Accountancy [http://dictionary.reference.com/browse/accountancy , dictionary.com] or accounting is the measurement, statement, or provision of assurance about financial information primarily used by
lenders, managers, investors, taxauthorities and other decision makers to make resource allocation decisions between and within companies, organizations, and public agencies. The terms derive from the use of financial accounts.
Accounting has been defined by the
AICPAas " 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." [cite book | last = Singh Wahla | first = Ramnik | title = AICPA committee on Terminology. Accounting Termonology Bulletin No. 1 Review and Resume]
Financial accounting is one branch of accounting and historically has involved processes by which financial information about a business is recorded, classified, summarised, interpreted, and communicated; for public companies, this information is generally publicly-accessible. By contrast
management accountinginformation is used within an organization and is usually confidential and accessible only to a small group, mostly decision-makers. Open-book Accountingaims to improve accounting transparency. Tax Accounting is the accounting needed to comply with jurisdictional tax regulations.
Practitioners of accountancy are known as
accountants. There are many professional bodies for accountants throughout the world. Many allow their members to use titles indicating their membership or qualification level. Examples are Chartered Certified Accountant(ACCA or FCCA), Chartered Accountant(FCA, CA or ACA), International Accountant (FAIA or AAIA), Management Accountant (ACMA, FCMA or AICWA), Certified Public Accountant(CPA) and Certified General Accountant(CGA or FCGA).
Auditing is a related but separate discipline, with two sub-disciplines:
internal auditingand external auditing. External auditing is the process whereby an independent auditor examines an organisation's financial statements and accounting records in order to express an opinion as to the truth and fairness of the financial statements and their adherence to Generally Accepted Accounting Principles(GAAP), or International Financial Reporting Standards(IFRS), in all material respects. Internal auditing aims at providing information for management usage, and is typically carried out by employees of the company. Accounting scholarshipis the academic discipline which studies accounting/accountancy.
Accounting is the process of identifying, measuring and communicating economic information so a user of the information may make informed economic judgments and decisions based on it.
Accounting is the degree of measurement of financial transactions which are transfers of legal property rights made under contractual relationships. Non-financial transactions are specifically excluded due to conservatism and materiality principles.
At the heart of modern financial accounting is the
double-entry bookkeeping system. This system involves making at least two entries for every transaction: a debitin one account, and a corresponding credit in another account. The sum of all debits should always equal the sum of all credits, providing a simple way to check for errors. This system was first used in medieval Europe, although claims have been made that the system dates back to Ancient Romeor Greece.
According to critics of
standard accounting practices, it has changed little since. Accounting reformmeasures of some kind have been taken in each generation to attempt to keep bookkeeping relevant to capital assets or production capacity. However, these have not changed the basic principles, which are supposed to be independent of economicsas such. In recent times, the divergence of accounting from economic principles has resulted in controversial reforms to make financial reports more indicative of economic reality.
Critical approaches such as
Social accountingchallenge conventional accounting, in particular financial accounting, for giving a narrow image of the interaction between society and organisations, and thus artificially constraining the subject of accounting.Social accounting in particular argues that organisations ought to account for the social and environmental effects of their economic actions. Accounting should thus not only embrace descriptions of purely economic events, not be exclusively expressed in financial terms, aim at a broader group of stakeholders and broaden its purpose beyond reporting financial success. [Gray R.H., D.L. Owen & C.Adams (1996) Accounting and Accountability: Changes and Challenges in Corporate Social and Environmental Reporting (London: Prentice Hall), Ch 1]
History of accountancy
Accountancy's infancy dates back to the earliest days of
human agricultureand civilization(the Sumeriansin Mesopotamia, and the Egyptian Old Kingdom). Ancient economic thoughtof the Near East facilitated the creation of accurate records of the quantities and relative values of agricultural products, methods that were formalized in trading and monetary systems by 2000 BC. Simple accounting is mentioned in the Christian Bible(New Testament) in the Book of Matthew, in the Parable of the Talents [ Matt. 25:19 ] . The Islamic Quranalso mentions simple accounting for trade and credit arrangements [ Quran 2: 282 ] .
