot offer shares to the public; their owners can only  raise capital from friends or from banks and other venture capital institutions. A successful, growing Brishtish business can apply to the Stock Exchange to become a public limited company; if accepted, it can publish a prospectus and offer its shares for sale on the open stock market. In America, there is no legal distinction between private and public corporations, but the equivalent of a public company is one registered by the Securities and Exchange Commission.

2.1.2 FOUNDING A COMPANY

    Founders of companies have to write s Memorandum of Association (in the US, a Certificate of Incorporation), which states the company's name, purpose, registered office or premises and authorised share capital.

     Partnerships (always an 's' at the end) - is the technical term for the place in which a company does its business: an office, a shop, a workshop, a factory, a warehouse, etc. Authorised share capital means the maximum amount of a particular type of share the company can issue.

     Founders also write Articles of Association (US = Bylaws), which set out the rights and duties of directors and different classes of shareholders. Companies' memoranda and articles of association, and annual financial statements are sent to the registrar of companies, where they maybe inspected by the public. (A company that files its financial statements late is almost certainly in trouble). In Britain, founders can buy a "of-the-shelf" company from an agent, that is, a company formed and held specificially for later resale; the buyer then changes the name, memorandum, and so on.

2.2 Bookkeeping 

2.2.1 THE PARAGRAPH

      Bookkeepers record every purchase and sale that a business makes, in the order that they take place, in journals. At a later date, these temporary records are entered in or posted to the relevant account book or ledger. Of course the "books" these days are likely to be computer files. At the end of accounting period, all the relevant total are transferred to the profit and loss account. Double-entry bookkeeping records the dual effect of every transaction - a value both received and parted with. Payments made or debit are entered on the left-hand (debtor) side of an account, and payments received or credit  on the right-hand side.

     Bookkeepers will periodically to do a trial balance to test whether both sides of an accountant book match. In most of business transaction, the seller of goods or services sends the buyer a bill or invoice, and later a receipt acknowledging payment. Businesses are obliged to retain the documents - know as vouchers - that support or prove an item in an account, and make them available to the internal and external auditors who check the accounts. Bookkeepers are not to be confused with librarians, who also keep books, or with bookmakers, who "make books" in the sense that they accept bets (on horse races, etc.) and traditionally wrote them down in a book like a bookkeeper's journal. Accountants, unlike bookkeeper, analyse financial records, and decide how to present them.

2.2.2 Add appropriate verbs from the text above to these sentences:

1. Bookkeepers record business transaction.

2. A debit is a payment made.

3. A credit is a payment received.

4. Debits are entered on the left-hand side.

5. At the bottom of the page, bookkeepers balance or check the totals.

6. Companies have to keep or retain invoices or receipts.

7. The auditors check the accounts.

8. Accountants, managers, and shareholders analyse the accounts.   

2.3 Accounting

A: You are accountant? Does that mean you spend your time writing down credits and debits, and adding up columns of figures all day? Can't be very exciting.

B: That's bookkeeping. not quite the same thing.

A: So what do accountants do?

B: Well, accountants do record cash flow, and the value of assets and liabilities, and they calculate profits and losses, and so on. But it's not just writing down numbers. We're really in the business of supplying people with information.

A: You mean the shareholders?

B: No, not only. Managers always need the help of accountants. They need financial statements, and budgets, and cash-flow projections, and so on, to measure the success of what they've done, and to make decisions about allocating  resources for future projects.

A: So you prepare reports for manager?

B: No, managerial accountant do, but I work in cost accounting. We have to work out the real cost of each item the company makes, which means finding a way to allocate all the overheads to different products.

A: And the cost of the accountants department!

B: Of course. But like I said, we're necessary. And useful. Haven't you heard of "window dressing"?

A: You mean what they do in the front of shop?

B: Sure, but it's also another name for what some people call "creative accounting" - making a company's financial situation look as good as possible in the balance sheet, and so on. It's not very legal, but it happens. The accountants in my firm also have lots of wonderful ways of reducing our tax bill.

A: Ah, now that's interesting...

B: Ha! Now you're going to ask me to tell you how you can pay less tax.

A: Not at all. As a matter of fact. I'm a tax inspector...

2.11 Bankruptcy
2.11.1 PARAGRAPH:
     If a person or a business has more debts than money to pay them, this mean they have more (1) liabilities than assets, and they are (2) insolvent. If a (3) creditor takes the matter to court, the person or company is declared bankrupt.A bankrupt company goes into liquidation or receivership or is wound up. The court appoints a liquidator (or receiver, or administrator) who realises (i.e sells) the company's (4) assets in order to repay creditors. A failing business can choose voluntary winding up, in which case it appoints its own liquidator. In American a (5) corporation in difficulty can file for Chapter Eleven and propose recovery plan; it is then temporarily protected from its creditors, and given some time to attempt to solve its problems. A failing business that knows it has no reasonable chance of  avoiding bankruptcy should stop trading. Continuing to (6) do business, and building up debts with creditors that will never be paid, is called wrongful trading and is illegal. There are limits to limited liabilities!

1.  a.  equity                               b.  liability                              c.  liabilities
2.  a.  illegal                                b.  illiquid                               c.  insolvent
3.  a.  borrower                          b.  creditor                             c.  debtor
4.  a.  assets                               b.  debts                                 c.  liabilities
5.  a.  corporation                       b.  partnership                        c.  proprietor
6.  a.  do business                       b.  earn                                  c.  make business
 NOTE:
     In speech there are other more colourful , but less polite, ways of saying that a company has gone bankrupt:
              They've gone bust.
              They've gone to the wall.
              They've gone broke.
              They've gone belly up.
              They've gone under.
              They've gone down the tubes.

2.11.2 Complete the following sentences with either 'bankrupt' or 'bankruptcy'
1.  The company has gone bankrupt.
2.  We're on the verge of bankruptcy.
3.  If they keep spending money like that, they'll bankrupt the company.
4.  I am sorry to say that we are facing bankruptcy.
5.  There are limits to what an undischarged bankrupt can do.
6.  We've got no choice but to declare ourselves bankrupt.