Accounting is a field of specialization critical to
the functioning of all types of organizations. Accounting
often is referred to as ‘‘the language of
business’’ because of its role in maintaining and
processing all relevant financial information that
an entity requires for its managing and reporting
purposes.
Accountants often have a specific subspecialization
and function at one of several levels.
Preparation for the field is provided by secondary
schools, postsecondary business schools,
community colleges, and four-year colleges and
universities.
WHAT IS ACCOUNTING?
Accounting is a body of principles and conventions
as well as an established general process for
capturing financial information related to an entity’s
resources and their use in meeting the entity’s
goals. Accounting is a service function that
provides information of value to all operating
units and to other service functions, such as the
headquarters offices of a large corporation.
Origin of Accounting
Modern accounting is traced to the work of an Italian monk, Luca
Pacioli, whose publication in A.D. 1494 described
the double-entry system, which continues to be
the fundamental structure for contemporary accounting
systems in all types of entities. When
double-entry accounting is used, the balance
sheet identifies both the resources controlled by
the entity and those parties who have claims to
those assets.
Early histories of business identify the bookkeeper
as a valuable staff member. As businesses
became more complex, the need for more astute
review and interpretation of financial information
was met with the development of a new
profession—public accounting. In the United
States, public accounting began in the latter part
of the nineteenth century. The first organization
was established in 1887; the first professional examination
was administered in December 1896.
In the early days of the twentieth century,
numerous states established licensing requirements
and began to administer examinations.
During the first century of public accounting in
the United States, the American Institute of Certified
Public Accountants (and its predecessor
organizations) provided strong leadership to
meet the changing needs of business, not-forprofit,
and governmental entities.
Generally Accepted Accounting Principles (GAAP)
No single source provides principles for
handling all transactions and events. Over time,
conventional rules have developed that continue
to be relevant. Additionally, groups have been
authorized to establish accounting standards.
The Financial Accounting Standards Board
(FASB) assumed responsibility for accounting
standards and principles in 1973. It is authorized
to amend existing rules and establish new ones.
In 1992, the Auditing Standards Board established
the GAAP hierarchy. At the highest level of
the hierarchy are FASB statements and interpretations;
APB opinions were issued from 1959 to
1973 by the Accounting Principles Board (APB),
and Accounting Research Bulletins, issued until
ACCOUNTING
2 ENCYCLOPEDIA OF BUSINESS AND FINANCE
1959 by the Committee on Accounting Procedure
(CAP); both the APB and CAP were committees
of the American Institute of Certified
Public Accountants (AICPA).
What type of unit is served by accounting?
Probably no concept or idea is more basic to
accounting than the accounting unit or entity, a
term used to identify the organization for which
the accounting service is to be provided and
whose accounting or other information is to be
analyzed, accumulated, and reported. The entity
can be any area, activity, responsibility, or function
for which information would be useful.
Thus, an entity is established to provide the
needed focus of attention. The information
about one entity can be consolidated with that of
a part or all of another, and this combination
process can be continued until the combined
entity reaches the unit that is useful for the desired
purpose.
Accounting activities may occur within or
outside the organization. Although accounting is
usually identified with privately owned, profitseeking
entities, its services also are provided to
not-for-profit organizations such as universities
or hospitals, to governmental organizations, and
to other types of units. The organizations may be
small, owner-operated enterprises offering a single
product or service, or huge multi-enterprise,
international conglomerates with thousands of
different products and services. The not-forprofit,
governmental, or other units may be local,
national, or international; they may be small or
very large; they may even be entire nations, as in
national income accounting. Since not-for-profit
and governmental accounting are covered elsewhere
in this encyclopedia, the balance of this
article will focus on accounting for privately
owned, profit-seeking entities.
What is the work of accountants?
Accountants help entities be successful, ethical, responsible
participants in society. Their major activities include
observation, measurement, and communication.
These activities are analytical in nature
and draw on several other disciplines (e.g., economics,
mathematics, statistics, behavioral science,
law, history, and language/communication).
Accountants identify, analyze, record, and
accumulate facts, estimates, forecasts, and other
data about the unit’s activities; then they translate
these data into information that can be useful for
a specific purpose.
The data accumulation and recording phase
traditionally has been largely clerical; typically
and appropriately, this has been called bookkeeping,
which is still a common and largely manual
activity, especially in smaller firms that have not
adopted state-of-the-art technology. But with advances
in information technology and userfriendly
software, the clerical aspect has become
largely electronically performed, with internal
checks and controls to assure that the input and
output are factual and valid.
Accountants design and maintain accounting
systems, an entity’s central information system,
to help control and provide a record of the entity’s
activities, resources, and obligations. Such
systems also facilitate reporting on all or part of
the entity’s accomplishments for a period of time
and on its status at a given point in time.
