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</i><a href="/content/Portrait_of_Luca_Pacioli" style="color:blue">Portrait of Luca Pacioli</a>*, painted by <a href="/content/Jacopo_de%27_Barbari" style="color:blue">Jacopo de' Barbari</a>, 1495, (<a href="/content/Museo_di_Capodimonte" style="color:blue">Museo di Capodimonte</a>).
Portrait of Luca Pacioli*, painted by Jacopo de' Barbari, 1495, (Museo di Capodimonte).

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. The modern field was established by the Benedikt Kotruljevic in 1458, (Italian: Benedetto Cotrugli; 1416–1469) merchant, economist, scientist, diplomat and humanist from Dubrovnik (Croatia), and Italian mathematician Luca Pacioli in 1494.[3] Accounting, which has been called the "language of business",[4] measures the results of an organization's economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators.[5] 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.[6][7] 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;[8] and management accounting focuses on the measurement, analysis and reporting of information for internal use by management.[1][8] 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.[9]

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).[8] 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]

History


The history of 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]%D8%AA%D8%A7%D8%B1%DB%8C%D8%AE%20%D8%A7%DB%8C%D8%B1%D8%A7%D9%86%20%D8%A7%D8%B2%20%D8%B2%D9%85%D8%A7%D9%86%20%D8%A8%D8%A7%D8%B3%D8%AA%D8%A7]] auditing Egyptians Babylonians[13]Augustus Roman government[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 work on a double-entry bookkeeping system was published in Italy, by Luca Pacioli ("Father of Accounting").[21][22] Accounting began to transition into an organized profession in the nineteenth century,[23] with local professional bodies in England merging to form the Institute of Chartered Accountants in England and Wales in 1880.[24]

Etymology


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.[25] 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,[26] 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."[26]

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.[27]

Accounting has variously been defined as the keeping or preparation of the financial records of an entity, 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.[28][29][30]

Accountancy refers to the occupation or profession of an accountant,[31][32][33] particularly in British English.[28][29]

Topics


Accounting has several subfields or subject areas, including financial accounting, management accounting, auditing, taxation and accounting information systems.[7]

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.

Financial accounting produces past-oriented reports—for example the financial statements prepared in 2006 reports on performance in 2005—on an annual or quarterly basis, generally about the organization as a whole.[8]

This branch of accounting is also studied as part of the board exams for qualifying as an actuary.

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.

Management accounting produces future-oriented reports—for example the budget for 2006 is prepared in 2005—and the time span of reports varies widely.

Auditing is the verification of assertions made by others regarding a payoff,[35] and in the context of accounting it is the "unbiased examination and evaluation of the financial statements of an organization".[36] Audit is a professional service that is systematic and conventional.[37]

An audit of financial statements aims to express or disclaim an opinion on the financial statements.

An accounting information system is a part of an organization's information system that focuses on processing accounting data.[39] Many corporations use artificial intelligence-based information systems.

Tax accounting in the United States concentrates on the preparation, analysis and presentation of tax payments and tax returns.

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.

Organizations


Professional accounting bodies include the American Institute of Certified Public Accountants (AICPA) and the other 179 members of the International Federation of Accountants (IFAC),[42] including Institute of Chartered Accountants of Scotland (ICAS), CPA Australia, 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.[43] 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.[44][45]

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.

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) [48] sets the internationally appropriate principles- based Code of Ethics for Professional Accounts the International Accounting Education Standards Board (IAESB) sets professional accounting education standards;[49] International Public Sector Accounting Standards Board (IPSASB) sets accrual-based international public sector accounting standards [50]

Organizations in individual countries may issue accounting standards unique to the countries.

Education and qualifications


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.[52] 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,[53] and associate membership with the Certified Public Accountants Association of the UK is available after gaining a degree in finance or accounting.[54]

A doctorate is required in order to pursue a career in accounting academia, for example to work as a university professor in accounting.[55][56] 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.[55]

Professional accounting qualifications include the Chartered Accountant designations and other qualifications including certificates and diplomas.[57] In Scotland, chartered accountants of ICAS undergo Continuous Professional Development and abide by the ICAS code of ethics[58]. 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.[59] 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. In India the Apex Accounting body constituted by parliament of India is "Institute of Chartered Accountants of India" (ICAI) was known for its rigorous training and study methodology for granting the Qualification.[60] 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.[61]

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.[62][63]. It encompasses a broad range of research areas including financial accounting, management accounting, auditing and taxation.[64]

Accounting research is carried out both by academic researchers and practicing accountants.

Empirical studies document that leading accounting journals publish in total fewer research articles than comparable journals in economics and other business disciplines[67], and consequently, accounting scholars[68] are relatively less successful in academic publishing than their business school peers.[69] 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.[70]

Accounting information system


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.

Accounting information systems 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.

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.[71]

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.[71]

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

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.[74]

Accounting error


An accounting error is an unintentional error in an accounting entry, often immediately fixed when spotted.

See also


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