Accounting

Accounting or Accountancy is the measurement, processing, and communication of

financial and non financial information about economic entities[1][2] such
as businesses and corporations. 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, external auditing, tax accounting and cost accounting.[5][6] Accounting
information systems are designed to support accounting functions and related activities.
Financial accounting focuses on the reporting of an organization's financial information,
including the preparation of financial statements, to the 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 has existed in various forms and levels of sophistication throughout human
history. The double-entry accounting system in use today was developed in medieval Europe,
particularly in Venice, and is usually attributed to the Italian mathematician and Franciscan
friar Luca Pacioli.[9] Today, accounting is facilitated by accounting organizations such as
standard-setters, accounting firms and professional bodies. Financial statements are usually
audited by accounting firms,[10] 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. As of 2012, "all major economies" have
plans to converge towards or adopt the International Financial Reporting Standards (IFRS).
[11]
HistoryEdit
Main article: History of accounting
Portrait of Luca Pacioli, painted by Jacopo de' Barbari, 1495, (Museo di Capodimonte).

Accounting is thousands of years old and can be traced to ancient civilizations.[12][13][14] The

early development of accounting dates back to ancient Mesopotamia, and is closely related to
developments in writing, counting and money;[12] there is also evidence of early forms
of bookkeeping in ancient Iran,[15][16] and early auditing systems by the
ancient Egyptians and Babylonians.[13] By the time of Emperor Augustus, the Roman
government had access to detailed financial information.[17]
Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval
Middle East[18][19] and was further refined in medieval Europe.[20] With the development
of joint-stock companies, accounting split into financial accounting and management
accounting.
The first published work on a double-entry bookkeeping system was the Summa de
arithmetica, published in Italy in 1494 by Luca Pacioli (the "Father of Accounting").[21]
[22] Accounting began to transition into an organized profession in the nineteenth century,[23]
[24] with local professional bodies in England merging to form the Institute of Chartered
Accountants in England and Wales in 1880.[25]
EtymologyEdit

Early 19th-century ledger.

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.
[26] 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,
[27] 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".[27]
The word "accountant" is derived from the French word compter, which is also derived from
the Italian and 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.[28]
TerminologyEdit
Accounting has variously been defined as the keeping or preparation of the financial records
of transactions of the firm, 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.
[29][30][31]
Accountancy refers to the occupation or profession of an accountant,[32][33][34] particularly
in British English.[29][30]
TopicsEdit
Accounting has several subfields or subject areas, including financial
accounting, management accounting, auditing, taxation and accounting information systems.
[6]
Financial accountingEdit
Main article: Financial accounting

Financial accounting focuses on the reporting of an organization's financial information to

external users of the information, such as investors, potential investors and creditors. It
calculates 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 financial statements are
often published six to ten months after the end of the accounting period—on an annual or
quarterly basis, generally about the organization as a whole.[7]
Management accountingEdit
Main article: Management accounting

Management accounting focuses on the measurement, analysis and reporting of information

that can help managers in making decisions to fulfill the goals of an organization. In
management accounting, internal measures and reports are based on cost-benefit analysis,
and are not required to follow the generally accepted accounting principle (GAAP).[7] In
2014 CIMA created the Global Management Accounting Principles (GMAPs). The result of
research from across 20 countries in five continents, the principles aim to guide best practice
in the discipline.[35]
Management accounting produces past-oriented reports with time spans that vary widely, but
it also encompasses future-oriented reports such as budgets. Management accounting reports
often include financial and non financial information, and may, for example, focus on
specific products and departments.[7]
AuditingEdit
Main articles: Financial audit and Internal audit

Auditing is the verification of assertions made by others regarding a payoff,[36] and in the

context of accounting it is the "unbiased examination and evaluation of the financial
statements of an organization".[37] Audit is a professional service that is systematic and
conventional.[38]
An audit of financial statements aims to express or disclaim an independent opinion on the
financial statements. The auditor expresses an independent 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 the generally acceptable accounting principle (GAAP)
and "in all material respects". An auditor is also required to identify circumstances in which
the generally acceptable accounting principles (GAAP) has not been consistently observed.
[39]
Information systemsEdit
Main article: Accounting information system

An accounting information system is a part of an organization's information system used for

processing accounting data.[40] Many corporations use artificial intelligence-based
information systems. The banking and finance industry uses AI in fraud detection. The retail
industry uses AI for customer services. AI is also used in the cybersecurity industry. It
involves computer hardware and software systems using statistics and modeling.[41]
Many accounting practices have been simplified with the help of accounting computer-based
software. An enterprise resource planning (ERP) system is commonly used for a large
organisation and it 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. These systems can be cloud based and available on
demand via application or browser, or available as software installed on specific computers or
local servers, often referred to as on-premise.
Tax accountingEdit
Main article: Tax accounting

Tax accounting in the United States concentrates on the preparation, analysis and
presentation of tax payments and tax returns. The U.S. tax system requires the use of
specialised accounting principles for tax purposes which can differ from the generally
accepted accounting principles (GAAP) for financial reporting.[42] U.S. tax law covers four
basic forms of business ownership: sole proprietorship, partnership, corporation, and limited
liability company. Corporate and personal income are taxed at different rates, both varying
according to income levels and including varying marginal rates (taxed on each additional
dollar of income) and average rates (set as a percentage of overall income).[42]
Forensic accountingEdit
Main article: Forensic accounting

