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.
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).
- 1 Etymology
- 2 History
- 3 Topics
- 4 Organizations
- 5 Education and qualifications
- 6 Accounting research
- 7 Accounting and computer software
- 8 Accounting scandals
- 9 See also
- 10 References
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.
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.
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). 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 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 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
Professional accounting bodies include the American Institute of Certified Public Accountants (AICPA), CPA Australia, and the 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). Professional bodies may offer the chartered accountant qualification.
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. The demise of Arthur Andersen following the Enron scandal reduced the Big Five to the Big Four.
Generally accepted accounting principles (GAAP) are issued by standard-setting organizations. For example, the International Accounting Standards Board (IASB) issues the International Financial Reporting Standards (IFRS).
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. However,as of 2012 "all major economies" have plans to converge towards or adopt the IFRS.
Education and qualifications
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 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 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.
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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