Accounting, or accountancy, is the measurement, processing
and communication of financial information about economic entities. Accounting,
which has been called the "language of business", measures the
results of an organization's economic activities and conveys this information
to a variety of users including investors, creditors, management, and
regulators. Practitioners of accounting are known as accountants. The terms
accounting and financial reporting are often used as synonyms.
Accounting can be divided into several fields including
financial accounting, management accounting, auditing, and tax accounting.
Financial accounting focuses on the reporting of an organization's financial
information, including the preparation of financial statements, to external
users of the information, such as investors, regulators and suppliers; and
management accounting focuses on the measurement, analysis and reporting of
information for internal use by management. The recording of financial
transactions, so that summaries of the financials may be presented in financial
reports, is known as bookkeeping, of which double-entry bookkeeping is the most
common system.
Accounting is facilitated by accounting organizations such
as standard-setters, accounting firms and professional bodies. Financial
statements are usually audited by accounting firms, and are prepared in
accordance with generally accepted accounting principles (GAAP). GAAP is set by
various standard-setting organizations such as the Financial Accounting
Standards Board (FASB) in the United States and the Financial Reporting Council
in the United Kingdom. As of 2012, "all major economies" have plans
to converge towards or adopt the International Financial Reporting Standards
(IFRS).
Etymology
Both the words accounting and accountancy were in use in
Great Britain by the mid-1800s, and are derived from the words accompting and
accountantship used in the 18th century. In Middle English (used roughly
between the 12th and the late 15th century) the verb "to account" had
the form accounten, which was derived from the Old French word aconter, which
is in turn related to the Vulgar Latin word computare, meaning "to
reckon". The base of computare is putare, which "variously meant to
prune, to purify, to correct an account, hence, to count or calculate, as well
as to think."
The word "accountant" is derived from the French
word compter, which is also derived from the Latin word computare. The word was
formerly written in English as "accomptant", but in process of time
the word, which was always pronounced by dropping the "p", became
gradually changed both in pronunciation and in orthography to its present form.
Accounting and accountancy
Accounting has variously been defined as the keeping or
preparation of the financial records of an entity, the analysis, verification
and reporting of such records and "the principles and procedures of
accounting"; it also refers to the job of being an accountant.
Accountancy refers to the occupation or profession of an
accountant, particularly in British English.
Accounting affects the economy
Although financial accounting produces past-oriented
reports, it is based on generally accepted accounting principles and generally
accepted accounting practices compliant with International Financial Reporting
Standards/US GAAP. In order to prepare the financial accounts/reports an entity
has to comply with these GAAPs and gaaps. Which of these accounting practices
and principles the board of directors choose at the start of the financial
period and whatever changes in these generally accepted accounting principles
and practices are implemented during the accounting period, affect the entity´s
economy and affect the financial accounts (financial reports) prepared at the
end of the financial period. When all entities implement the same change during
the financial year as required by IFRS/US GAAP, then that affects the entire
economy.
History
Early 19th-century ledger.
The history of accounting is thousands of years old and can
be traced to ancient civilizations. The early development of accounting dates
back to ancient Mesopotamia, and is closely related to developments in writing,
counting and money; there is also evidence for early forms of bookkeeping in
ancient Iran, and early auditing systems by the ancient Egyptians and
Babylonians. By the time of the Emperor Augustus, the Roman government had
access to detailed financial information.
Double-entry bookkeeping developed in medieval Europe, and
accounting split into financial accounting and management accounting with the
development of joint-stock companies. Accounting began to transition into an
organized profession in the nineteenth century, with local professional bodies
in England merging to form the Institute of Chartered Accountants in England
and Wales in 1880.
Topics
Accounting has several subfields or subject areas, including
financial accounting, management accounting, auditing, taxation and accounting
information systems.
Financial accounting
Financial accounting is financial capital maintenance in
either nominal monetary units (Historical Cost Accounting) during low and high
inflation and deflation or units of constant purchasing power (Constant
Purchasing Power Accounting) as required in IFRS during hyperinflation.
Financial accounting focuses on the reporting of an organization's financial
information to external users of the information, such as investors, regulators
and suppliers either based on the HCA model or the CPPA model. It measures and
records business transactions and prepares financial statements for the external
users in accordance with generally accepted accounting principles (GAAP). GAAP,
in turn, arises from the wide agreement between accounting theory and practice,
and change over time to meet the needs of decision-makers.
