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Accounting, also known as accountancy, is the process of recording and processing information about economic entity, such as and . Accounting measures the results of an organization's economic activities and conveys this information to a variety of stakeholders, including , , management, and regulators. Practitioners of accounting are known as . The terms "accounting" and "financial reporting" are often used interchangeably.
Accounting can be divided into several fields including financial accounting, management accounting, tax accounting and cost accounting. 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. Management accounting focuses on the measurement, analysis and reporting of information for internal use by management to enhance business operations. 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. Accounting information systems are designed to support accounting functions and related activities.
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. Today, accounting is facilitated by accounting organizations such as standard-setters, accounting firms and professional bodies. Financial statements are usually audited by accounting firms, and are prepared in accordance with generally accepted accounting principles (GAAP). GAAP is set by various standard-setting organizations such as the Financial Accounting Standards Board (FASB) in the United States 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).
Many concepts related to today's accounting seem to be initiated in medieval's Middle East. For example, Jewish communities used double-entry bookkeeping in the early-medieval periodParker, L. M., "Medieval Traders as International Change Agents: A Comparison with Twentieth Century International Accounting Firms", The Accounting Historians Journal, 16(2) (1989): 107–118. Medieval Traders as International Change Agents: a Comment, Michael Scorgie, The Accounting Historians Journal, Vol. 21, No. 1 (June 1994), pp. 137–143 and Muslim societies, at least since the 10th century also used many modern accounting concepts.
The spread of the use of Arabic numerals, instead of the Roman numerals historically used in Europe, increased efficiency of accounting procedures among Mediterranean merchants, who further refined accounting in medieval Europe. 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"). Accounting began to transition into an organized profession in the 19th century, with local professional bodies in England merging to form the Institute of Chartered Accountants in England and Wales in 1880.
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.Pixley, Francis William: Accountancy—constructive and recording accountancy (Sir Isaac Pitman & Sons, Ltd, London, 1900), p. 4
Accountancy refers to the occupation or profession of an accountant, particularly in British English.
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 report or quarterly basis, generally about the organization as a whole.
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.
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 accepted accounting principles (GAAP) and "in all material respects". An auditor is also required to identify circumstances in which the generally accepted accounting principles (GAAP) have not been consistently observed.
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.
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. The demise of Arthur Andersen following the Enron scandal reduced the Big Five to the Big Four.
Organizations in individual countries may issue accounting standards unique to the countries. For example, in Australia, the Australian Accounting Standards Board manages the issuance of the accounting standards in line with IFRS. In the United States the Financial Accounting Standards Board (FASB) issues the Statements of Financial Accounting Standards, which form the basis of US GAAP, and in the United Kingdom the Financial Reporting Council (FRC) sets accounting standards. However, as of 2012 "all major economies" have plans to converge towards or adopt the IFRS.
A doctorate is required in order to pursue a career in accounting academia, for example, to work as a university professor in accounting. 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.
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 levels.
Accounting research is carried out both by academic researchers and practicing accountants. Methodology 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 Theory or substantiating ideas in mathematical terms"; Antipositivism 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 theory research, which emphasizes the role of power and conflict in accounting practice; Case study; computer simulation; and field research.Coyne, Joshua G., Scott L. Summers, Brady Williams, and David a. Wood. 2010. "Accounting Program Research Rankings by Topical Area and Methodology." Issues in Accounting Education 25 (4) (November): 631–654.
Empirical studies document that leading accounting journals publish in total fewer research articles than comparable journals in economics and other business disciplines, and consequently, accounting scholars are relatively less successful in academic publishing than their business school peers. 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.
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 failureBratton, William W. "Enron and the Dark Side of Shareholder Value" (Tulane Law Review, New Orleans, May 2002) p. 61 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.
One consequence of these events was the passage of the Sarbanes–Oxley Act in the United States 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.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
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. 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.
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