TOPIC 1: INTRODUCTION TO ACCOUNTING

WHAT IS ACCOUNTING?

Pre-reading

What do you think are the main purposes of accounting?

Does accountancy only describe the past or is it useful in dealing with the future?

Is accounting completely objective or does it involve subjective judgements?

Skim and scan

Read the text quickly to say whether the following statements are True or False. Don’t worry
about any words you don’t understand.

a. The author thinks that accountancy is a totally objective activity.

b. Accountancy is important whatever the type of economic system a country has.

Note: All words in a text preceded by an asterisk (*) may need a brief explanation regarding
meaning.

What is accounting?

Accounting contains elements of both science and art. The important thing is that it is not merely
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a collection of arithmetical techniques but a set of complex processes depending on and prepared
for people. The human aspect, which many people, especially accountants, forget, arises because:

1. Most accounting reports of any significance depend, to a greater or lesser extent, on people’s
opinions and estimates.

2. Accounting reports are prepared in order to help people make decisions.

3. Accounting reports are based on activities which have been carried out by people.

10 But what specifically is accounting? It is very difficult to find a pithy definition that is all-inclusive
but we can say that accounting is concerned with: The provision of information in financial terms
that will help in decisions concerning resource allocation, and the preparation of reports in
financial terms describing the effects of past resource allocation decisions.

Examples of resource allocation decisions are:

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 a. Should an investor buy or sell shares?

b. Should a bank manager lend money to a firm?

c. How much tax should a company pay?

d. Which collective farm should get the extra tractor?

As you can see, an accountant is needed in any society requiring resource allocation and its
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usefulness is not confined to “capitalist” or “mixed” economies.

An accountant is concerned with the provision and interpretation of financial information. He does
not, as an accountant, make decisions. Many accountants do of course get directly involved in
decision making but when they do they are performing a different function.

Accounting is also concerned with reporting on the effects of past decisions. But one should
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consider whether this is done for its own sake or whether it is done in order to provide information
that it is hoped will prove helpful in current and future decisions. We contend that knowledge of
the past is relevant only if it can be used to help in making current and future decisions, for we can
hope that we shall be able to influence the future by making appropriate decisions but we cannot
redo the past. Thus the measurement of past results is a subsidiary role, but because of the historical
30 development of accounting and, perhaps, because of the limitations of the present state of the art,
‘backwards looking’ accounting sometimes appears to be an end in itself and not as a means that
will help in achieving a more fundamental objective.

“Foundation in Accounting”, Lewis, R. and Gillespie, I. (Prentice Hall)

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Comprehension

1.

a. How many reasons does the author give to support the idea that accounting involves a human
element?

b. Which of the following reasons does the author give as showing human’s influence on
accounting?

i. Accounting summaries describe human action.

ii. Accounting systems are artificial creations.
iii. Accounting is affected negatively by human judgement.
iv. Accountancy is based on the subjective ideas of individuals.
2. In the definition of accounting given in the text (lines 11-14), which of the following are said to
be its two main functions?
i. Providing general information to aid immediate decision-making.
ii. Providing financial information to help with the future division of resources.
iii. Providing financial information that will ensure that decisions made are correct.
iv. Providing financial information to show the results of past use of resources.

3. The author gives examples of resource allocation decisions. Indicate in the table below with a
tick (√) whether you think these decisions are important for a capitalist, a mixed or a state-
controlled economy. Some could be relevant to more than one type of economy.

Resource allocation decision Important for

Capitalist Mixed State-

economy economy controlled
economy

i. Should an investor buy or sell shares?

ii. Should a bank manager lend money to a firm?

iii. How much tax should a company pay?

iv. Which collective farm should get the extra tractor?

4. According to the author, is management decision-making part of an accountant’s job? Which

lines in the text give the answer?

Text organisation:

5. The statements below express the main ideas of the last paragraph. Number these statements so
that they are in the same order as the ideas in the text. The first one is given for you.

Statement Order

i. Financial information about the past is only useful if it helps future decisions.

ii. The history of accountancy has made it appear to concentrate on the past.
 iii. Accounting can indicate the results of past actions. 1

iv. Showing the financial results of past actions can be an aid to decision-making.

v. Showing the financial results of past actions can be just to record what happened.

vi. Describing the past is a less important role of accountancy.

vii. We can affect the future but we cannot change the past.

Vocabulary

6. In line 3 “complex” means: 9. In line 26 “for its own sake” means:

i. different i. to provide work
ii. confusing ii. for one person/company only
iii. complicated iii. to solve problems
iv. unusual iv. for no other purpose

7. In line 10 “pithy” means: 10. In line 31 “subsidiary” means:

i. accurate i. less important
ii. short ii. different
iii. understandable iii. vital
iv. comprehensive iv. equally important

8. In line 11 “provision” means: 11. In line 32 “state of the art” means:

i. providing i. technology
ii. researching ii. the government controls
iii. producing iii. knowledge and techniques
iv. organisation iv. understanding

Viewpoint

In the text (lines 20-21), it was said that accountancy is equally important for all types of economic
systems. Do you agree with this? If true, does this mean that only one type of accounting system
is correct or that the same system of accounting should be used in all economic systems and
countries?