Twelfth-century A.D. Arab writer
Ibn Taymiyyahmentioned in his book "Hisba" (literally, "verification" or "calculation") detailed accounting systems used by Muslimsas early as in the mid-seventh century A.D. These accounting practices were influenced by the Roman and the Persian civilisations that Muslims interacted with. The most detailed example Ibn Taymiyyah provides of a complex governmental accounting system is the Divan of Umar, the second Caliphof Islam, in which all revenues and disbursements were recorded. The Divan of Umar has been described in detail by various Islamic historians and was used by Muslimrulers in the Middle East with modifications and enhancements until the fall of the Ottoman Empire.
Luca Pacioli and the birth of modern accountancy
Luca Pacioli(1445 - 1517), also known as Friar Luca dal Borgo, is credited for the "birth" of accountancy. His "Summa de arithmetica, geometrica, proportioni et proportionalita" (" Summaon arithmetic, geometry, proportions and proportionality", Venice1494), was a textbook for use in the abbaco schools of northern Italy, where the sons of merchants and craftsmen were educated. It was a compendium of the mathematical knowledge of his time, and includes the first printed description of the method of keeping accounts that Venetian merchants used at that time, known as the double-entry accounting system. Although Pacioli codified rather than invented this system, he is widely regarded as the "Father of Accounting". The system he published included most of the accounting cycle as we know it today. He described the use of journals and ledgers, and warned that a person should not go to sleep at night until the debits equalled the credits. His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses — the account categories that are reported on an organisation's balance sheetand income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. His treatise also touches on a wide range of related topics from accounting ethics to cost accounting.
The first known book in the
English languageon accounting was published in London, Englandby John Gouge(or Gough) in 1543. It is described as "A Profitable Treatyce called the Instrument or Boke to learn to know the good order of the kepyng of the famous reconynge, called in Latin, Dare and Habere, and, in English, debtor and Creditor".Fact|date=March 2008
A short book of instructions was also published in 1588 by
John Mellisof Southwark, England, in which he says, "I am but the renuer and reviver of an ancient old copies printed here in London the 14 of August 1543: collected, published, made, and set forth by one Hugh Oldcastle, Schoolmaster, who, as reappeared by his treatise, then taught Arithmetics, and this booke in Saint Ollaves parish in Marko Lane." Mellis refers to the fact that the principle of accounts he explains (which is a simple system of double entry) is "after the former of Venice".
A book described as "The Merchants Mirrour, or directions for the perfect ordering and keeping of his accounts formed by way of Debitor and Creditor", after the (so termed) Italian manner, by Richard Dafforne, accountant, published in 1635, contains many references to early books on the science of accountancy. In a chapter in this book, headed "Opinion of Book-keeping's Antiquity," the author states, on the authority of another writer, that the form of book-keeping referred to had then been in use in Italy about two hundred years, "but that the same, or one in many parts very like this, was used in the time of Julius Caesar, and in Rome long before." He gives quotations of Latin book-keeping terms in use in ancient times, and refers to "ex Oratione Ciceronis pro Roscio Comaedo"; and he adds: :"That the one side of their booke was used for Debitor, the other for Creditor, is manifest in a certain place, "Naturalis Historiae Plinii", lib. 2, cap. 7, where hee, speaking of Fortune, saith thus: : "Huic Omnia Expensa.": "Huic Omnia Feruntur accepta et in tota Ratione mortalium sola.": "Utramque Paginam facit."
An early Dutch writer appears to have suggested that double-entry book-keeping was even in existence among the Greeks, pointing to scientific accountancy having been invented in remote times.
There were several editions of Richard Dafforne's book - the second edition in 1636, the third in 1656, and another in 1684. The book is a very complete treatise on scientific accountancy, beautifully prepared and containing elaborate explanations. The numerous editions tend to prove that the science was highly appreciated in the 17th century. From this time on, there has been a continuous supply of literature on the subject, many of the authors styling themselves accountants and teachers of the art, and thus proving that the professional accountant was then known and employed.
Accountancy qualifications and regulation
The expectations for qualification in the profession of accounting vary between different jurisdictions and countries.
