Unit 1: Introduction to accounting

When deciding on a future career a lot of people don't give accountancy a second
thought. Most people don't realize how varied the world of accounting is and in fact it is
often seen as boring. The truth is that accounting is the backbone of any organization
and offers a wide number of attractive careers within it.
Below you will hear about just some of the more common careers in the field of
accountancy, there are of course many more, but we don't have time to talk about all of
them.
When we consider the accounts team within a company, we generally think about
clerks, both sales ledger clerks and purchase ledger clerks recording the financial
information from all transactions the company makes. Other roles include the payroll
clerk responsible for processing staff salaries and the tax which occurs from them.
Higher up the hierarchy we have the management accountant who finalizes the
accounts and prepares the annual financial statements. The people doing these jobs
make sure that the directors or owners of the company always know its true financial
position.
However, accounting is more than just reporting financial data. A good accounts team
actually works to save the company money by minimizing the tax payable and delaying
payments so companies can earn interest from their banks.
These job roles are not so clear in smaller accounting practices, where the accounting
staff often need to perform various tasks from meeting clients to helping with loan
applications. Often the majority of the work in these smaller practices is done
by bookkeepers. Generally, the owner of the practice is the most senior accountant
and is usually a chartered accountant, which means that their signature is accepted
on the financial statements.
The job opportunities for accountants don't stop there: auditors are the police of the
accounting world and when they are called into a company it is their job to ensure that
the accounts were done in the correct way and that everything was accounted for. The
most feared of these auditors are the government auditors who are sent to companies
suspected of somehow breaking the rules. Working as an auditor is very different from
other accountancy work as there is no routine; you work in many locations and have
contact with many people. Although, you should be thick-skinned as often the
accounting staff in companies do not like the idea of being audited.

Career progression within accountancy often results from a specialist knowledge in a

particular area, tax advisors are able to help their clients lower their tax bill thanks to
their in-depth knowledge of taxation law and specifically what a client can off-set against
tax.
As you can see the world of accountancy offers various careers, but in all of these areas
there are some qualities that a potential accountant should have. Firstly, as accounting
is the process of collecting and classifying financial data all accountants need to be
perfectionists unwilling to accept anything less than an exact result. Also, as
accountants deal with large volumes of data they need to have a good eye for detail and
a real love of numbers.
A talented accountant will also be able to advise their clients on the best course of
action to take so as to save money and at the same time stay within the local
accounting standards.
Accountants have to follow very strict rules and codes of conduct in order to make
sure that they do everything in a legal way. If an accountant breaks these rules they
could face severe punishment, but some accountants practice creative accounting to
get around rules without breaking them. Confidentiality is obligatory for all people
working with accounts as the financial data could be very sensitive.
Whether working in the public or private sector, accountants can expect to earn very
good salaries and also gain valuable knowledge on topics like income tax, value
added tax(VAT) and pension schemes which can help them in their life outside of work.
What's more, as accounting is such an important part of a company's success there will
always be a demand for good accountants.
After reading this text I hope that you will appreciate the complexity and the variety of
accounting and the value accountants serve in an organization. So the next time you
hear someone say that accounting is dull, please correct them. Accounting is about truth
and money, and there is nothing dull about that!