Forensic accounting is a specialty practice area of accounting that describes engagements that
result from actual or anticipated disputes or litigation. "Forensic" means "suitable for use in a
court of law", and it is to that standard and potential outcome that forensic accountants
generally have to work.
Political campaign accountingEdit
Main article: Political campaign accounting

Political campaign accounting deals with the development and implementation of financial
systems and the accounting of financial transactions in compliance with laws governing
political campaign operations. This branch of accounting was first formally introduced in the
March 1976 issue of The Journal of Accountancy.[43]
OrganizationsEdit
See also: Category:Accounting organizations

Professional bodiesEdit
Main article: Professional accounting body

Professional accounting bodies include the American Institute of Certified Public

Accountants (AICPA) and the other 179 members of the International Federation of
Accountants (IFAC),[44] including Institute of Chartered Accountants of Scotland (ICAS),
Institute of Chartered Accountants of Pakistan (ICAP), CPA Australia, Institute of Chartered
Accountants of India, Association of Chartered Certified Accountants (ACCA) 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) in the UK and Institute of management accountants in the United
States.[45] Many of these professional bodies offer education and training including
qualification and administration for various accounting designations, such as certified public
accountant (AICPA) and chartered accountant.[46][47]
FirmsEdit
Main article: Accounting networks and associations
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.[10]
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 of the auditing market by the "Big Five" accounting firms: Arthur
Andersen, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.[48] The demise of
Arthur Andersen following the Enron scandal reduced the Big Five to the Big Four.[49]
Standard-settersEdit
See also: Accounting standards and Convergence of accounting standards

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) [50] sets the internationally appropriate principles- based Code of
Ethics for Professional Accounts the International Accounting Education Standards
Board (IAESB) sets professional accounting education standards;[51] International Public
Sector Accounting Standards Board (IPSASB) sets accrual-based international public sector
accounting standards [52]
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.
[53] However, as of 2012 "all major economies" have plans to converge towards or adopt the
IFRS.[11]
Education, training and qualificationsEdit
DegreesEdit
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.[54] A
degree in accounting may also be required for, or may be used to fulfill the requirements for,
membership to professional accounting bodies. For example, the education during an
accounting degree can be used to fulfill the American Institute of CPA's (AICPA) 150
semester hour requirement,[55] and associate membership with the Certified Public
Accountants Association of the UK is available after gaining a degree in finance or
accounting.[56]
A doctorate is required in order to pursue a career in accounting academia, for example to
work as a university professor in accounting.[57][58] 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.[57]
Professional qualificationsEdit
Main articles: Chartered Accountant and Certified Public Accountant

See also: Professional certification § Accountancy, auditing and finance

Professional accounting qualifications include the Chartered Accountant designations and
other qualifications including certificates and diplomas.[59] In Scotland, chartered accountants
of ICAS undergo Continuous Professional Development and abide by the ICAS code of
ethics.[60] In England and Wales, chartered accountants of the ICAEW undergo annual
training, and are bound by the ICAEW's code of ethics and subject to its disciplinary
procedures.[61]
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.
The ACCA is the largest global accountancy body with over 320,000 members and the
organisation provides an ‘IFRS stream’ and a ‘UK stream’. Students must pass a total of 14
exams, which are arranged across three papers.[62]
ResearchEdit
Main article: Accounting research

Accounting research is research in the effects of economic events on the process of

accounting, the effects of reported information on economic events, and the roles of
accounting in organizations and society.[63][64] It encompasses a broad range of research areas
including financial accounting, management accounting, auditing and taxation.[65]
Accounting research is carried out both by academic researchers and practicing
accountants. Methodologies in academic accounting research include archival research,
which examines "objective data collected from repositories"; experimental research, which
examines data "the researcher gathered by administering treatments to subjects"; analytical
research, which is "based on the act of formally modeling theories or substantiating ideas in
mathematical terms"; interpretive research, which emphasizes the role of language,
interpretation and understanding in accounting practice, "highlighting the symbolic structures
and taken-for-granted themes which pattern the world in distinct ways"; critical research,
which emphasizes the role of power and conflict in accounting practice; case
studies; computer simulation; and field research.[66][67]
Empirical studies document that leading accounting journals publish in total fewer research
articles than comparable journals in economics and other business disciplines,[68] and
consequently, accounting scholars[69] are relatively less successful in academic
publishing than their business school peers.[70] Due to different publication rates between
accounting and other business disciplines, a recent study based on academic author rankings
concludes that the competitive value of a single publication in a top-ranked journal is highest
in accounting and lowest in marketing.[71]
ScandalsEdit
Main article: Accounting scandals

See also: Accounting ethics

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.[72]
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.[72]
In addition to being the largest bankruptcy reorganization in American history, the Enron
scandal undoubtedly is the biggest audit failure[73] causing 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.[74]
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.[75]

Fraud and errorEdit

Accounting fraud is an intentional misstatement or omission in the accounting records by
management or employees which involves the use of deception. It is a criminal act and a
breach of civil tort. It may involve collusion with third parties.[76]
An accounting error is an unintentional misstatement or omission in the accounting records,
for example misinterpretation of facts, mistakes in processing data, or oversights leading to
incorrect estimates.[76] Acts leading to accounting errors are not criminal but may breach civil
law, for example, the tort of negligence.
The primary responsibility for the prevention and detection of fraud and errors rests with the
entity's management.[76]