Accountants may be
certifiedby a variety of organisations or bodies, such as the Association of Accounting Technicians (AAT), [ [http://www.aat.org.uk/ Association of Accounting Technicians] , aat.org.uk.] British qualified accountancy bodies including the Chartered Institute of Management Accountants(CIMA), Association of Chartered Certified Accountants(ACCA), Association of International Accountants(AIA)and Institute of Chartered Accountants, and are recognised by titles such as " Chartered Management Accountant" (ACMA or FCMA) "Chartered Certified Accountant" (ACCA or FCCA), "International Accountant" (AAIA or FAIA) and "Chartered Accountant" (UK, Australia, New Zealand, Canada, India, Pakistan, South Africa, Ghana), "Certified Public Accountant" (Ireland, Japan, US, Singapore, Hong Kong, the Philippines), " Certified Management Accountant" (Canada, U.S.), "Certified General Accountant" (Canada, Caribbean, China, Hong Kong, Bermuda), or "Certified Practicing Accountant" (Australia). Some Commonwealth countries (Australia and Canada) often recognise both the certified and chartered accounting bodies. The majority of "public" accountants in New Zealand and Canada are Chartered Accountants; however, Certified General Accountants are also authorised by legislation to practice public accounting and auditing in all Canadian provinces, except Ontario and Quebec, as of 2005Fact|date=June 2008 There is, however, no legal requirement for an accountant to be a paid-up member of one of the many Institutes.
The "Big Four" accountancy firms
Big Four auditors", listed alphabetically below, are the largest multinational accountancy firms.
Deloitte Touche Tohmatsu
Ernst & Young
These firms are associations of the partnerships in each country rather than having the classical structure of holding company and subsidiaries, but each has an international 'umbrella' organization for coordination (technically known as a
Enronand other accounting scandalsin the United States, there were five large firms and were called the Big Five: Arthur Andersen, PricewaterhouseCoopers, KPMG, Deloitte Touche Tohmatsu and Ernst & Young.
June 15, 2002, Arthur Andersen was convicted (later overturned) of obstruction of justice for shredding documents related to its audit of Enron. Nancy Temple(Andersen Legal Dept.) and David Duncan(Lead Partner for the Enron account) were cited as the responsible managers in this scandal as they had given the order to shred relevant documents. Since the U.S. Securities and Exchange Commissiondoes not allow convicted felons to audit public companies, the firm agreed to surrender its licenses and its right to practice before the SEC on August 31, 2002. A plurality of Arthur Andersen joined KPMGin the US and Deloitte & Toucheoutside of the US. Historically, there had also been groupings referred to as the "Big Six" (Arthur Andersen, plus Coopers & Lybrand before its merger with Price Waterhouse) and the "Big Eight" (Ernst and Young prior to their merger were Ernst & Whinney, and Arthur Young and Deloitte & Touche was formed by the merger of Deloitte, Haskins and Sells with the firm Touche Ross).
The accounting scandals at Enron and other high profile companies in the USA and Europe have had, and continue to have, far-reaching consequences for the accounting industry. Application of
International Accounting Standardsoriginating in International Accounting Standards Boardheadquartered in London and bearing more resemblance to UK than current US practices is often advocated by those who note the relative stability of the UK accounting system (which reformed itself after scandals in the late 1980s and early 1990s).
Topics in accounting
list of accounting topicsfor complete listing.
Information technology audit
Accountancy methods and fields
*Cash-basis and accrual-basis accounting
Social and Environmental Accounting
*A) Personal Account B) Impersonal Account(1.Real Account, 2. Nominal Account)
*1. Personal Account:- Dr.the receiver Cr. the giver
*2. Real Account:- Dr. what comes in Cr. what goes out
*3. Nominal Account:- Dr. all expenses and lossessCr. all incomes and gains. This is called Principles of accounting or Golden Principles.Accounting principles, rules of conduct and action are described by various terms such as concepts, conventions, tenets, assumptions, axioms and postulates.
*See also Generally Accepted Accounting Procedures.
Money measurement concept
Historical Cost concept
Accounting methods(includes a discussion on the concept of accruals)
Accrual(also known as " Matching principle")
Unified Ledger Accounting
Convention of disclosure
*Convention of materiality
Convention of consistency
Convention of conservatism
Tools for accounting
Types of accountancy
The following list is intended to give some idea of the breadth and scope of the accountancy profession:
Accounting softwarefor E-accounting
Critical accounting policy
Financial statementsand Notes to the Financial Statements
Standard accounting practices
Lists of related topics
List of accounting topics
List of accountancy bodies
List of finance topics
List of business law topics
List of business ethics, political economy, and philosophy of business topics
Notes and references
* [http://www.reshafim.org.il/ad/egypt/texts/heqanakht.htm The oldest monetary/accounting text] , the
* [http://www.nysscpa.org/prof_library/guide.htm Accounting Terminology Guide] (New York Society of CPAs, United States)
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