ACCOUNTING AS A FIELD OF STUDY, INTRODUCTION:
Accounting is the measurement, processing, and communication of financial and nonfinancial information about economic entities such as businesses and corporations. Accounting is a field of study and a profession that is dedicated to carrying out tasks like the recording of financial transactions along with storing, sorting, retrieving, summarizing, and presenting the results in various reports and analyses.
Accounting can also be seen as the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. The financial statements used in accounting are a concise summary of financial transactions over an accounting period, summarizing a company's operations, financial position, and cash flows.
Accounting, which has been called the "language of business", measures the results of an organization's economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants. The terms "accounting" and "financial reporting" are often used as synonyms
FURTHER ILLUSTRATION OF ACCOUNTING AS A FIELD OF STUDY
Although accounting has existed in various forms and levels sophistication throughout many human societies, 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).
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.
To illustrate double-entry accounting, just imagine a business sends an invoice to one of its clients. An accountant using the double-entry method records a debit to accounts receivables, which flows through to the balance sheet, and a credit to sales revenue, which flows through to the income statement.
When the client pays the invoice, the accountant credits accounts receivables and debits cash. Double-entry accounting is also called balancing the books, as all of the accounting entries are balanced against each other. If the entries aren't balanced, the accountant knows there must be a mistake somewhere in the general ledger.
ACCOUNTING AS A FIELD OF STUDY PROCEDURES:
Accounting is one of the key functions for almost any business. It may be handled by a bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of employees at larger companies. The reports generated by various streams of accounting, such as cost accounting and managerial accounting, are invaluable in helping management make informed business decisions.
Regardless of the size of a business, accounting is a necessary function for decision making, cost planning, and measurement of economic performance measurement.
A bookkeeper can handle basic accounting needs, but a Certified Public Accountant (CPA) should be utilized for larger or more advanced accounting tasks.
Two important types of accounting for businesses are managerial accounting and cost accounting. Managerial accounting helps management teams make business decisions, while cost accounting helps business owners decide how much a product should cost.
Professional accountants follow a set of standards known as the Generally Accepted Accounting Principles (GAAP) when preparing financial statements.
The financial statements that summarize a large company's operations, financial position, and cash flows over a particular period are concise and consolidated reports based on thousands of individual financial transactions. As a result, all accounting designations are the culmination of years of study and rigorous examinations combined with a minimum number of years of practical accounting experience.
While basic accounting functions can be handled by a bookkeeper, advanced accounting is typically handled by qualified accountants who possess designations such as Certified Public Accountant (CPA) or Certified Management Accountant (CMA) in the United States. In Canada, the designations are Chartered Accountant (CA), Certified General Accountant (CGA), and Certified Management Accountant (CMA); however, all three will be unified under the designation Chartered Professional Accountant (CPA) in the near future.
The Alliance for Responsible Professional Licensing (ARPL) was formed during August 2019 in response to a series of state deregulatory proposals making the requirements to become a CPA more lenient. The ARPL is a coalition of various advanced professional groups including engineers, accountants, and architects.
HISTORY OF ACCOUNTING AS A FIELD OF STUDY:
The accounting history is thousands of years old and can be traced to ancient civilizations. The early development of accounting is dated back to ancient Mesopotamia, and is closely related to developments in writing, counting, and money; there is also evidence of early forms of bookkeeping in ancient Iran, and early auditing systems by the ancient Egyptians and Babylonians. By the time of Emperor Augustus, the Roman government had access to detailed financial information.
Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval Middle East and was further refined in medieval Europe. With the development of joint-stock companies, accounting split into financial accounting and management accounting.
Luca Pacioli is considered “The Father of Accounting and Bookkeeping” due to his contributions to the development of accounting as a profession. An Italian mathematician and friend of Leonardo da Vinci, Pacioli published a book on the double-entry system of bookkeeping sometime between 1470 and 1517.
By 1880, the modern profession of accounting was fully formed and recognized by the Institute of Chartered Accountants in England and Wales. This institute created many of the systems by which accountants practice today. The formation of the Institute occurred in large part due to the Industrial Revolution. Merchants not only needed to track their records but sought to avoid bankruptcy as well.
CHARACTERISTICS OF ACCOUNTING
Accounting can be divided into several subfields or subject areas which include
Accounting information systems
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; and management accounting focuses on the measurement, analysis, and reporting of information for internal use by management.
Financial accounting refers to the processes used to generate interim and annual financial statements. The results of all financial transactions that occur during an accounting period are summarized into the balance sheet, income statement, and cash flow statement. It 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 prepares financial statements for the external users in accordance with generally accepted accounting principles (GAAP). GAAP, in turn, arises from the wide agreement between accounting theory and practice, and change over time to meet the needs of decision-makers.
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.
This branch of accounting is also studied as part of the board exams for qualifying as an actuary. These two types of professionals, accountants, and actuaries, have created a culture of being archrivals.
Management accounting uses much of the same data as financial accounting, but it organizes and utilizes information in different ways. Namely, in managerial accounting, an accountant generates monthly or quarterly reports that a business's management team can use to make decisions about how the business operates. Managerial accounting also encompasses many other facets of accounting, including budgeting, forecasting, and various financial analysis tools. Essentially, any information that may be useful to management falls underneath this umbrella. 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 on cost-benefit analysis and are not required to follow the generally accepted accounting principle (GAAP). In 2014 CIMA created the Global Management Accounting Principles (GMAPs). The result of research from across 20 countries on five continents, the principles aim to guide best practice in the discipline.
Management accounting produces future-oriented reports—for example, the budget for 2006 is prepared in 2005—and the time span of reports varies widely. Such reports may include both financial and nonfinancial information, and may, for example, focus on specific products and departments.
Auditing is the verification of assertions made by others regarding a payoff, and in the context of accounting it is the "unbiased examination and evaluation of the financial statements of an organization". The audit is a professional service that is systematic and conventional.
An audit of financial statements aims to express or disclaim an opinion on the financial statements. The auditor expresses an opinion on the fairness with which the financial statements present the financial position, results of operations, and cash flows of an entity, in accordance with the generally acceptable accounting principle (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.
An accounting information system is a part of an organization's information system that focuses on processing accounting data. Many corporations use artificial intelligence-based information systems. The banking and finance industry is using AI as fraud detection. The retail industry is using AI for customer services. AI is also used in the cybersecurity industry. It involves computer hardware and software systems and using statistics and modeling.
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 specialized accounting principles for tax purposes which can differ from the generally accepted accounting principles (GAAP) for financial reporting. U.S. tax law covers four basic forms of business ownership: sole proprietorship, partnership, corporation, and Limited Liability Company. Corporate and personal 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).
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.
Just as managerial accounting helps businesses make decisions about management, cost accounting helps businesses make decisions about costing. Essentially, cost accounting considers all of the costs related to producing a product. Analysts, managers, business owners, and accountants use this information to determine what their products should cost. In cost accounting, money is cast as an economic factor in production, whereas in financial accounting, money is considered to be a measure of a company's economic performance.