Accounting, also known as accountancy, is the
measurement
Measurement is the quantification of attributes of an object or event, which can be used to compare with other objects or events.
In other words, measurement is a process of determining how large or small a physical quantity is as compared ...
, processing, and
communication
Communication (from la, communicare, meaning "to share" or "to be in relation with") is usually defined as the transmission of information. The term may also refer to the message communicated through such transmissions or the field of inquir ...
of financial and non financial information about
economic entities such as
business
Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
es and
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
s.
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 stakeholders, including
investor
An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...
s,
creditor
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
s,
management
Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business.
Management includes the activities o ...
, and
regulators
Regulator may refer to:
Technology
* Regulator (automatic control), a device that maintains a designated characteristic, as in:
** Battery regulator
** Pressure regulator
** Diving regulator
** Voltage regulator
* Regulator (sewer), a control de ...
.
Practitioners of accounting are known as
accountant
An accountant is a practitioner of accounting or accountancy.
Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certifi ...
s. The terms "accounting" and "
financial reporting
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...
" are often used as synonyms.
Accounting can be divided into several fields including
financial accounting
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, s ...
,
management accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is th ...
,
tax accounting
U.S. tax accounting refers to accounting for tax purposes in the United States. Unlike most countries, the United States has a comprehensive set of accounting principles for tax purposes, prescribed by tax law, which are separate and distinct from ...
and
cost accounting
Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, al ...
.
Financial accounting focuses on the reporting of an organization's financial information, including the preparation of
financial statement
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s, to the external users of the information, such as investors, regulators and
suppliers
In commerce, a supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. It refers to the network of organizations, people, activ ...
;
and management accounting focuses on the measurement, analysis and reporting of information for internal use by management.
The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as
bookkeeping
Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. Tr ...
, of which
double-entry bookkeeping
Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry to ...
is the most common system.
Accounting information system
An accounting as an information system (AIS) is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking acco ...
s 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
Venice ( ; it, Venezia ; vec, Venesia or ) is a city in northeastern Italy and the capital of the Veneto Regions of Italy, region. It is built on a group of 118 small islands that are separated by canals and linked by over 400 ...
, and is usually attributed to the Italian mathematician and Franciscan friar
Luca Pacioli
Fra Luca Bartolomeo de Pacioli (sometimes ''Paccioli'' or ''Paciolo''; 1447 – 19 June 1517) was an Italian mathematician, Franciscan friar, collaborator with Leonardo da Vinci, and an early contributor to the field now known as accounting ...
.
Today, accounting is facilitated by
accounting organizations
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language ...
such as standard-setters,
accounting firms
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language ...
and
professional bodies
A professional is a member of a profession or any person who works in a specified professional activity. The term also describes the standards of education and training that prepare members of the profession with the particular knowledge and skil ...
. Financial statements are usually audited by accounting firms,
and are prepared in accordance with
generally accepted accounting principles
Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
(GAAP).
GAAP is set by various standard-setting organizations such as the
Financial Accounting Standards Board
The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
(FASB) in the United States
and the Financial Reporting Council in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
. As of 2012, "all major economies" have plans to
converge
Converge may refer to:
* Converge (band), American hardcore punk band
* Converge (Baptist denomination), American national evangelical Baptist body
* Limit (mathematics)
* Converge ICT, internet service provider in the Philippines
*CONVERGE CFD s ...
towards or adopt the
International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...
(IFRS).
History
![Pacioli](https://upload.wikimedia.org/wikipedia/commons/2/2a/Pacioli.jpg)
Accounting is thousands of years old and can be traced to
ancient
Ancient history is a time period from the History of writing, beginning of writing and recorded human history to as far as late antiquity. The span of recorded history is roughly 5,000 years, beginning with the Sumerian language, Sumerian c ...
civilization
A civilization (or civilisation) is any complex society characterized by the development of a state, social stratification, urbanization, and symbolic systems of communication beyond natural spoken language (namely, a writing system).
Ci ...
s.
[Robson, Keith. 1992. "Accounting Numbers as 'inscription': Action at a Distance and the Development of Accounting." ''Accounting, Organizations and Society'' 17 (7): 685–708.] The early development of accounting dates back to ancient
Mesopotamia
Mesopotamia ''Mesopotamíā''; ar, بِلَاد ٱلرَّافِدَيْن or ; syc, ܐܪܡ ܢܗܪ̈ܝܢ, or , ) is a historical region of Western Asia situated within the Tigris–Euphrates river system, in the northern part of the F ...
, and is closely related to developments in
writing
Writing is a medium of human communication which involves the representation of a language through a system of physically Epigraphy, inscribed, Printing press, mechanically transferred, or Word processor, digitally represented Symbols (semiot ...
