Accounting, or
accountancy, is the
measurement, processing and communication of financial information about
economic entities.
[1][2] Accounting, which has been called the "language of business",
[3] measures the results of an organization's economic activities and conveys this information to a variety of users including
investors,
creditors,
management, and
regulators.
[4] 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.
[5][6] 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;
[7] and management accounting focuses on the measurement, analysis and reporting of information for internal use by management.
[1][7]
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.
[8]
Accounting is facilitated by
accounting organizations such as standard-setters,
accounting firms and
professional bodies.
Financial statements are usually audited by
accounting firms,
[9] and are prepared in accordance with
generally accepted accounting principles (GAAP).
[7] GAAP is set by various standard-setting organizations such as the
Financial Accounting Standards Board (FASB) in the United States
[1] and the Financial Reporting Council in the
United Kingdom.
[10] As of 2012, "all major economies" have plans to
converge towards or adopt the
International Financial Reporting Standards (IFRS).
[11]
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.
[12] 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,
[13] 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."
[13]
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.
[14]
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.
[15][16][17]
Accountancy refers to the
occupation or
profession of an accountant,
[18][19][20] particularly in
British English.
[15][16]
History
The history of accounting is thousands of years old and can be traced to
ancient civilizations.
[21][22][23] The early development of accounting dates back to ancient
Mesopotamia, and is closely related to developments in
writing,
counting and
money;
[21] there is also evidence for early forms of
bookkeeping in ancient
Iran,
[24][25] and early
auditing systems by the ancient
Egyptians and
Babylonians.
[22] By the time of the Emperor
Augustus, the
Roman government had access to detailed financial information.
[26]
Double-entry bookkeeping developed in
medieval Europe,
[27] and accounting split into
financial accounting and
management accounting with the development of
joint-stock companies.
[28] Accounting began to transition into an organized profession in the nineteenth century,
[29] with local
professional bodies in England merging to form the
Institute of Chartered Accountants in England and Wales in 1880.
[30]
Topics
Accounting has several subfields or subject areas, including
financial accounting,
management accounting,
auditing,
taxation and
accounting information systems.
[5][6]
Financial accounting
Financial accounting focuses on the reporting of an organization's
financial information to external users of the information, such as
investors,
regulators and
suppliers. It measures and records business transactions and prepares
financial statements for the external users in accordance with
generally accepted accounting principles (GAAP).
[7] GAAP, in turn, arises from the wide agreement between
accounting theory and practice, and change over time to meet the needs of decision-makers.
[1]
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.
[7]
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.
[7]
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.
[7]
Auditing
Auditing is the verification of assertions made by others regarding a payoff,
[31] and in the context of accounting it is the "
unbiased examination and evaluation of the financial statements of an organization".
[32]
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.
[33]
Accounting information systems
An accounting information system is a part of an organisation's
information system that focuses almost exclusively on processing quantitative data.
[34]
Tax accounting
Main article:
Tax accounting
U.S. tax accounting concentrates on the preparation, analysis and
presentation of tax payments and tax returns. The United States’ tax
system has a complicated set of accounting method characteristic for tax
accounting purposes. Although tax accounting largely applies under
generally accepted accounting principles (GAAP), a different accounting method may cause a quite different.
[35] In the U.S.’s organizational form and taxes: there are four basic forms of business ownerships: the
Sole proprietorship, the
partnership, the
corporation, and the limited liability company. Corporate income taxes structures include
corporation and personal income taxes, which contains,
sole proprietorship,
partnership
and limited liability Company. Corporate Income taxes include marginal,
which is taxed on each additional dollar of income, average corporate
tax rates, which is basic on total tax as a percentage of income, and
basic corporate income tax structure. The current corporate-tax rate is
from 15 percent to 39 percent.
[35]
“The current corporate income tax rate is 15 percent on the first
$50,000 of income, 25 percent on the next $25,000, 34 percent on the
next $25,000, 39 percent on the next $235,000, 34 percent on the next
$9,665,000, 5 percent on the next $5000,000, 38 percent on the next
$3,333,333, 35 percent on all income above $18,333,333.”
[35]
The personal- tax rate starts lower than the corporate-tax rate in the
lowest brackets to the higher income levels. “15 percent for corporate
income of less than $50,000 and 10 percent in the lowest personal
brackets for all filing statures for the lowest income, and the highest
personal rate of 35 percent never exceeds the highest corporate rate of
35 percent.”
[35]
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),
[36] including
CPA Australia, Institute of Chartered Accountants of India (ICAI) 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).
[37]
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.
[38][39]
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.
[9]
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.
[40] The
demise of Arthur Andersen following the
Enron scandal reduced the Big Five to the
Big Four.
[41]
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.
[1]
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)
[42] sets the internationally appropriate principles- based
Code of Ethics for Professional Accounts the
International Accounting Education Standards Board (IAESB) sets professional accounting education standards;
[43] International Public Sector Accounting Standards Board (IPSASB) sets accrual-based international public sector accounting standards
[44]
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,
[1] 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.
[11]
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.
[45]
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,
[46] and associate membership with the
Certified Public Accountants Association of the UK is available after gaining a degree in finance or accounting.
[47]
A
doctorate is required in order to pursue a career in accounting
academia, for example to work as a university
professor.
[48][49] 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.
[48]
Professional qualifications
Professional accounting qualifications include the
Chartered Accountant designations and other qualifications including certificates and diplomas.
[50] 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.
[51] 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. In India the Apex Accounting body constituted by parliament
of India is "Institute of Chartered Accountants of India" (ICAI) was
known for its rigorous training and study methodology for granting the
Qualification.
[52]
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.
[53]
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.
[54] Academic accounting research can make significant contribution to accounting practice,
[54][55] although changes in accounting
education and the accounting academia in recent decades has led to a divide between academia and practice in accounting.
[56]
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.
[57]
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 fewer 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.
[58]
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.
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.
[59]
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.
[59]
In addition to being the largest bankruptcy reorganization in American history, the
Enron scandal undoubtedly is the biggest audit failure.
[60] 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.
[61]
One consequence of these events was the passage of
Sarbanes–Oxley Act in the
United States
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.
[62]
See also
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