Unit 2: Making a career in accounting

In these uncertain economic times it can be hard to know which career path is right for
you, everywhere you look you can see job cuts and unemployment but the accounting
sector is still performing well.
A recent report on the starting salaries of 2012 university graduates stated that
accounting graduates salaries are still rising with an average salary of $42,500. When
you add that to the fact that in America accounting firms have almost recovered from the
effects of the global crisis, you can see why accountancy is becoming an attractive
prospect.
And that is not all, according to the Bureau of Labour Statistics the prediction is that in
the next 8 years the number of accounting jobs will rise from 1.2 million to 1.4 million in
the US.
With such positive reports a lot of young people are looking to become one of the next
generation of accountants. A university education is the most common route into
accounting but it is not the only way, many firms offer apprenticeships where you learn
while you work. This means starting at the bottom so for the first year you are more
likely to be making the tea than preparing the balance sheet, or trial balance.
Those people who have graduated with a degree in accounting can expect to jump in at
the deep end and start dealing with the debits and credits that make up the foundation
of accounting. Although, further training will usually be given before you are expected to
work on the more complex accounting issues such as deferral.
Before applying for a job you should consider the area that you would like to work in.
Accounting is not limited to the private sector, with many accounting graduates being
employed by governmental and non-profit organisations.
Public accounting is perhaps the most common choice because they employ the
most CPAs. Public accounting also offers a wide variety of roles such as: corporate
finance, due diligence, as well as the more traditional accounting and tax advice. Some
public firms also specialise in a particular sector, such as entertainment or travel, so you
can work in an area which interests you. The job of a public accountant is always
changing as new laws are introduced, so you must always be learning new skills.
Public accounting may not be for everyone, and if you prefer the idea of working for the
government, you would do well to apply to the Internal Revenue Service (IRS). Working
for the national agency often involves analysing a company's financial statements and

attempting to reconcile the tax which has been paid on the reported earnings. It is a job
with a great deal of responsibility and would best suit someone with a strong knowledge
of accounting and tax affairs.
Other government organisations also make use of accounting staff so you could even
end up working for the CIA, but of course you can't talk about it.
To do well in either of these areas you need to remember that whether you are dealing
with asole-trader, or a limited liability company (LLC), accounting is an exact science
and everyrecord must be precise. And if you are one of the increasing number of
accountants working for a multi-national corporation, you will need to be familiar with the
often confusing rules on double taxation and be up-to-date on the exchange rate of the
foreign currency you are working with.
There are even more opportunities if you continue your accounting education and get a
PhD in accounting. People, who do this often end up lecturing at Universities as well as
running successful practices or being CFO's of major corporations.
So remember the economy may be in bad shape, but a career in accountancy may just
be the best way to survive the crisis if you can cope with some of the challenges facing
the new generation of accountants.
These challenges include long hours. New graduates, especially, are often expected to
workin excess of 50 hour working weeks with many failing to meet the heavy workload
placed on them. Long hours are not the only challenge of a career in accounting though.
Major accounting firms are constantly raising the employment requirements with Big4
firms often only hiring MBA graduates.
Those who can meet the entry requirements and cope with the long hours, are likely to
find a rewarding career which will allow them to live in a comfortable style and enjoy the
finer things in life.

Unit 3: Bookkeeping
A lot of people look down on bookkeepers, and the act of bookkeeping is often seen as
one of the less challenging aspects of accountancy. However, without good
bookkeepers, accounts would find that they were faced with a huge amount of extra
work. Bookkeeping is the foundation of accounting and is just as, if not even more
important than some of the more 'glamorous' accounting work.

So why are bookkeepers seen as being less important to the success of an accounting
department than accountants? Well to get the answer to this, it is important to
understand what exactly bookkeeping is.
Bookkeeping within a business is basically the recording of any financial transactions.
These transactions include purchases, sales, receipts and payments- in fact just about
every financial transaction.
A lot of people think that bookkeeping and accounting is the same thing, but this is
wrong. The confusion comes from the fact that bookkeeping is an element of the
accounting process. Accountants create reports from the financial transactions, which
were recorded, and file the appropriate forms with the government. But it is the
bookkeeper who provides the accountant with the source information which these
reports are based on. So without the bookkeeper the accountant would be forced to
spend a great amount of time recording every transaction.
It is also incorrect to think that bookkeeping is easy. Bookkeepers use one of several
methods of recording transactions, the single entry bookkeeping system and
the double entry bookkeeping system being the most common. Of these methods, it
is universally recognised that double entry bookkeeping is a more effective system for
accounting. By using double entry you can prove the accuracy of the records
to ensure that the two sides agree. This being said double entry bookkeeping is known
for being difficult, with some qualified accountants not completely understanding it.
The
double
entry
system
works
by
recording
two
sides
to
each income or expendituretransaction. For example, if you buy a new computer for
the office the two sides would be that: the amount of money in your bank account would
decrease and the value of assets in the office would increase. This follows the
accounting equation that assets - liability =capital.
Traditionally, bookkeepers kept written records in the form of daybooks, sales ledgers,
purchase ledgers and other journals. Recently, computerised accounting programmes
have overtaken these in popularity as they allow bookkeepers to record transactions
faster and at the same time automatically generate reports based on the figures. In the
traditional paper form bookkeeping required an exact knowledge of which transactions
should be posted into which T-accounts, now a bookkeeper can do the same job by
memorising the nominal code attached to an account.

