Financial EnglishStephan Langdon, MBA, M. Ed.

Accounting

Audio One

• Balance Sheet• Asset (tangible,

intangible)• Liability• liable• Make a Loss, Take a

loss• Profit and loss

statement• Financial statements

• Video Vocab

• GAAP• calculate• Cash flow• Operating, non

operating

• Video Vocab 2

Put correct words in blanks: accounts data-entry errors.expense account keeping track likelihood record-keepingtransaction transfer owe

• Double-entry accounting is a method of _____ that lets you track just where your money comes from and where it goes.

• Using double-entry means that money is never gained nor lost---it is always _____ from somewhere (a source account) to somewhere else (a destination account). This transfer is known as a _____, and each transaction requires at least two _____.

• An account in GnuCash is a record for _____ of what you own, _____, spend or receive. For example, if you pay a phone bill with a check, money transfers from checking to the phone company. This is a transaction transferring money from a checking account to a phone _____. You probably already think of your checking account as a bank "account," but your expenses (such as phone bill) are also "accounts".

• This double-entry concept has been around since the 13th century, and its purpose has always been to reduce the _____ of _____.

• Double-entry accounting is a method of record-keeping that lets you track just where your money comes from and where it goes.

• Using double-entry means that money is never gained nor lost---it is always transferred from somewhere (a source account) to somewhere else (a destination account). This transfer is known as a transaction, and each transaction requires at least two accounts.

• An account in GnuCash is a record for keeping track of what you own, owe, spend or receive. For example, if you pay a phone bill with a check, money transfers from checking to the phone company. In GnuCash, this is a transaction transferring money from a checking account to a phone expense account. You probably already think of your checking account as a bank "account," but your expenses (such as phone bill) are also "accounts".

• This double-entry concept has been around since the 13th century, and its purpose has always been to reduce the likelihood of data-entry errors.

Accounting Cycle• Invoice• Entry• Debit• Credit• Compound Entry

Nouns• Post• Debit• Credit• Bill• Revenue

Verbs• Make an entry• Post up to / post to• Double Entry Method• Historical Cost Principle• In the real world

Phrases

Accounting CycleIdentify

the transaction

• an original source document (invoice, receipt , cancelled check, time card, deposit slip, purchase order) which provides:

• date • amount • description (account or business purpose) • name and address of other party (if practical)

Analyze

the transaction

• determine which accounts are affected, how (increase or decrease), and how much

Accounting CycleMak

e Journal entries

• record the transaction in the journal as both a debit and a credit

• journals are kept in chronological order • journals may include sales journal, purchases

journal, cash receipts journal, cash payments journal, and the general journal

Post to

ledger

• transfer the journal entries to ledger accounts • ledger is kept by account • ledger accounts may be T-account form or include

balances

Accounting Cycle Video Accounting Equation

• What is assumed? • What is ALO• What are the types

of Assets• What must the

sides be?

• Video

Finance and Accounts

Finance and Accounts

Key Terms

Costs

• not influenced by the amount produced but can change in the long run e.g., insurance costs, administration, rent, some types of labour costs (salaries), some types of energy costs, equipment and machinery, buildings, advertising and promotion costs

Fixed (Indirect/Overheads) –

• vary directly with the amount produced, e.g., raw material costs, some direct labour costs, some direct energy costs

Variable (Direct)

• where costs not directly attributable to either of the above, for example, some types of energy and labour costs

Semi-fixed

Costs

• Fixed Costs (FC)+ Variable Costs (VC)

Total Costs (TC)

• TC/Output (Q)• AC (unit costs) show the amount it costs

to produce one unit of output on average

Average Costs

• the cost of producing one extra or one fewer units of production

• MC = TCn – TCn-1

Marginal Costs (MC)

Revenue

• Total Revenue – also known as turnover, sales revenue or ‘sales’ = Price x Quantity Sold

• TR = P x Q• Price – may be a variety of different prices

for different products in the portfolio• Quantity – could be global sales

Profit

• Profit (Π) = TR – TC• Normal Profit – the minimum amount

required to keep a business in a particular line of production

• Abnormal/Supernormal Profit – the amount over and above the amount needed to keep a business in its current line of production

Break Even

Break Even• Occurs where Total Costs = Total Revenue• Start-up costs – fixed costs• Running costs – variable costs• Revenue stream depends on price charged• ‘Low’ price – need to sell more to break-even• ‘High’ price – lower level of sales required before breaking

even

Fixed Costs• Break-Even Point = --------------- Contribution

Purpose of Accounts

Profit and Loss Account - Flow

Profit and Loss Account• Shows the flow of sales and costs over a period• Shows the level of profit or loss made• Shows what has been done

with the profit or loss

Profit and Loss AccountConsolidated Profit & Loss Account for the year ended 2003 2002 2001

