Accounting

For other uses, see Accounting (disambiguation).

Accountancy (UK), or accounting (US), is the production of financial records about an organization. Accountancy generally produces financial statements that show in money terms the economic resources under the control of management; selecting information that is relevant and representing it faithfully. The principles of accountancy are applied to accounting, bookkeeping, and auditing.

Many tedious accounting 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 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. Computers have 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. 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 is thousands of years old; the earliest accounting records, which date back more than 7,000 years, were found in Mesopotamia (Assyrians). The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced.

Early accounts served mainly to assist the memory of the businessperson and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint-stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information. This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.

Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, owner-managers and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accounting and provides information to present and potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting in a given jurisdiction is called Generally Accepted Accounting Principles, or GAAP. Other rules include International Financial Reporting Standards, or IFRS, or US GAAP.

Etymology

The word "Accountant" is derived from the French word [Compter] Error: {{Lang}}: text has italic markup (help), which took its origin from the Latin word [Computare] Error: {{Lang}}: text has italic markup (help). 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 (see also comptroller).

History

Ancient history

Economic tablet with numeric signs. Proto-Elamite script in clay, Susa, Uruk period (3200 BC to 2700 BC). Department of Oriental Antiquities, Louvre.

A 76,000 years old systematically engraved ocher plaque, recovered from the Blombos Cave in South Africa, had marks that may have been used to count or store information. According to some researchers, these marks represent the earliest instance of accounting in the world.

The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned.

Between the 4th millennium BC and the 3rd millennium BC, in ancient Iran, new socioeconomic situations resulted in unequal distribution of wealth and in such conditions leaders and priests started to rule. They had people to look after the financial matters. In Godin Tepe (گدین تپه) and also Tepe Yahya (تپه يحيی), buildings were discovered with large rooms for storage of crops. Cylindrical tokens were found in these buildings, which were used for bookkeeping on clay scripts. In Godin Tepe's findings, the scripts only contained tables with figures. In Tepe Yahya's findings, the scripts also contained graphical representations.

The invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind.

Roman Empire

Part of the Res Gestae Divi Augusti from the Monumentum Ancyranum (Temple of Augustus and Rome) at Ancyra, built between 25 BCE - 20 BCE.

The Res Gestae Divi Augusti (Latin: "The Deeds of the Divine Augustus") is a remarkable account to the Roman people of the Emperor Augustus' stewardship. It listed and quantified his public expenditure, which encompassed distributions to the people, grants of land or money to army veterans, subsidies to the aerarium (treasury), building of temples, religious offerings, and expenditures on theatrical shows and gladiatorial games. It was not an account of state revenue and expenditure, but was designed to demonstrate Augustus' munificence. The significance of the Res Gestae Divi Augusti from an accounting perspective lies in the fact that it illustrates that the executive authority had access to detailed financial information, covering a period of some forty years, which was still retrievable after the event. The scope of the accounting information at the emperor's disposal suggests that its purpose encompassed planning and decision-making.

The Roman historians Suetonius and Cassius Dio record that in 23 BC, Augustus prepared a rationarium (account) which listed public revenues, the amounts of cash in the aerarium (treasury), in the provincial fisci (tax officials), and in the hands of the publicani (public contractors); and that it included the names of the freedmen and slaves from whom a detailed account could be obtained. The closeness of this information to the executive authority of the emperor is attested by Tacitus' statement that it was written out by Augustus himself.

Records of cash, commodities, and transactions were kept scrupulously by military personnel of the Roman army. An account of small cash sums received over a few days at the fort of Vindolanda circa 110 AD shows that the fort could compute revenues in cash on a daily basis, perhaps from sales of surplus supplies or goods manufactured in the camp, items dispensed to slaves such as cervesa (beer) and clavi caligares (nails for boots), as well as commodities bought by individual soldiers. The basic needs of the fort were met by a mixture of direct production, purchase and requisition; in one letter, a request for money to buy 5,000 modii (measures) of braces (a cereal used in brewing) shows that the fort bought provisions for a considerable number of people.

The Heroninos Archive is the name given to a huge collection of papyrus documents, mostly letters, but also including a fair number of accounts, which come from Roman Egypt in 3rd century AD. The bulk of the documents relate to the running of a large, private estate is named after Heroninos because he was phrontistes (Koine Greek: manager) of the estate which had a complex and standarised system of accounting which was followed by all its local farm managers. Each administrator on each sub-division of the estate drew up his own little accounts, for the day-to-day running of the estate, payment of the workforce, production of crops, the sale of produce, the use of animals, and general expenditure on the staff. This information was then summarized as pieces of papyrus scroll into one big yearly account for each particular sub-division of the estate. Entries were arranged by sector, with cash expenses and gains extrapolated from all the different sectors. Accounts of this kind gave the owner the opportunity to take better economic decisions because the information was purposefully selected and arranged.

Double-entry bookkeeping

Main articles: Luca Pacioli and Double-entry bookkeeping system

When medieval Europe moved to a monetary economy in the 13th century, sedentary merchants depended on bookkeeping to oversee multiple simultaneous transactions financed by bank loans. One important breakthrough took place around that time: the introduction of double-entry bookkeeping, which is defined as any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form. The historical origin of the use of the words 'debit' and 'credit' in accounting goes back to the days of single-entry bookkeeping in which the chief objective was to keep track of amounts owed by customers (debtors) and amounts owed to creditors. 'Debit,' is Latin for 'he owes' and 'credit' Latin for 'he trusts'.

