Accounting, also known asaccountancy, is the process of recording and processing information abouteconomic entities, such asbusinesses andcorporations.[1][2] Accounting measures the results of an organization's economic activities and conveys this information to a variety of stakeholders, includinginvestors,creditors,management, andregulators.[3] Practitioners of accounting are known asaccountants. The terms "accounting" and "financial reporting" are often used interchangeably.[4]
Many concepts found in present accounting seem to have been initiated in the medieval Middle East. For example, Jewish communities useddouble-entry bookkeeping in the early-medieval period[18][19] and Muslim societies, at least since the 10th century also used many modern accounting concepts.[20]
Both the words "accounting" and "accountancy" were in use inGreat Britain by the mid-1800s and are derived from the wordsaccompting andaccountantship used in the 18th century.[28] InMiddle English (used roughly between the 12th and the late 15th century), the verb "to account" had the formaccounten, which was derived from the Old French wordaconter,[29] which is in turn related to theVulgar Latin wordcomputare, meaning "to reckon". The base ofcomputare isputare, which "variously meant to prune, to purify, to correct an account, hence, to count or calculate, as well as to think".[29]
The word "accountant" is derived from the French wordcompter, which is also derived from the Italian andLatin wordcomputare. 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 inpronunciation and inorthography to its present form.[30]
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 "theprinciples and procedures of accounting"; it also refers to thejob of being anaccountant.[31][32][33]
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 preparesfinancial statements for the external users in accordance withgenerally accepted accounting principles (GAAP).[6] GAAP, in turn, arises from the wide agreement betweenaccounting theory and practice, and changes 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 anannual or quarterly basis, generally about the organization as a whole.[6]
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 oncost–benefit analysis, and are not required to follow the generally accepted accounting principle (GAAP).[6] In 2014 CIMA created theGlobal 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.[37]
Management accounting produces past-oriented reports with time spans that vary widely, but it also encompasses future-oriented reports such asbudgets. Management accounting reports often include financial and non financial information, and may, for example, focus on specific products and departments.[6]
Intercompany accounting focuses on the measurement, analysis and reporting of information between separate entities that are related, such as a parent company and its subsidiary companies. Intercompany accounting concerns record keeping of transactions between companies that have common ownership such as a parent company and a partially or wholly owned subsidiary. Intercompany transactions are also recorded in accounting when business is transacted between companies with a common parent company (subsidiaries).[38][39]
Auditing is the verification of assertions made by others regarding a payoff,[40] and in the context of accounting it is the "unbiased examination and evaluation of the financial statements of an organization".[41] Audit is a professional service that is systematic and conventional.[42]
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.[43]
An accounting information system is a part of an organization'sinformation system used for processing accounting data.[44]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.[45]
Many accounting practices have been simplified with the help ofaccounting computer-based software. Anenterprise 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.[citation needed]
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 thegenerally accepted accounting principles (GAAP) for financial reporting.[46] U.S. tax law covers four basic forms of business ownership:sole proprietorship,partnership,corporation, andlimited liability company.Corporate andpersonal 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).[46]
Forensic accounting is a specialty practice area of accounting that describes engagements that result from actual or anticipated disputes orlitigation.[47] "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 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 ofThe Journal of Accountancy.[48]
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 andPricewaterhouseCoopers.[53] Thedemise of Arthur Andersen following theEnron scandal reduced the Big Five to theBig Four.[54]
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 theUnited States theFinancial Accounting Standards Board (FASB) issues the Statements of Financial Accounting Standards, which form the basis ofUS GAAP,[1] and in theUnited Kingdom theFinancial Reporting Council (FRC) sets accounting standards.[58] However, as of 2012 "all major economies" have plans toconverge towards or adopt the IFRS.[10]
Abachelor's degree or amaster's degree in accounting or a related field is required for most accountant andauditorjob positions, and some employers prefer applicants with advanced qualifications.[59] 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 theAmerican Institute of CPA's (AICPA) 150 semester hour requirement,[60] and associate membership with theCertified Public Accountants Association of the UK is available after gaining a degree in finance or accounting.[61]
Adoctorate is required in order to pursue a career in accountingacademia, for example, to work as a universityprofessor in accounting.[62][63] TheDoctor of Philosophy (PhD) and theDoctor 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 equippingbusiness executives for business or public careers requiring research skills and qualifications.[62]
Professional accounting qualifications include thechartered accountant designations and other qualifications including certificates and diplomas.[64] In Scotland, chartered accountants ofICAS undergoContinuous Professional Development and abide by the ICAS code of ethics.[65] In England and Wales, chartered accountants of theICAEW undergo annual training, and are bound by the ICAEW'scode of ethics and subject to its disciplinary procedures.[66]
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.[67]
Accounting research isresearch 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.[68][69] It encompasses a broad range of research areas includingfinancial accounting,management accounting,auditing andtaxation.[70]
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 fromrepositories"; experimental research, which examines data "the researcher gathered byadministering treatments to subjects"; analytical research, which is "based on the act offormally modelingtheories 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; andfield research.[71][72]
Empirical studies document that leadingaccounting journals publish in total fewer research articles than comparable journals in economics and other business disciplines,[73] and consequently, accounting scholars[74] are relatively less successful inacademic publishing than theirbusiness school peers.[75] 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.[76]
The year 2001 witnessed a series of financial information frauds involvingEnron, auditing firmArthur Andersen, the telecommunications companyWorldCom,Qwest andSunbeam, among other well-known corporations. These problems highlighted the need to review the effectiveness ofaccounting standards, auditing regulations andcorporate 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.[77]
TheEnron scandal deeply influenced the development of newregulations 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.[77]
In addition to being the largestbankruptcy reorganization in American history, the Enron scandal undoubtedly is the biggest audit failure[78] causing the dissolution ofArthur 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 forChapter 11 bankruptcy protection in December 2001.[79]
One consequence of these events was the passage of theSarbanes–Oxley Act in theUnited States in 2002, as a result of the first admissions of fraudulent behavior made by Enron. The act significantly raises criminal penalties forsecurities fraud, for destroying, altering or fabricating records in federal investigations or any scheme or attempt to defraud shareholders.[80]
Accountingfraud 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.[81]
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.[81] Acts leading to accounting errors are not criminal but may breach civil law, for example, the tort ofnegligence.
The primary responsibility for the prevention and detection of fraud and errors rests with the entity's management.[81]
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