Although automated bookkeeping software has made bookkeeping easier, it is still an

area of great difficulty for anyone without suitable training or experience. Bookkeeping,
as with accounting, requires a thorough understanding of the system which is being
used and the effects of the transactions being posted.
In the single entry system, each transaction is recorded only once. This means that the
record does not accurately show the effect of the transaction and as such is less
effective. Single entry bookkeeping is often used by sole-traders starting out in business
as it requires little expert knowledge. In fact most people who have balanced their
chequebook have used a single entry system.
Bookkeepers bring 'the books' to the trial balance stage at which point the work is
passed to the accountant to prepare the income statement and balance sheet using the
work prepared by the bookkeeper.
Bookkeepers usually also deal with petty cash and authorise its use, VAT returns and
personal tax returns. In fact, just about any 'accounting' function that doesn't require an
official statement from a certified accountant.
In effect anyone working on accounts preparation before this stage can be labelled as a
bookkeeper although most people prefer a more formal title such as accounts payable.
Self-employed bookkeepers face the added difficulty of having to deal with clients who
have either incomplete or disorganised financial records and as a result have to spend
hours wading through boxes of receipts before they can start recording the financial
information contained in these receipts.
Unfortunately a lot of people remain unaware of the complexity of the role of the
bookkeeper, and the term is now more commonly used to show an individual preparing
basic financial records rather than a member of a professional accounting team.

Unit 4: Tax Accounting vs GAAP

In the 21st century many laws and regulations have been standardized but there are still
some standards which are specific to each country.
If you work in accounting in the US you will have heard of and understand tax
accounting, but your European counterpart will have no idea what it is. Unlike a lot of
countries where the generally accepted accounting principles (GAAP) is the only

method for calculating tax, accountants in America have two options; tax accounting
and GAAP.
So to clear up the question: What is the difference between GAAP and tax accounting?
The primary difference between the methods is that under GAAP, all financial
transactions must be recorded and accounted for whereas tax accounting focuses on
the transactions which have an impact on the tax situation of the company, with other
transactions being omitted.
The Generally Accepted Accounting Principles is the compulsory method of accounting
for a public company. Tax accounting can be similar, but with far more options
available.
Knowing the differences between these two methods of accounting will help you
determine the best method to use for your clients and your business.
GAAP exists to provide accounting principles, standards and practices, which as a
result of being standardised provides financial statements capable of being compared
amongst each other. The Internal Revenue Service (IRS) developed a tax accounting
system to levy taxes against net earnings or taxable income. Taxable income differs
from revenue as defined by GAAP.
Depreciation, the allocation of cost over the estimated useful life of an asset, also
varies between the two methods. Common depreciation methods under U.S. GAAP
include straight line and reducing balance depreciation. Tax accounting commonly
uses the Modified Accelerated Cost Recovery System, or MACRS, which uses declining
percentages defined by the IRS. In addition, the IRS allows taxpayers
to expense a fixed asset in the year of the purchase.
The accounting basis used in the production of financial statements determines how to
report transactions and what information appears on the finished financial statements.
Under GAAP the only option is accrual basis accounting. But the tax accounting
system allows for the use of cash, accrual or modified basis accounting. Developing and
using the GAAP accounting system can be too expensive for small business, so the IRS
lets smaller companies account for their business transactions using alternative
methods.

