Accounting

Created on December 1, 2012 at 9:23 am by ABITPAC Admin

Accountancy, or accounting, is the process of communicating financial information about a [3]

The American Institute of Certified Public Accountants (AICPA) defines accountancy as “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.”[4]

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.[5]

Early accounts served mainly to assist the memory of the [7]

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,[8] or US GAAP.

Contents

[edit] Theory

The basic accounting equation is equity. This is the Statement of Financial Position (It is the new name of Balance Sheet according to IFRS). The foundation for the balance sheet begins with the income statement, which is revenues – expenses = net income or net loss. This is followed by the retained earnings statement, which is beginning retained earnings + net income + additional capital(capital contribution) – dividends/drawings = ending retained earnings.

[edit] Etymology

The word “Accountant” is derived from the French word Compter, which took its origin 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[9] (see also comptroller).

[edit] History

[edit] Token accounting in ancient Mesopotamia

Map of the Middle East showing the Fertile Crescent circa 3rd millennium BC.

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.[5]

Accounting tokens made of clay, from Louvre.

The invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind.[10]

Globular token envelope with a cluster of accounting tokens. Clay, Louvre.

Economic tablet with numeric signs. Louvre.

[edit] Accounting in the Roman Empire

Part of the Res Gestae Divi Augusti from the 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.[11]

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.[12]

Roman writing tablet from the Vindolanda Roman fort of British Museum.

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.[13]

The [16]

Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents.[17]

[edit] Islamic accounting and algebra

The [21]

[edit] Luca Pacioli and double-entry bookkeeping

When medieval Europe moved to a [24]

The earliest extant evidence of full double-entry bookkeeping is the Farolfi ledger of 1299-1300.[26]

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.[27]

Although Luca Pacioli did not invent double-entry bookkeeping,[30]

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.[31]

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.[32]

The nature of double-entry can be grasped by recognizing that this system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription and calculation. One of its social effects was to proclaim the honesty of merchants as a group; one of its epistemological effects was to make its formal precision based on a rule bound system of arithmetic seem to guarantee the accuracy of the details it recorded. Even though the information recorded in the books of account was not necessarily accurate, the combination of the double entry system’s precision and the normalizing effect that precision tended to create, produced the impression that books of account were not only precise, but accurate as well. Instead of gaining prestige from numbers, double entry bookkeeping helped confer cultural authority on numbers.[33]

Double entry accounting means that each transaction requires the use of at least two accounts.

[edit] Accounting in the internet era

In the 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 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.

[edit] Accounting scandals

The year 2001 witnessed a series of financial information frauds involving Enron Corporation, 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.[34]

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.[34]

In addition to being the largest bankruptcy reorganization in American history, the [36]

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.[37]

Another example of corporate fraud was the case of Australian telecommunications company One-tel. The financial manager, Jodee Rich, was subsequently charged with fraud and spent several years in jail after fraudulently misrepresenting the company’s financial position to encourage investment by some of Australia’s richest people, including James Packer and Lachlan Murdoch.[38] When it collapsed in 2001, One-tel lost its shareholders more than 920 million dollars.