An organization’s accounting system provides
information that (1) helps managers make
decisions about assembling resources, controlling,
and organizing financing and operating activities;
and (2) aids other users (employees, investors,
creditors, and others—usually called
stakeholders) in making investment, credit, and
other decisions.
The accounting system must also provide
internal controls to ensure that (1) laws and enterprise
policies are properly implemented; (2)
accounting records are accurate; (3) enterprise
assets are used effectively (e.g., that idle cash
balances are being invested to earn returns); and
(4) steps be taken to reduce chances of losing
assets or incurring liabilities from fraudulent or
similar activities, such as the carelessness or dishonesty
of employees, customers, or suppliers.
Many of these controls are simple (e.g., the
prenumbering of documents and accounting for
all numbers); others require division of duties
among employees to separate record keeping and
ACCOUNTING
ENCYCLOPEDIA OF BUSINESS AND FINANCE 3
custodial tasks in order to reduce opportunities
for falsification of records and thefts or misappropriation
of assets.
An enterprise’s system of internal controls
usually includes an internal auditing function
and personnel to ensure that prescribed data
handling and asset/liability protection procedures
are being followed. The internal auditor
uses a variety of approaches, including observation
of current activities, examination of past
transactions, and simulation—often using sample
or fictitious transactions—to test the accuracy
and reliability of the system.
Accountants may also be responsible for preparing
several types of documents. Many of these
(e.g., employees’ salary and wage records) also
serve as inputs for the accounting system, but
many are needed to satisfy other reporting requirements
(e.g., employee salary records may be
needed to support employee claims for pensions).
Accountants also provide data for completing
income tax returns.
What is the accountant’s role in decision making?
Accountants have a major role in providing
information for making economic and financial
decisions. Rational decisions are usually based on
analyses and comparisons of estimates, which in
turn, are based on accounting and other data that
project future results from alternative courses of
action.
External or financial accounting, reporting,
and auditing are directly involved in providing
information for the decisions of investors and
creditors that help the capital markets to efficiently
and effectively allocate resources to enterprises;
internal, managerial, or management accounting
is responsible for providing
information and input to help managers make
decisions on the efficient and effective use of
enterprise resources.
The accounting information used in making
decisions within an enterprise is not subject to
governmental or other external regulation, so any
rules and constraints are largely self-imposed. As
a result, in developing the data and information
that are relevant for decisions within the enterprise,
managerial accountants are constrained
largely by cost-benefit considerations and their
own ingenuity and ability to predict future conditions
and events.
But accounting to external users (financial
accounting, reporting, and auditing) has many
regulatory constraints—especially if the enterprise
is a ‘‘public’’ corporation whose securities
are registered (under the United States Securities
Acts of 1933 and 1934) with the Securities and
Exchange Commission (SEC) and traded publicly
over-the-counter or on a stock exchange.
Public companies are subject to regulations and
reporting requirements imposed and enforced by
the SEC; to rules and standards established for its
financial reports by the FASB and enforced by the
SEC; to regulations of the organization where its
securities are traded; and to the regulations of the
AICPA, which establishes requirements and standards
for its members (who may be either internal
or external accountants or auditors).
If the entity is a state or local governmental
unit, it is subject to the reporting standards and
requirements of the Government Accounting
Standards Board. If the entity is private and not a
profit-seeking unit, it is subject to various reporting
and other regulations, including those of the
Internal Revenue Service, which approves its tax
status and with which it must file reports.
Largely as a result of the governmental regulation
of private profit-seeking businesses that
began in 1933, an increasingly clear distinction
has been made between managerial or internal
accounting and financial accounting that is
largely for external users. One important exception
to this trend, however, was the change
adopted in the 1970s in the objectives of financial
reporting such that both managerial and financial
accounting now have the same objective: to
provide information that is useful for making
economic decisions.
But it must be recognized that although the
financial accounting information reported to
stakeholders comes from the organization’s accounting
system, its usefulness for decision making
is limited. This is because it is largely historical—
it reflects events and activities that occurred
in the past, not what is expected in the future.
Even estimated data such as budgets and standard
costs must be examined regularly to determine
whether these past estimates continue to be
indicative of current conditions and expectations
and thus are useful for making decisions. Thus
historical accounting information must be examined
carefully, modified, and supplemented to
make certain that what is used is relevant to
expectations about the future.
But it also must be recognized that accounting
can and does provide information that is
current and useful in making estimates about
future events. For example, accounting provides
current-value information about selected items,
such as readily marketable investments in debt
and equity securities and inventories, and it provides
reports on what the organization plans to
accomplish and its expectations about the future
in budgets and earnings forecasts.
Who uses accounting information for decision
making?
