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Lesson 6ª: Accounting & Banking


Sonido Stop

Key Vocabulary

 

 

Accounting deals with recording, summarizing and reporting a company's transactions. There are various types of accounting:

Financial accounting

Cost accounting

Managerial accounting

A statement is a copy of the bank's account with you. It contains a record of the money paid into your account, money withdrawn, etc.

The balance is the total amount of money in your account.

A balance sheet is a vital part of accounting. It shows your company's financial position at a particular point in time. It could indicate one business to be in a strong financial position and another to be in serious financial difficulties. By comparing balance sheets at different periods it is possible to find out the profit made.

Profit generation is the objective of a business and this requires the preparation of profit statements.

Resources, debts and owner's interests are known correspondingly as assets, liabilities and capital:

Assets - anything of value owned by a company.

Liabilities - financial obligations to outside parties such as a loan repayable to the bank.

Capital - the sum of money invested in a business by the owners / partners / shareholders, etc. Capital represents the rights of owners to the assets after the prior claims of outside parties (liabilities) have been satisfied in the event of the business closing.

E.g.

You set up a business with 1000. This money (Cash) is known as an Asset (1000). The proprietor has introduced 1000 Capital.

The two are equal: Assets = Capital

One month later the owner buys a photocopier for 300. The business now has two assets:

Cash 700 + Photocopier 300 =Total: 1000 (Assets)

Capital introduced 1000 =Total: 1000 (Capital)

Six months later the owner decides to borrow 500 from the bank. The asset is increased. However, the company now owes the bank money.

Cash 1200 + Photocopier 300 =Total: 1500 (Assets)

This money owed to the bank is called a Liability:

Capital 1000 + Loan 500 = Total 1500 (Capital + Liabilities)

Therefore the Accounting Equation is:

Assets = Liabilities + Capital

Cost - money that is spent on maintaining a business. This includes wages, equipment, etc.

Expense - is a cost that benefits the company in an accounting period.

 

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Questions

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