Weeks 52 52 52

Currency £ million £ million £ million

Turnover 7688.0 8340.0 9278.0

Cost of sales -7263.0 -8291.0 -8757.0

Gross Profit 425.0 49.0 521.0

Operating Expenses -130.0 -137.0 -77.0

Operating Profit 295.0 -88.0 444.0

Other costs/income 95.0 166.0 -68.0

Profit before interest and taxation 390.0 78.0 376.0

Net interest receivable (payable) -255.0 -278.0 -226.0

Profit on ordinary activities before taxation 135.0 -200.0 150.0

Tax on profit on ordinary activities -50.0 -71.0 -69.0

Profit on ordinary activities after taxation 85.0 -129.0 81.0

Equity minority interests -13.0 -13.0 -14.0

Profit for the financial period 72.0 -142.0 67.0

Dividends 0.0 -193.0

Retained profit 72.0 -142.0 -126.0

Profit and Loss Account for British Airways plcSource: http://www.bized.ac.uk/cgi-bin/ratios/ratiodata.pl

Turnover – the revenue earned over the year

Gross Profit = turnover – cost of sales

Operating Expenses – the fixed costs

Operating or Net Profit = Gross profit – operating costs

Subtract other costs and expenses incurred to get profit before tax

Final section called ‘appropriation account’ – shows where the profit/loss is going

Dividend – the share of the profit returned to shareholders

Retained Profit – the amount kept back for future investment, etc.

Balance Sheet - Snapshot

Balance Sheet

• A snapshot of the firm’s position at a point in time

• Shows what a company owns (assets) and what it owes (liabilities)

• Balance Sheet shows what assets a company has (use of funds) and where the money came from to acquire those assets (source of funds)

Balance Sheet – Part 1

Consolidated Balance Sheet for the year ended 2003 2002 2001

Weeks 52 52 52

Currency £ million £ million £ million

Fixed assets

Intangible Assets 164.0 105.0 60.0

Tangible Assets 9487.0 10509.0 10662.0

Investments 524.0 489.0 426.0

Total Fixed Assets 10175.0 11103.0 11148.0

Current assets

Stock 87.0 109.0 170.0

Debtors due within one year 986.0 1231.0 1444.0

Short-term investments 1430.0 1155.0 865.0

Cash at bank and in hand 222.0 64.0 71.0

Total Current Assets 2725.0 2559.0 2550.0

Fixed Assets – assets not used up in production or lasting longer than one year – equipment, buildings, machinery, etc.

Fixed assets can be tangible – i.e. physical items or intangible – i.e. brand name, goodwill.

Current Assets: assets that are used up during production and which are likely to yield cash in the coming year – for example, stock will be sold and debtors owing the business money will pay up!

Balance Sheet – Part 2

Creditors: Amounts falling due within one year -2904.0 -3201.0 -3308.0

Net Current Assets (liabilities) -179.0 -642.0 -758.0

Total assets less current liabilities 9996.0 10461.0 10390.0

Creditors: Amounts falling due after more than one year -6553.0 -7097.0 -6901.0

Provisions for liabilities and charges -1169.0 -1157.0 -1164.0

Net assets 2274.0 2207.0 2325.0

Capital and reserves

Called-up share capital 271.0 271.0 271.0

Share premium 788.0 788.0 788.0

Other reserves 270.0 270.0 290.0

Profit and loss account 729.0 687.0 772.0

Equit shareholders' funds 2058.0 2016.0 2121.0

Minority interests 216.0 191.0 204.0

Total capital employed 2274.0 2207.0 2325.0

And to those who are longer term creditors – loans, mortgage on property etc

This leaves us with ‘Net Assets’

It can ce from share capital and from retained profit (profit and loss account)

The total capital employed must be the same as the sum of the net assets – hence the term ‘balance’ sheet!

Balance Sheet

• A guide to the structure of the assets of a company

• A guide to the level of gearing – the ratio of loan to share capital

• Gives a guide as to the degree of working capital – the amount the company has to be able to pay its everyday debts (current assets – current liabilities)

• Shows the total value of a firm at that moment in time

WritingFragments

Fragments• Rule #1: Fragments are illegal

• Rule #2: Some place need

• Rule #3: In case of discrepancy, ignore Rule #1

05/09/08

Fragments• Sentence—a complete unit of thought

containing at least one independent clause that begins with a capital letter and ends with a period, question mark, or exclamation point

• Independent Clause—a cluster of words containing a subject and a predicate or verb

• Fragment—a set of words punctuated as a sentence, but lacking one or more of the elements usually considered necessary to a sentence

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There are two basic types

1. The word combination which is missing the subject, verb, or both

2. The dependent clause which cannot “stand” alone

The dependent clause is alone, confused, and clinging to something—the independent clause.