Financial accounting produces past-oriented reports—for
example the financial statements prepared in 2006 reports on performance in
2005—on an annual or quarterly basis, generally about the organization as a
whole.
Management accounting
Management accounting focuses on the measurement, analysis
and reporting of information that can help managers in making decisions to
fulfil the goals of an organization. In management accounting, internal
measures and reports are based on cost-benefit analysis, and are not required
to follow GAAP.
Management accounting produces future-oriented reports—for
example the budget for 2006 is prepared in 2005—and the time span of reports
varies widely. Such reports may include both financial and nonfinancial information,
and may, for example, focus on specific products and departments.
Auditing
Auditing is the verification of assertions made by others
regarding a payoff, and in the context of accounting it is the "unbiased
examination and evaluation of the financial statements of an
organization".
An audit of financial statements aims to express or disclaim
an opinion on the financial statements. The auditor expresses an opinion on the
fairness with which the financial statements presents the financial position,
results of operations, and cash flows of an entity, in accordance with GAAP and
"in all material respects". An auditor is also required to identify
circumstances in which GAAP has not been consistently observed.
Accounting information systems
An accounting information system is a part of an
organisation's information system that focuses almost exclusively on processing
quantitative data.
Organizations
Professional bodies
Professional accounting bodies include the American
Institute of Certified Public Accountants (AICPA) and the other 179 members of
the International Federation of Accountants (IFAC), including CPA Australia,
and Institute of Chartered Accountants in England and Wales (ICAEW).
Professional bodies for subfields of the accounting professions also exist, for
example the Chartered Institute of Management Accountants (CIMA). Many of these
professional bodies offer education and training including qualification and
administration for various accounting designations, such as certified public
accountant and chartered accountant.
Accounting firms
Depending on its size, a company may be legally required to
have their financial statements audited by a qualified auditor, and audits are
usually carried out by accounting firms.
Accounting firms grew in the United States and Europe in the
late nineteenth and early twentieth century, and through several mergers there
were large international accounting firms by the mid-twentieth century. Further
large mergers in the late twentieth century led to the dominance by the
auditing market by the Big Five accounting firms: Arthur Andersen, Deloitte,
Ernst & Young, KPMG and PricewaterhouseCoopers.[39] The demise of Arthur
Andersen following the Enron scandal reduced the Big Five to the Big Four.
Standard-setters
Generally accepted accounting principles (GAAP) are
accounting standards issued by national regulatory bodies. In addition, the
International Accounting Standards Board (IASB) issues the International
Financial Reporting Standards (IFRS) implemented by 147 countries. While
standards for international audit and assurance, ethics, education, and public
sector accounting are all set by independent standard settings boards supported
by IFAC. The International Auditing and Assurance Standards Board sets
international standards for auditing, assurance, and quality control; the
International Ethics Standards Board for Accountants (IESBA) sets the internationally appropriate
principles- based Code of Ethics for Professional Accounts the International
Accounting Education Standards Board (IAESB) sets professional accounting
education standards; International Public Sector Accounting Standards Board
(IPSASB) sets accrual-based international public sector accounting standards
Organizations in individual countries may issue accounting
standards unique to the countries. For example, in the United States the
Financial Accounting Standards Board (FASB) issues the Statements of Financial
Accounting Standards, which form the basis of US GAAP, and in the United
Kingdom the Financial Reporting Council (FRC) sets accounting standards.[10]
However,as of 2012 "all major economies" have plans to converge
towards or adopt the IFRS.
Education and qualifications
Accounting degrees
At least a bachelor's degree in accounting or a related
field is required for most accountant and auditor job positions, and some
employers prefer applicants with a master's degree. A degree in accounting may
also be required for, or may be used to fulfil the requirements for, membership
to professional accounting bodies. For example, the education during an
accounting degree can be used to fulfil the American Institute of CPA's (AICPA)
150 semester hour requirement, and associate membership with the Certified
Public Accountants Association of the UK is available after gaining a degree in
finance or accounting.