The information developed by the accountant’s
information system can be useful to:
● Managers in planning, controlling, and evaluating
their organization’s activities
● Owners, directors, and others in evaluating
the performance of the organization and determining
operating, compensation, and other
policies
● Union, governmental, regulatory, taxing, environmental,
and other entities in evaluating
whether the organization is conforming with
applicable contracts, rules, laws, and public
policies and/or whether changes are needed;
● Existing and potential owners, lenders, employees,
customers, and suppliers in evaluating
their current and future commitments to the
organization
● Accounting researchers, security analysts, security
brokers and dealers, mutual-fund managers,
and others in their analyses and evaluations
of enterprises, capital markets, and/or
investors
The services that accounting and the accountant
can provide have been enhanced in
many ways since the 1970s by advances in computers
and other information technology. The
impact of these changes is revolutionizing accounting
and the accounting profession. But the
changes have yet to reach their ultimate potential.
For example, accounting in the 1990s began
to provide current-value information and estimates
about the future that an investor or other
user would find useful for decision making. The
availability of computer software and the Internet
greatly enhanced the potential for data and
information services. Such changes create opportunities
for accounting and accountants and also
will require substantial modifications in the traditional
financial accounting and reporting
model.
What is the profession of accounting?
At the core of the profession of accounting is the certified
public accountant (CPA) who has passed the
national CPA examination, been licensed in at
least one state or territory, and engages in the
practice of public accounting/auditing in a public
accounting or CPA firm. The CPA firm provides
some combination of two or more of four types
of services: accounting, auditing, income tax
planning and reporting, and management advising/
consulting. Analysis of trends indicates that
the demand for auditing services has peaked and
that most of the growth experienced by public
accounting firms is in the consulting area.
Accounting career paths, specializations, or
subprofessions for CPAs who join profit-seeking
enterprises include being controllers, chief financial
officers, or internal auditors. Other career
paths include being controllers or chief financial
officers in not-for-profit or government organizations
and teaching in colleges and universities.
Students should note that non-CPAs also could
enter these subprofessions and that certificates,
but not licenses, could be earned by passing examinations
in several areas, including internal
auditing, management accounting, and bank
auditing.
How do environmentalchanges impact the accounting
profession?
Numerous changes in the environment make the practice of accounting
and auditing much different in the new century
than it was in the 1970s. For example, profes-
sional accounting firms now actively compete for
clients by advertising extensively in various media,
a practice that at one time was forbidden by
their code of professional conduct. Mergers of
clients have led CPA firms into mergers as well,
such that the Big Eight is now the Big Five and
the second-tier group has been reduced from
twelve firms to about five. Another result of competition
and other changes has been that some of
the largest employers of CPAs now include income
tax and accounting services firms such as
H&R Block and an American Express subsidiary.
Competition among CPAs also has led the
SEC to expand its regulatory and enforcement
activities to ensure that financial reports are relevant
and reliable. From its inception, the SEC has
had legal authority to prescribe the accounting
principles and standards used in the financial
reports of enterprises whose securities are publicly
traded, but it has delegated this responsibility
to the accounting profession. Since 1973, that
organization has been the FASB, with which the
SEC works closely. But since the FASB is limited
to performing what is essentially a legislative
function, the SEC has substantially increased its
enforcement activities to ensure that the FASB’s
standards are appropriately applied in financial
reports and that accountants/auditors act in the
public interest in performing their independent
audits—for which the Securities Acts have given
the CPA profession a monopoly.
How does a student prepare for the accounting
profession?
Persons considering entering the accounting
profession should begin by doing some
self-analysis to determine whether they enjoy
mathematical, problem- or puzzle-solving, or
other analytical activities; by taking some aptitude
tests; or by talking with accounting teachers
or practitioners about their work.
Anyone interested in becoming an accounting
professional should expect to enter a rigorous
five-year education program and to earn a master’s
degree in order to qualify to enter the profession
and to sit for the CPA examination. To
build a base for rising to the top of the profession,
students should select courses that help them
learn how to think and to define and solve problems.
The courses should help them to develop
analytical (logical, mathematical, statistical),
communication (oral, reading, writing), computer,
and interpersonal skills. The early part of
the program should emphasize arts and sciences
courses in these skill-development areas.
The person should begin to develop wordprocessing,
data-processing, and Internet skills
long before entering college and should expect to
maintain competence in them throughout his or
her professional career. These skills greatly enhance
and facilitate all phases and aspects of what
accounting and accountants attempt to do. What
can be done is limited only by technology and by
the sophistication of the system, its operators,
and users.
(SEE ALSO: Accounting cycle; Careers in accounting;
Financial Accounting Standards Board; Certified
Management Accountant; Generally Accepted Accounting
Principles; Government accounting; Institute
for Internal Auditors; Institute of Management Accountants;
International Accounting Standards;
International Federation of Accountants; National Association
of Boards of Accountancy; Public Oversight
Board; Uniform Certified Public Accountant examination;
United States General Accounting Office;
Securities Acts: Requirements for accounting)
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