Accounting Methods

American: Accounting is a kind of data processing and recording. In my country it's usually the accountant who decides on the form which this recording shall take and on the methods to be used.

Russian: Do you mean that in writing financial statements for stockholders and lenders accountants can make the firm look strong and healthy and when preparing tax returns, on the other hand, they can make the firm look poor and weak?

Am.: Accountants prepare financial statements according to rules set by law and by the accounting profession itself. Often the rules allow more than one way of reporting information.

R..: Accounts can be kept on an accrual or a cash basis. How do the two methods differ in real life?

Am.: Firms that keep their accounts on an accrual basis report costs and revenues in the year in which sales are made even if the customers do not pay until later. Those that keep their accounts on a cash basis report costs and revenues in the year in which payment is made.

R.: I know that each method has its pros and cons. But how does each method affect the way the outside users of the income statement and the balance sheet see the image of the company?

Am.: The accrual basis matches the income statement more closely to the balance sheet and accrual basis accounts show rapidly rising income. But little of the income is cash!

R..: What is more, the accrual basis assumes that all accounts receivable will be collected, but in reality some may not.

Am.: For these reasons, some people think the cash basis is a more prudent way to draw up an income statement. Accountants have also to decide how to determine the monetary value of an item included in a financial statement.

R.: What problems can arise here?

Am.: Assets can be recorded at the amount of cash paid to acquire them at the time of their acquisition.

R.: At the historical cost, in other words.

Am.: Yes. In addition, current replacement cost and net realizable value can be used. R.: Are goods held in inventory another problem area?

Am.: Yes, there are two ways of dealing with inventories. One is FIFO, the other is LIFO. JR.: Theoretically, I believe, we can argue in favour of both methods. Which works better in real life? Am.: In recent years many firms have switched from FIFO to LIFO.

R.: Do you have an explanation?

Am.: Yes. During periods of inflation, LIFO results in a higher cost of goods and, hence, a lower reported income. As a result a firm that uses LIFO pays less income tax.

Words you may need:

accounting method - метод учета

cash basis - метод записи доходов и издержек на счетах только при их поступлении и выплате; кассовая база

pros and cons за и против

the image of a company peny - репутация, имидж компании

monetary value of an item - стоимость операции (статьи в балансе) в денежном выражении

current replacement cost - текущая восстановительная стоимость

net realizable value - чистая (потенциальная) стоимость реализации

inventories pl -товарно-материальные запасы

FIFO - «первая партия на приход – первая в расход»

LIFO - «последняя партия в приход – первая в расход»

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