Using GAAP, unpaid due expenses accrue on the balance sheet. This results in an
expense accrual, which is a liability to be paid at a later date. Tax accounting does not
need an accrual basis unless you report your company tax return as an accrual basis
taxpayer.
The IRS imposes limits for both cash and modified basis accounting, which includes
income and expense reporting limits as well as revenue limits.
Having highlighted the differences between the two systems, it is clear that the two are
not equal and depending on your business one may be better suited for your needs.
There are several reasons why so many small and medium sized enterprises (SME)
use the tax accounting system over GAAP.
Tax accounting is significantly simpler than GAAP, as instead of having to record every
single transaction, only those which impact on the tax situation are taken into
consideration. This makes tax accounting the preferred method for the majority of CPAs
and SMEs.
Many firms use professional accountants to prepare the tax returns and financial
statements. When the basis of the taxes differs from the financial statements, more time
is spent on the process, resulting in higher fees. Businesses often change to tax
accounting basis when changes required by GAAP are too expensive.
Most business owners have a degree of knowledge on income taxes because they
usually check their returns and sign them. This knowledge should be consistent
with tax accounting principles. Tax regulations use everyday language and easily
understandable examples as they are not just meant for experienced accountants but
also business owners. GAAP rules are more technical and are designed for
professionals with wide financial knowledge who can fully understand and apply them.

Unit 5: Management Accounting

Most businesses are aware of the value of highly skilled accountants, as their
knowledge can save the company money. However, a lot of companies forget that good
accountants can actually help in increasing revenue and decreasing overheads as well.

Accountancy is much more than recording financial transactions in order to calculate

profit or show the tax liability of a company. Management accountants actually help
shape company policy and the direction that the company will take in the future.
Whereas financial accounting is focused on providing reports for both internal users like
the board of management and external users such as the tax office, management
accounting focuses on providing information for internal users so that they can choose
the correct course of action in any situation and confirm that actions are taken efficiently.
Unlike financial accounting, management accounting has no set of standard reports instead management accountants compile any reports which are likely to assist the
company in making the right choice.
So how can managerial accounting help your company?
The primary function of managerial accounting is focused on increasing knowledge
inside a company and as a result reducing risks connected with decision making.
Accountants candraft reports on the cost of production, workforce expenditure, and the
cost of various projects and schemes, among other activities. Managers may then utilise
these reports to measure the difference, or "variance," between the expected and
actual results, or to compare performance to other benchmarks.
Because of the need for a variety of detailed information about specific areas within a
company, the reports produced by management accountants are often much more indepththan financial accounting reports, such as balance sheet ratios and net income
calculations. Managerial reports can also differ from financial reports in the frequency at
which they are produced with these reports being prepared on a monthly, weekly or
even daily basis. One of the characteristics of most managerial accounting reports is the
summary format that they are presented in. This format makes it easier for managers to
quickly identify potential problem areas and then study those areas to aid in determining
the correct way to resolve these problems.
The majority of managerial accounting functions produce information which is used to
make decisions about the future and to evaluate the effectiveness of past decisions.
Monitoring financial results and measuring the outcome is called "controlling." The
person in charge of a company's accounting department is called the "controller." This
person plays a key role in planning and controlling processes throughout the company.

Management plans are formally shown as budgets, and the term "budgeting" usually
talks about management planning. The controller supervises the creation of budgets.
Budgets are often prepared for individual teams and departments within a company as
well as for the company as one entity.
After the budgets have been established, managerial accountants collect information
generated by the organization that indicates the actual company performance in
contrast to the budgeted figures.
The managerial accounting findings are presented using performance reports tailored
for the individual needs of the executives or departments. The performance reports
compare budgets with actual results for a particular time period, which allows
managers to identify problem areas.
Management accountants can also create special reports which are used to help make
decisions about proposed projects or possible takeovers. Reports are created to
analyse cost and benefit relationships connected to different variables. For example, if a
company's competitor lowers its prices, management may ask for a report comparing
possible responses, such as lowering its prices, or increasing advertising. These reports
usually include the collection of outside data as well as forecasting.
Managerial accounting staff are now often expected to help in creating strategies to
increase the profitability of a company and to cooperate in cross-functional teams with
managers from operational departments throughout the organization. As a result of
these additional duties, management accountants are now not only accountants but
key members of finance teams.