Subject

Verb

Type #1 Fragments

• No-Subject FragmentExample—Is tired of asking questions.

• No-Verb FragmentExample—My sister frequently working late at night.

• No-Subject, No-Verb Fragment

Example—So kind of you.

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Type #2 Fragments

• A dependent or subordinate clause does NOT make a complete statement and cannot “stand” alone. There are basically three types of dependent clauses—adverb, adjective, and noun.

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Type #2 Fragments

• Adverb Dependent Clause—serves the function of an adverb, begins with a subordinating conjunction [after, although, as, as if, as long as, as soon as, as though, because, now, if, in order that, provided (that), since, so (that), than, though, till, unless, until, when, whenever, where, wherever, while]• Example of an Adverb Dependent Clause: When he is

here, I feel comfortable.• Example of an Adverb-Clause Fragment: Since they

are going.05/09/08

Type #2 Fragments (cont.)

• Adjective Dependent Clause—serves the function of an adjective, begins with a relative pronoun (who, whoever, whom, whomever, whose, that, what, which)

• Example of an Adjective Dependent Clause: This is the house that I want to buy.• Example of an Adjective-Clause Fragment: Which I

cannot buy.

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Type #2 Fragments (cont.)

• Noun Dependent Clause—serves the function of a noun

• Example of a Noun Dependent Clause: That I want to go is a secret.• Example of a Noun-Clause Fragment: Whomever I see.

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Type #2 Fragments (cont.)

• Remember that a dependent clause has a subject and a verb but that the dependent clause cannot “stand” alone.

• Seemingly, most fragments in college papers are of the dependent-clause type.

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Determining Fragments

When determining whether a group of words is a sentence or a fragment, ask the following questions:

• Is there a subject?• Is there a complete verb?• Is there an independent clause?

• If any answer is NO, then the group of words is a fragment.

• If all answers are YES, then the group of words is a sentence.

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Business Letter

6 characteristics that all business letters share:1. Starting Point: reason for contact2. Purpose: discuss, announce, clarify, confirm3. Form: semi-block or block, memo etc…4. Audience: who are you speaking to?5. Voice: direct and sincere6. Point of View: person to person (I) general or

group discussion (he she they)

Form of the Business LetterA letter must be professional and look professional.

The two formats for writing business letters are the following:

• Semi-Block• Full Block

Additional items to keep in mind when setting up your letter:

Use margins left and right, top and bottom, from 1 to 1.5inches.

Center the letter vertically, from top to bottom.

The 7 parts of a business letter

1. Heading2. Inside address3. Salutation 4. Body5. Complimentary closing6. Signature7. Enclosure: when needed

The Heading

The heading gives the writer’s complete address with the date of application.

This would be your address!

The Inside AddressGives the reader’s name and address.

If you’re not sure who to address or how to spell a person’s name, you could call the company for the information.

If the person’s title is a single word, place it after the name and a comma. A longer title goes on a separate line.

The SalutationBegins with Dear and ends with a colon, NOT a

comma!Do not guess to whom you should address your

letter to!Use Mr. or MS. Plus the person’s last name, unless

you are well acquainted.If you can’t get the person’s name, replace the

salutation with Dear or Attention: or an appropriate title for the reader: Sales Manager, To Whom it May Concern: etc…NEVER use Dear Sir or Gentlemen.

The Body The body should consist of single-spaced

paragraphs with double-spacing between paragraphs.

DO NOT INDENT THE PARAGRAPHS!

Complimentary Closing For the closing use Sincerely, Yours truly, Thank

you…followed by a comma.

Capitalize only the first word.

SignatureThe signature includes the writer’s

handwritten name plus the typed name.

If a document (brochure, form, copy, etc..) is enclosed with the letter, the word Enclosure or Encl. appears below the initials.

If you send more than one copy of the letter out, type the letters cc: plus the person’s or department’s name beneath the enclosure line.

Spacing within a letterAfter the Heading: 4 spacesAfter the Inside Add.: 2 spacesAfter the Salutation: 2 spacesBetween the paragraphs: 1 space EXCEPT for the

final paragraph where you skip 2 spaces (before closing)

After Closing (between closing and sign.) skip 4 spaces.