,
counting
Counting is the process of determining the number of elements of a finite set of objects, i.e., determining the size of a set. The traditional way of counting consists of continually increasing a (mental or spoken) counter by a unit for every ele ...
and
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
;
there is also evidence of early forms of
bookkeeping
Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. Tr ...
in ancient
Iran
Iran, officially the Islamic Republic of Iran, and also called Persia, is a country located in Western Asia. It is bordered by Iraq and Turkey to the west, by Azerbaijan and Armenia to the northwest, by the Caspian Sea and Turkmeni ...
,
[Oldroyd, David & Dobie, Alisdair: ''Themes in the history of bookkeeping'', The Routledge Companion to Accounting History, London, July 2008, , Chapter 5, p. 96] and early
auditing
An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
systems by the ancient
Egyptians
Egyptians ( arz, المَصرِيُون, translit=al-Maṣriyyūn, ; arz, المَصرِيِين, translit=al-Maṣriyyīn, ; cop, ⲣⲉⲙⲛ̀ⲭⲏⲙⲓ, remenkhēmi) are an ethnic group native to the Nile, Nile Valley in Egypt. Egyptian ...
and
Babylonians
Babylonia (; Akkadian: , ''māt Akkadī'') was an ancient Akkadian-speaking state and cultural area based in the city of Babylon in central-southern Mesopotamia (present-day Iraq and parts of Syria). It emerged as an Amorite-ruled state c. ...
.
By the time of Emperor
Augustus
Caesar Augustus (born Gaius Octavius; 23 September 63 BC – 19 August AD 14), also known as Octavian, was the first Roman emperor; he reigned from 27 BC until his death in AD 14. He is known for being the founder of the Roman Pri ...
, the
Roman government had access to detailed financial information.
Double-entry bookkeeping
Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry to ...
was pioneered in the Jewish community of the early-medieval Middle East and was further refined in
medieval Europe
In the history of Europe, the Middle Ages or medieval period lasted approximately from the late 5th to the late 15th centuries, similar to the post-classical period of global history. It began with the fall of the Western Roman Empire a ...
.
With the development of
joint-stock companies
A joint-stock company is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares (certificates of ownership). Shareholders are ...
, accounting split into
financial accounting
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, s ...
and
management accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is th ...
.
The first published work on a
double-entry bookkeeping system
Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry t ...
was the ''
Summa de arithmetica
' (''Summary of arithmetic, geometry, proportions and proportionality'') is a book on mathematics written by Luca Pacioli and first published in 1494. It contains a comprehensive summary of Renaissance mathematics, including practical arithmeti ...
'', published in
Italy
Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the homonymous geographical re ...
in 1494 by
Luca Pacioli
Fra Luca Bartolomeo de Pacioli (sometimes ''Paccioli'' or ''Paciolo''; 1447 – 19 June 1517) was an Italian mathematician, Franciscan friar, collaborator with Leonardo da Vinci, and an early contributor to the field now known as accounting ...
(the "Father of Accounting").
Accounting began to transition into an organized profession in the nineteenth century,
with local
professional bodies
A professional is a member of a profession or any person who works in a specified professional activity. The term also describes the standards of education and training that prepare members of the profession with the particular knowledge and skil ...
in England merging to form the
Institute of Chartered Accountants in England and Wales
The Institute of Chartered Accountants in England and Wales (ICAEW) is a professional membership organisation that promotes, develops and supports chartered accountants and students around the world. As of July 2022, it has over 198,000 members ...
in 1880.
Etymology
![Hauptbuch Hochstetter vor 1828](https://upload.wikimedia.org/wikipedia/commons/4/49/Hauptbuch_Hochstetter_vor_1828.jpg)
Both the words accounting and accountancy were in use in
Great Britain
Great Britain is an island in the North Atlantic Ocean off the northwest coast of continental Europe. With an area of , it is the largest of the British Isles, the largest European island and the ninth-largest island in the world. It is ...
by the mid-1800s, and are derived from the words ''accompting'' and ''accountantship'' used in the 18th century.
[Labardin, Pierre, and Marc Nikitin. 2009. "Accounting and the Words to Tell It: An Historical Perspective." ''Accounting, Business & Financial History'' 19 (2): 149–166.] In
Middle English
Middle English (abbreviated to ME) is a form of the English language that was spoken after the Norman conquest of 1066, until the late 15th century. The English language underwent distinct variations and developments following the Old English p ...
(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'',
[Baladouni, Vahé. 1984. "Etymological Observations on Some Accounting Terms." ''The Accounting Historians Journal'' 11 (2): 101–109.] which is in turn related to the
Vulgar Latin
Vulgar Latin, also known as Popular or Colloquial Latin, is the range of non-formal Register (sociolinguistics), registers of Latin spoken from the Crisis of the Roman Republic, Late Roman Republic onward. Through time, Vulgar Latin would evolve ...
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".
The word "
accountant
An accountant is a practitioner of accounting or accountancy.
Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certifi ...