Unit 6: The Accounting Equation

Financial accounting is an area which can be explained simply by using the accounting
equation, which is assets = liabilities + capital.
But what does that really mean? To understand the significance of the equation, first we
must explore the meaning of the three words; assets, liabilities and capital. These terms
are often used in accounting but can have very different meanings.
In general, assets are something of value to the company but usually when we think of
assets we think of current and fixed assets. However, in the accounting equation we
should also take longterm and intangible assets into consideration as they all fall into

the category of assets and thus add value to an entity. Intangible assets can be hard
to quantify as we are often unable to compare them with the market. Intangible assets
include such things as licenses, intellectual property and goodwill which may have a
specific value to the entity.
The understanding of liabilities can be even more complicated as the numerous
classifications can leave even an experienced accountant scratching his head. These
classifications vary by region, but are based along the lines of: fixed, long-term, current,
trade, financial and contingent. Many of these appear to be self-explanatory but when it
comes to contingent liabilities it is important to remember that this is not an actual
liability, it represents a possible liability in an uncertain situation. Of course, you can
equate liabilities to negative assets.
Capital is generally understood as the money invested in the entity by the owner /
owners, but it can be so much more. Capital is divided into fixed capital which
represents the excess between the fixed assets and the fixed liabilities and working
capital which is the excess of current assets over current liabilities.
Having cleared up the terminology, we can start to explain the purpose of the
accounting equation.
The accounting equation is how double-entry bookkeeping is established. The equation
represents the relationship between the assets, liabilities, and owner's equity of a small
business. It is necessary to understand the accounting equation to learn how to read a
balance sheet.
The accounting equation shows what the firm owns (its assets) are purchased by either
what it owes (its liabilities) or by what its owners invest (its shareholder equity or
capital). This relationship is expressed in the form of an equation.
This equation must balance because everything the entity owns (assets) has to be
purchased with something, either a liability or owner's capital. Assets refer to items
likeinventory or accounts receivable. Examples of liabilities are bank loans or accounts
payable. Owner's capital or equity is the investment or capital the owner has in the firm.
The accounting equation can be shown in two other ways:
Liabilities = Assets - Owner's Equity
Owner's Equity = Assets - Liabilities

If you know any two of the three components of the accounting equation, you can
calculate the third component. If you look at a balance sheet, you will see that the
balance sheet is basically an extended form of the accounting equation.
There is also an expanded accounting equation which shows the relationship between
theincome statement and the balance sheet. The expanded accounting equation, after
you consider sales revenue and expenses, is:
Assets = Liabilities + Owner's Equity + Revenue - Expenses - Draws
The capital or (owner's equity) part of the accounting equation can be divided into two
parts - revenue and expenses. Until now, the accounting equation has focused on the
balance sheet components. Now, splitting the owner's equity part of the accounting
equation into revenues and expenses highlights the relationship between the balance
sheet and the income statement because the key components of the firm's income
statement are revenue and expenses.
Revenues are what any given business earns from its product or service. Expenses are
what it costs the business to operate and provide the aforementioned product or
service. The relationship between revenues and expenses is simple. If revenues are
greater than expenses, the business makes a profit. If revenues are less than
expenses, the businessincurs a loss.
The owner or owners of the entity may also withdraw a salary from the business. If the
company is an SME (small or medium enterprise), sole proprietorship, partnership, or
limited liability company, then the owner or owners will take a draw from the business as
their salaries. These drawings reduce the owner's equity in the entity.
It's vitally important that the accounting equation balance because, if not, your financial
reports will not make sense.

Unit 7: Depreciation and Amortization

If you ask any newly qualified accountant what they find hardest, they will almost
certainly answer depreciation and amortization. But why do people find these two
concepts so hard to master?
Well, for one thing depending on where you are located the terms may mean the same
thing, or may have decidedly different meanings.

