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Read the text to explain what functions accounts usually perform.

An account can be defined as the basic storage unit for data in accounting. All the transactions that occur in a business are sorted out classified through the use of accounts. An accounting system has separate accounts for each asset, each liability, and each component of owner's equity. But each business must design its accounts in a way that may reflect its nature and the needs of its management. So, different businesses may keep a different number of accounts. For example, a very small company may need only a few accounts whereas a multinational corporation can keep thousands of them. The specific accounts used by a business depend on its nature.

As a rule, accounts are usually kept in books of accounts. Books of accounts reflect all kinds of business transactions – sales, payment, profits losses etc. They also show the effect of different transactions on the financial position of a firm or a person doing business. In general, accounts are prepared to perform three main functions: first, to show the financial position of a business; second, to enable the income tax computations to be prepared; third, to provide management with necessary information to control the activity of a business.

Very often accounts fail to present a real picture of affairs. This is why the systems of accounts and the main methods of their classification came under criticism in many countries of late. The accounts are believed to be inherently narrow even if they comprehensively present every relevant fact about business activity. They are also said to have certain limitations. First of all, financial accounts report only events which can be expressed in monetary terms. Another limitation is that financial statements report events that have already happened, and they do not show what might have accrued, or what might occur in the future. For example, the fact that a business earned 10 billion hrivnas last year does not necessarily indicate that it will earn the same amount next year. Meanwhile businesses are most interested in what will happen in the future. Historical data is of little use to management who should consider the future when making decisions. Usually managers see the data reflected on the accounts as only one piece of a large body of information to be examined before making decisions.

 

Answer the following questions.

1. How can an account be defined?

2. What are all business transactions sorted out and classified through?

3. What sort of accounts has an accounting system?

4. In what way must each business design its accounts?

5. How many accounts does a business need?

6. What do books of accounts reflect?

7. Why did the systems of accounts and the methods of their classification come under criticism in many countries?

8. What are the limitations of accounts?

9. What is the use of historical data to management?

10. What is the importance of accounting data for managers?

 

FROM THE HISTORY OF THE DOUBLE-ENTRY SYSTEM


Date: 2015-12-24; view: 1043


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