Accountancy
From : Wikipedia, the free encyclopedia
Accountancy, or accounting, 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.
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Theory
The basic accounting equation is assets = liabilities + 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. This is also used in many businesses.
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 (see also comptroller).
History
Ocher plaque accounting in
ancient South Africa
The Smithsonian Museum now has a
systematically engraved ocher plaque, from the Blombos Cave in South Africa. It
is about 76,000 years old, with marks that may have been used to count or store
information. A close-up look shows that the markings are clearly organized.
This suggests, to some researchers, that they represent information rather than
decoration. This could mean accounting is far older than previously thought.
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.
Clay-token accounting in
ancient Iran
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.
Accounting
tokens made of clay, from Susa, Uruk period, circa 3500 BC. Department of Oriental
Antiquities, Louvre.
The invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind.[13]
Globular
token envelope with a cluster of accounting tokens. Clay, Susa, Uruk period (4000 to 3100 BC). Department of Oriental
Antiquities, Louvre.
Economic
tablet with numeric signs. Proto-Elamite script in clay, Susa, Uruk period (3200 BC to 2700 BC). Department of Oriental
Antiquities, Louvre.
Accounting in the 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.
Roman
writing tablet from the Vindolanda Roman fort of Hadrian's Wall, in Northumberland (1st-2nd century AD) requesting money to buy
5,000 measures of cereal used for brewing beer. Department of Prehistory and
Europe, 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.
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.[19]
Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents.
Luca Pacioli and
double-entry bookkeeping
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.
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.
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.
Double entry accounting means that each
transaction requires the use of at least two accounts.
Modern professional
accounting - Scotland
Scotland is where Chartered Accountants
originated. Edinburgh was long associated with the profession of law, so we
often find the designation of Writer applied to persons designated as an
Accountant. Several members of the Society of Writers to the Signet, the
leading Solicitor Society in Scotland, practiced as accountants. Moreover,
until rather recent times, much accountant work was done in the offices of
solicitors. To some extent in Edinburgh, but to a greater extent in Glasgow,
the early designation of accountant was confounded with that of merchant.
In July 1854 The Institute of Accountants in
Glasgow petitioned Queen Victoria for a Royal Charter. The Petition, signed by
49 Glasgow accountants, set forth: That the profession of an Accountant has
long existed in Scotland as a distinct profession of great respectability; that
originally the number of those practising it was few but that, for many years
back, the number has been rapidly increasing. The Edinburgh Society of
accountants adopted the name "Chartered Accountant" for members. In
1880 the English Institute also adopted this designation.
Accounting in the internet
era
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.
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.
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