Both depreciation and amortization are key aspects of accrual accounting and need to
be mastered by anyone wanting to make a career in accountancy. The aim of both
depreciation and amortization are to allocate the cost of an asset over the life of the
asset. To do this they need to carry over an expense account containing each years
depreciation figure.
As depreciation deals with tangible assets and amortization deals with intangible assets,
we usually find that depreciation is more commonly understood because we can
visualize the process easier. However, the various methods of depreciation can confuse
the matter greatly.
There are multiple methods of depreciating an asset, based either on time or the activity
of the asset. The most common of these are:
Straight line depreciation, in which the company calculates the salvage value of the
asset and then depreciates a set percentage over the useful life of that asset until
the net-book value reaches the salvage value. This is considered to be the simplest
method of depreciation, and as such is the most commonly used.
The sum-of-years-digits depreciation method is again based on time passing but is a
considerably more complicated method than the straight line method. It is used because
it results in accelerated depreciation of an asset. When using this method, the first
thing to do is to determine the years digits figures. For example, on an asset with a
useful life of five years these would be: 5, 4, 3, 2, 1. Then calculate the sum of the
figures, in this case 15. To get the depreciation rate we then divide the years digits
figures by the sum of figures, so in the first year the depreciation rate would be 5/15, in
the second year 4/15 etc. The result of this is that the asset depreciates quicker at the
start of its useful life than at the end.
Annuity depreciation is a method which is not based on time, but rather on cost. When
the asset is purchased its useful life is established and from this the number of uses
estimated. This could be miles traveled in the case of a vehicle or cycle turns in the
case of a production machine. This figure is then divided by the difference between the
cost and the salvage value of that asset, which gives a unit cost. Each year, the
depreciation is calculated on the actual usage of that asset by multiplying the unit cost.
Units of time depreciation works along a similar principle, but instead of a unit of use the
depreciation is calculated on a unit of time. This is used particularly when the asset is
not expected to be in use for the whole linear year.

The choice of depreciation method is determined by the type of asset.

Amortization of intangible assets is calculated in a similar way to the straight line
depreciation method with the notable exception of the useful life of the asset. The first
thing to do is to determine whether the asset has an infinite or finite life. An asset with
a finite lifemight be constricted by laws or regulations which prohibit its use after a
certain amount of time. An asset with an infinite life, such as goodwill, cannot be
amortized. Once you have the useful life of the asset, you need to determine the net
book value of the asset, which is typically the cost of purchase. Then amortization
occurs as in the straight line method until the net book value of the asset reaches zero
at the end of its useful life. Certain intangible assets may have a salvage value, if they
are able to be re-sold at the end of their useful life. In this case, the net book value will
decline year on year until it reaches the expected re-sale price.
Both depreciation and amortization present one major problem. The total cost of the
asset is paid in full in the first year but is accounted for over the useful life of the asset.
Therefore the company's actual current cash-flow situation can be misrepresented in
the accounts during this time.

Unit 8: Financial Statements

If you walked into any accounts office twenty years ago, you would have seen piles of
financial statements and reports in every corner. However, now, there is an increasing
trend towards the paperless office.
Accounting teams, much like other office workers, are using electronic copies to replace
the traditional hard copies of everything from tax returns to financial statements. But
how has this electronic revolution changed the accountants working day?
As you can imagine, accounting especially for larger corporations generates a lot of
paperwork. The actual accounts are only a small portion of the accounting records. To
start with each transaction has to be meticulously recorded which before computerized
programmes meant a large number of ledgers. These books were the basis for the
accounts so it was essential that they were accurately maintained. Each accounting
function would operate a different set of ledgers which would then be reconciled in the
process of generating the final accounts.
In each set of accounts, for each company the accounting firm had to prepare the
workings, otherwise known as T-accounts, the trial balance summarizing these