The earliest extant evidence of full double-entry bookkeeping is the Farolfi ledger of 1299-1300. Giovanno Farolfi & Company were a firm of Florentine merchants whose head office was in Nîmes who also acted as moneylenders to the Archbishop of Arles, their most important customer. The oldest discovered record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts of the city of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and contain balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.

Portrait of Luca Pacioli, attributed to Jacopo de' Barbari, 1495, (Museo di Capodimonte).

Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (early Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (Latin: "Details of Calculation and Recording"). It was written primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebra.

Although Luca Pacioli did not invent double-entry bookkeeping, his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today. Even though Pacioli's treatise exhibits almost no originality, it is generally considered as an important work, mainly because of its wide circulation, it was written in the vernacular Italian language, and it was a printed book.

According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books of account are at the direct basis of this system: the memoriale (Italian: memorandum), the giornale (Journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index.

Pacioli's treatise gave instructions in how to record barter transactions and transactions in a variety of currencies – both of which were far more common than they are today. It also enabled merchants to audit their own books and to ensure that the entries in the accounting records made by their bookkeepers complied with the method he described. Without such a system, all merchants who did not maintain their own records were at greater risk of theft by their employees and agents: it is not by accident that the first and last items described in his treatise concern maintenance of an accurate inventory.

Modern professional accounting

Emblem of the Society of Writers to the Signet, an early Society of Solicitors and Accountants.

The modern profession of the chartered accountant originated in Scotland in the mid-nineteenth century, as well as the first public accountant societies. Early accountants tended to regard themselves as solicitors and would subsume their accounting activities within the rubric of their legal profession, often calling themselves 'Writers' as well as 'Accountants'. Several members of the Society of Writers to the Signet, the leading Solicitor Society in Scotland, practiced as accountants. Moreover much accountant work was done in the offices of solicitors.

A typical figure in this transitional period, and one of the first known forensic accountants, was James Mclelland, who recorded his duties as of 1824 as including managing heritable or other property for gentlemen in the country, acting as agent for houses connected with bankruptcies, winding up dissolved partnership concerns, keeping and balancing the account-books belonging to merchants, manufacturers and shopkeepers and examining and adjusting disputed accounts, writing out reports on disputed accounts for evidence at the courts and all other departments of the accountant business.

In July 1854 The Institute of Accountants in Glasgow petitioned Queen Victoria for a Royal Charter. The Petition, signed by 49 Glasgow accountants, argued that the profession of accountancy had long existed in Scotland as a distinct profession of great respectability, and that although the number of practitioners had been originally few, the number had been rapidly increasing. The petition also pointed out that accountancy required a varied group of skills; as well as mathematical skills for calculation, the accountant had to have an acquaintance with the general principles of the legal system as they were frequently employed by the courts to give evidence on financial matters. The Edinburgh Society of accountants adopted the name "Chartered Accountant" for members.

By the middle of the 19th century, England's Industrial Revolution was in full swing, and London was the financial centre of the world. With the growth of the limited liability company and large scale manufacturing and logistics, demand surged for more technically proficient accountants capable of handling the increasingly complex world of high speed global transactions, able to calculate figures like asset depreciation and inventory valuation and cognizant of the latest changes in legislation such as the new Company law, then being introduced. As companies proliferated, the demand for reliable accountancy shot up, and the profession rapidly became an integral part of the business and financial system.

To improve their status and combat criticism of low standards, local professional bodies in England amalgamated to form the Institute of Chartered Accountants in England and Wales, established by royal charter in 1880. Initially with just under 600 members, the newly formed institute expanded rapidly; it soon drew up standards of conduct and examinations for admission and members were authorised to use the professional designations "FCA" (Fellow Chartered Accountant), for a firm partner and "ACA" (Associate Chartered Accountant) for a qualified member of an accountant's staff. In the United States the American Institute of Certified Public Accountants was established in 1887.

Accounting in the internet user account management

In the IETF RFCs the act of accounting is usually defined as the act of collecting information on resource usage for the purpose of trend analysis, auditing, billing, or cost allocation.

For example when a user uses a connectivity service paid with a pay-per-view approach the accounting process is based on a metering of the resource usage by the user (usually time spent with an active connection or the amount of data transferred using that connection). The accounting is hence the recording of this connectivity service consumption for subsequent charging of the service itself.

Accountancy language impacted by international treaties

National accountancy and trade administrative vocabulary definitions are at present date influenced by international treaties and especially within Europe the EU VAT directive defining a legal terminology set of expressions. Most countries have had a very unregulated business administrative vocabulary and there is in practice for instance different English Business administrative vocabulary in different areas of the world. The VAT directive is published in every official language within the EU, and make an impact on each business administrative language. The chart of accounts are to a large extent dependent on VAT and tax law and an important issue of understanding the accounting and analyse reports. This has importance in the development of accounting.

Electronic accounting impacts the future Accountancy culture

There are international works of accounting information interchange like XBRL GL, UN/CEFACT also make an impact on the logics of accounting. Different accounting cultures need to meet in definitions to transform their content to the file format standards to be able to transfer the data from one computer system to another. The Swedish SIE (file format) that has been in domestic use since the early 1990ies has shown such file formats and its applied use make huge change in the work conditions in accounting and audit.

We see a world where banks starts to refuse cash and internet banking and mobile phone banking apps are making huge change in the common life in accounting, large portions of information the accounting work information comes from banking events. The projects of electronic trade documents like UN/CEFACT and previously UBL will not only change the daily world of accounting, the work tools but also to a large extent accounting logics itself. Accounting definitions will be tighter and the national accounting culture differences will decrease in a process being able to use modern tools and information sources, in order to save work, costs and increase quality of information.

Accounting scandals

Main article: 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.

See also

• History of numbers