A doctorate is required in order to pursue a career in
accounting academia, for example to work as a university professor. The Doctor
of Philosophy (PhD) and the Doctor of Business Administration (DBA) are the
most popular degrees. The PhD is the most common degree for those wishing to
pursue a career in academia, while DBA programs generally focus on equipping
business executives for business or public careers requiring research skills
and qualifications.
Professional qualifications
Professional accounting qualifications include the Chartered
Accountant designations and other qualifications including certificates and
diplomas. In the United Kingdom, chartered accountants of the ICAEW undergo
annual training, and are bound by the ICAEW's code of ethics and subject to its
disciplinary procedures. In the United States, the requirements for joining the
AICPA as a Certified Public Accountant are set by the Board of Accountancy of
each state, and members agree to abide by the AICPA's Code of Professional
Conduct and Bylaws.
Accounting research
Accounting research is research on the effects of economic
events on the process of accounting, and the effects of reported information on
economic events. It encompasses a broad range of research areas including
financial accounting, management accounting, auditing and taxation.
Accounting research is carried out both by academic
researchers and practicing accountants. Academic accounting research
"addresses all aspects of the accounting profession" using the
scientific method, while research by practicing accountants focuses on solving
problems for a client or group of clients. Academic accounting research can
make significant contribution to accounting practice, although changes in
accounting education and the accounting academia in recent decades has led to a
divide between academia and practice in accounting.
Methodologies in academic accounting research can be
classified into archival research, which examines "objective data
collected from repositories"; experimental research, which examines data
"the researcher gathered by administering treatments to subjects";
and analytical research, which is "based on the act of formally modeling
theories or substantiating ideas in mathematical terms". This
classification is not exhaustive; other possible methodologies include the use
of case studies, computer simulations and field research.
Accounting and computer software
Many laborious practices have been simplified with the help
of computer software. Enterprise resource planning (ERP) software provides a
comprehensive, centralized, integrated source of information that companies can
use to manage all major business processes, from purchasing to manufacturing to
human resources. This software can replace up to 200 individual software
programs that were previously used. Computer integrated manufacturing allows
products to be made and completely untouched by human hands and can increase
production by having less errors in the manufacturing process.
Computers have reduced the cost of accumulating, storing,
and reporting managerial accounting information and have made it possible to
produce a more detailed account of all data that is entered into any given
system. They have also changed business to business interaction through
e-commerce. Rather than dealing with multiple companies to purchase products, a
business can purchase a product at a less expensive price and take out the
third party and vastly reduces expenses companies once accrued.
Additionally, Inter-organizational information system enable
suppliers and businesses to be connected at all times. When a company is low on
a product the supplier will be notified and fulfill an order immediately which
eliminates the need for someone to do inventory, fill out the proper documents,
send them out and wait for their products.
Accounting scandals
The year 2001 witnessed a series of financial information
frauds involving Enron, auditing firm Arthur Andersen, the telecommunications
company WorldCom, Qwest and Sunbeam, among other well-known corporations. These
problems highlighted the need to review the effectiveness of accounting
standards, auditing regulations and corporate governance principles. In some
cases, management manipulated the figures shown in financial reports to
indicate a better economic performance. In others, tax and regulatory
incentives encouraged over-leveraging of companies and decisions to bear
extraordinary and unjustified risk.
The Enron scandal deeply influenced the development of new
regulations to improve the reliability of financial reporting, and increased
public awareness about the importance of having accounting standards that show
the financial reality of companies and the objectivity and independence of auditing
firms.
In addition to being the largest bankruptcy reorganization
in American history, the Enron scandal undoubtedly is the biggest audit
failure. It involved a financial scandal of Enron Corporation and their
auditors Arthur Andersen, which was revealed in late 2001. The scandal caused
the dissolution of Arthur Andersen, which at the time was one of the five largest
accounting firms in the world. After a series of revelations involving
irregular accounting procedures conducted throughout the 1990s, Enron filed for
Chapter 11 bankruptcy protection in December 2001.
One consequence of these events was the passage of
Sarbanes–Oxley Act in 2002, as a result of the first admissions of fraudulent
behavior made by Enron. The act significantly raises criminal penalties for
securities fraud, for destroying, altering or fabricating records in federal
investigations or any scheme or attempt to defraud shareholders.
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