accounts, the bank reconciliations showing the cash in hand, a draft set of accounts
and of course the approved set of accounts, with accompanying notes to the
accounts and this was just the beginning.
Each company was also expected to keep records of all tax matters, in case of the need
to produce them for an audit. This meant hundreds or even thousands of receipts, bills
andinvoices. All of which were summarized on the tax returns, again more paper.
Additionally if a company made use of management accounting services, the number of
reports which were produced increased dramatically. Although these management
reports were only internal and as such did not need to be retained by law, it was
common practice for companies to store these along with the accounting records for
that year thus allowing easy reference.
All in all, a lot of paperwork was generated by the act of accounting which was not a
problem until it came time to find a certain piece of information from a previous year.
Then, accountants were completely reliant on the filing clerks who knew the system
but if something went wrong it could take weeks to find the right document.
The electronic revolution in accounting started with the invention of spreadsheets, which
allowed bookkeepers to perform complex calculations without the need of a calculator.
This greatly speeded up the process of reconciliation. Instead of waiting until after all
figures had been entered into the ledgers to see if the accounts balanced a bookkeeper
could keep track of the balance after each entry.
Of course spreadsheets had their limitations as it still required the user to
manually posteach transaction using the double entry system and as such the process
still requires a skilled bookkeeper to ensure that no errors occur.
With the development of computerized accounting programmes such as SAGE, the
double-entry system has been automated and the user need only enter the transaction
once and the second side will be automatically posted into the correct account. These
systems make the process of report generation much faster as all of the data is stored
and can be extracted in a variety of methods, by various criteria thus reports for any
given period can be generated almost instantly. The one disadvantage of computerized
accounting programmes comes from the difficulty in cross-checking journal entries
for irregularities as the data is presented as a list of transactions rather than being
clearly visible as a set of T-accounts. As such many experienced accountants still use
hard copies for ledger control.

Even governmental institutions have started accepting returns filed online which
eliminates the need for a printed hard copy at all although, it is still advisable to keep a
copy of any important document just in case.

Unit 9: Taxes: Part One

In the 21st Century, the number of different taxes that we are obliged to pay has
reached record levels which means as a society we are even less willing to pay them.
As well as income tax we are exposed to many other taxes including corporation
tax,capital gains tax, consumption tax and property taxes. All of this can be too much
to handle for an SME so accountants are often used to try to minimize the tax liability of
a company.
Certain taxes are unavoidable though. As a registered business entity you will have to
pay a consumption tax, which would either be sales tax in the US or value added tax in
the rest of the world. Sales tax is levied against the consumer, which means that the
company has no liability other than the act of collecting the tax which is calculated on
the sale price of a product. This tax is held by the company until a determined time
when it is paid to the appropriate governmental department. As there is no tax due from
the production of the goods, sales tax does not affect the profit of an organization,
unlike VAT which is levied on both the consumer and the producer.
Capital gains tax, which is basically a tax on the sale of a non-inventory asset that has
increased in value since purchase. The difference in value is then treated as a taxable
source of income and thus has tax levied against it. The rate of taxation varies
depending on the income tax bracket of the individual or corporation selling the asset
and whether it is a short or long-term gain. Short term gains are anything up to one
year. As any accountant dealing with capital gains tax knows, it is advisable to wait for
over 12 months after the point of purchase before selling the asset so that long-term
capital gains tax is due at a lower rate. Tax due on both short and long-term gains can
be deferred by a variety of methods.

Corporation tax is the taxation method for taxing the income of a business entity
classified as a corporation; the tax rate is dependent on the taxable earnings of that
corporation. As with income tax, the tax due may be reduced with the aid of tax credits.
Tax credits are offered to businesses for a variety of reasons with the most common of
these being, encouragement to invest in alternative energies, encouragement to employ
certain individuals, disaster relief or on earnings outside the US. These credits are
then offsetagainst the tax liability reducing the tax due.
Even individuals are confronted by an often confusing array of taxes. The most common
of these taxes is income tax, which taxes our earnings. People are often unaware how
much income tax they pay as it is dealt with by the employer who, while calculating the
wages for an employee also calculates the income tax due and deducts this from the
pay packet.
The PAYE system in England is the system of paying wages and appropriate taxes and
insurances on the cost of employees. This system allows employers to withhold any
deductions due on an employees salary, while calculating the correct payments for
statutory sick and maternity pay.
Tax affects everyone from an employee to the CEO of the largest corporation but if you
are in the position where you employee a good accountant, you can actually lower your
liability by exploiting loopholes in the anti-avoidance legislation.
A common method of avoiding income tax is for an employee in the higher tax bracket
to channel their wages through a shell company, thus changing the type of taxation from
income to corporation. Then drawing the maximum salary whilst remaining on the lower
tax bracket, after a certain number of years the shell company is then liquidated.
Accountants can also advise on the best type of investments so as to receive tax credits
from the government.
There is an old expression: Only two things in life are certain, death and taxes. Well,
we cant do anything about the former, but a good accountant can help with the latter.