[edit] Notes and references

  1. Books.Google.co.uk
  2. ^ Elliot, Barry & Elliot, Jamie: Financial accounting and reporting, Prentice Hall, London 2004, ISBN 0-273-70364-1, p. 3
  3. ^ Goodyear, Lloyd Earnest: Principles of Accountancy, Goodyear-Marshall Publishing Co., Cedar Rapids, Iowa, 1913, p.7 Archive.org
  4. ^ Singh Wahla, Ramnik. AICPA committee on Terminology. Accounting Terminology Bulletin No. 1 Review and Résumé.
  5. ^ ISBN 0-471-13075-3, p.1
  6. ^ Carruthers, Bruce G., & Espeland, Wendy Nelson, Accounting for Rationality: Double-Entry Bookkeeping and the Rhetoric of Economic Rationality, American Journal of Sociology, Vol. 97, No. 1, July 1991, pp. 40-41,44 46,
  7. ^ Lauwers, Luc & Willekens, Marleen: “Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli” (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.302), KUleuven.be
  8. ^ www.ifrs.com
  9. ^ Pixley, Francis William: Accountancy — constructive and recording accountancy (Sir Isaac Pitman & Sons, Ltd, London, 1900), p4
  10. ^ Oldroyd, David & Dobie, Alisdair: Themes in the history of bookkeeping, The Routledge Companion to Accounting History, London, July 2008, ISBN 978-0-415-41094-6, Chapter 5, p. 96
  11. ^ Oldroyd, David: The role of accounting in public expenditure and monetary policy in the first century AD Roman Empire, Accounting Historians Journal, Volume 22, Number 2, Birmingham, Alabama, December 1995, p.124, Olemiss.edu
  12. ^ Oldroyd, David: The role of accounting in public expenditure and monetary policy in the first century AD Roman Empire, Accounting Historians Journal, Volume 22, Number 2, Birmingham, Alabama, December 1995, p.123, Olemiss.edu
  13. ^ Bowman, Alan K., Life and letters on the Roman frontier: Vindolanda and its people Routledge, London, January 1998, ISBN 978-0-415-92024-7, p. 40-41,45
  14. ^ Farag, Shawki M., The accounting profession in Egypt: Its origin and development, University of Illinois, 2009, p.7 Aucegypt.edu
  15. ^ Rathbone, Dominic: Economic Rationalism and Rural Society in Third-Century AD Egypt: The Heroninos Archive and the Appianus Estate, Cambridge University Press, ISBN 0-521-03763-8, 1991, p.4
  16. ^ Cuomo,Serafina: Ancient mathematics, Routledge, London, ISBN 978-0-415-16495-5, July 2001, p.231
  17. ^ Matt. 25:19
  18. ^ Lewis, Mervyn K.: Islam and accounting, Wiley-Blackwell, Oxford, 2001, p. 109,VT.edu
  19. ^ Gandz, Solomon (1938). “The Algebra of Inheritance: A Rehabilitation of Al-Khuwarizmi”. Osiris (University of Chicago Press) 5: 319–91. doi:10.1086/368492
  20. ^ Struik, Dirk Jan (1987), A Concise History of Mathematics (4th ed.), Dover Publications, ISBN 0-486-60255-9
  21. ^ Alan Sangster, Greg Stoner & Patricia McCarthy, pp. 1–2
  22. ^ http://logica.ugent.be/albrecht/thesis/FOTFS2008-Heeffer.pdf.
  23. ^ Mills, Geofrey T. “Early accounting in Northern Italy: The role of commercial development and the printing press in the expansion of double-entry from Genoa, Florence and Venice” (Critical Perspectives on Accounting, Vol. 4 No. 2, June 1993, pp. 113-140)
  24. ^ Thiéry, Michel: Did you say Debit?, Assumption University (Thailand), AU-GSB e-Journal, Vol. 2 No. 1, June 2009, p.35, AU.edu
  25. ^ Lee, Geoffrey A., The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299-1300, Accounting Historians Journal, Vol. 4, No. 2, 1977 p.80 University of Mississippi
  26. ^ Lauwers, Luc & Willekens, Marleen: “Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli” (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.300), KUleuven.be
  27. ^ Alan Sangster, Greg Stoner & Patricia McCarthy: “The market for Luca Pacioli’s Summa Arithmetica” (Accounting, Business & Financial History Conference, Cardiff, September 2007) p.1–2, Cardiff.ac.uk
  28. ^ Carruthers, Bruce G., & Espeland, Wendy Nelson, Accounting for Rationality: Double-Entry Bookkeeping and the Rhetoric of Economic Rationality, American Journal of Sociology, Vol. 97, No. 1, July 1991, pp. 37
  29. ^ vSangster, Alan: “The printing of Pacioli’s Summa in 1494: how many copies were printed?” (Accounting Historians Journal, John Carroll University, Cleveland, Ohio, June 2007)
  30. ^ Lauwers, Luc & Willekens, Marleen: “Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli” (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.292), KUleuven.be
  31. ^ Lauwers, Luc & Willekens, Marleen: “Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli” (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.296), KUleuven.be
  32. ^ Alan Sangster, Using accounting history and Luca Pacioli to teach double entry, Middlesex University Business School, September 2009, p.9, Cardiff.ac.uk
  33. ^ Poovey, Mary “A history of the modern fact” (University of Chicago Press, 1998) Ch.2 p.30, 58 & 54
  34. ^ UFM.edu.gt
  35. ^ Bratton, William W. “Enron and the Dark Side of Shareholder Value” (Tulane Law Review, New Orleans, May 2002) p. 61
  36. ^ “Enron files for bankruptcy”. BBC News. 2001-12-03. http://news.bbc.co.uk/1/hi/business/1688550.stm. Retrieved 2008-03-15.
  37. ^ Aiyesha Dey, and Thomas Z. Lys: “Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods (Kellogg School of Management, Evanston, Illinois, February, 2005) p. 5
  38. ^ Cratchley, Drew (20 November 2009). “One.Tel saga not over for James Packer and Lachlan Murdoch”. The Daily Telegraph. http://www.dailytelegraph.com.au/business/news/onetel-saga-not-over-for-james-packer-and-lachlan-murdoch/story-e6frez80-1225800268330?from=public_rss.



This article uses material from the Wikipedia article Accounting, which is released under the Creative Commons Attribution-Share-Alike License 3.0.

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