" is derived from the French word , which is also derived from the Italian and
Latin
Latin (, or , ) is a classical language belonging to the Italic branch of the Indo-European languages. Latin was originally a dialect spoken in the lower Tiber area (then known as Latium) around present-day Rome, but through the power of the ...
word . 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
Pronunciation is the way in which a word or a language is spoken. This may refer to generally agreed-upon sequences of sounds used in speaking a given word or language in a specific dialect ("correct pronunciation") or simply the way a particular ...
and in
orthography
An orthography is a set of conventions for writing a language, including norms of spelling, hyphenation, capitalization, word breaks, emphasis, and punctuation.
Most transnational languages in the modern period have a writing system, and mos ...
to its present form.
Terminology
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 "the
principles
A principle is a proposition or value that is a guide for behavior or evaluation. In law, it is a rule that has to be or usually is to be followed. It can be desirably followed, or it can be an inevitable consequence of something, such as the la ...
and procedures of accounting"; it also refers to the
job
Work or labor (or labour in British English) is intentional activity people perform to support the needs and wants of themselves, others, or a wider community. In the context of economics, work can be viewed as the human activity that contr ...
of being an
accountant
An accountant is a practitioner of accounting or accountancy.
Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certifi ...
.
Accountancy refers to the
occupation
Occupation commonly refers to:
*Occupation (human activity), or job, one's role in society, often a regular activity performed for payment
*Occupation (protest), political demonstration by holding public or symbolic spaces
*Military occupation, th ...
or
profession
A profession is a field of work that has been successfully ''professionalized''. It can be defined as a disciplined group of individuals, '' professionals'', who adhere to ethical standards and who hold themselves out as, and are accepted by ...
of an accountant,
particularly in
British English
British English (BrE, en-GB, or BE) is, according to Lexico, Oxford Dictionaries, "English language, English as used in Great Britain, as distinct from that used elsewhere". More narrowly, it can refer specifically to the English language in ...
.
Topics
Accounting has several subfields or subject areas, including
financial accounting
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, s ...
,
management accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is th ...
,
auditing
An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
,
taxation
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
and
accounting information system
An accounting as an information system (AIS) is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking acco ...
s.
[Weber, Richard P., and W. C. Stevenson. 1981. "Evaluations of Accounting Journal and Department Quality." The Accounting Review 56 (3): 596–612.]
Financial accounting
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 prepares
financial statement
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s for the external users in accordance with
generally accepted accounting principles
Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
(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 financial statements are often published six to ten months after the end of the accounting period—on an
annual
Annual may refer to:
* Annual publication, periodical publications appearing regularly once per year
**Yearbook
** Literary annual
* Annual plant
* Annual report
* Annual giving
* Annual, Morocco, a settlement in northeastern Morocco
* Annuals (b ...
or quarterly basis, generally about the organization as a whole.
Management accounting
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 th
Global 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.
Management accounting produces past-oriented reports with time spans that vary widely, but it also encompasses future-oriented reports such as
budgets
A budget is a calculation play, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environmenta ...
. Management accounting reports often include financial and non financial information, and may, for example, focus on specific products and departments.
Auditing
Auditing is the verification of assertions made by others regarding a payoff,
[Baiman, Stanley. 1979. "Discussion of Auditing: Incentives and Truthful Reporting." Journal of Accounting Research 17: 25–29.] and in the context of accounting it is the "
unbiased
Bias is a disproportionate weight ''in favor of'' or ''against'' an idea or thing, usually in a way that is closed-minded, prejudicial, or unfair. Biases can be innate or learned. People may develop biases for or against an individual, a group, ...
examination and evaluation of the financial statements of an organization".
Audit is a professional service that is systematic and conventional.
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.
Information systems
An accounting information system is a part of an organization's
information system
An information system (IS) is a formal, sociotechnical, organizational system designed to collect, process, store, and distribute information. From a sociotechnical perspective, information systems are composed by four components: task, people ...
used for processing accounting data.
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.
Many accounting practices have been simplified with the help of
accounting computer-based software. An
enterprise resource planning
Enterprise resource planning (ERP) is the integrated management of main business processes, often in real time and mediated by software and technology. ERP is usually referred to as a category of Business management tools, business management ...
(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.
Tax accounting
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 the
generally accepted accounting principles
Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
(GAAP) for financial reporting.
U.S. tax law covers four basic forms of business ownership:
sole proprietorship
A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole ...
,
partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments o ...
,
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
, and
limited liability company
A limited liability company (LLC for short) is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a ...
.
Corporate
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and re ...
and
personal
Personal may refer to:
Aspects of persons' respective individualities
* Privacy
* Personality
* Personal, personal advertisement, variety of classified advertisement used to find romance or friendship
Companies
* Personal, Inc., a Washington, ...
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
Forensic accounting is a specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or
litigation
-
A lawsuit is a proceeding by a party or parties against another in the civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. The term "lawsuit" is used in reference to a civil actio ...
. "
Forensic
Forensic science, also known as criminalistics, is the application of science to Criminal law, criminal and Civil law (legal system), civil laws, mainly—on the criminal side—during criminal investigation, as governed by the legal standard ...
" 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
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 of ''The Journal of Accountancy''.
Organizations
Professional bodies
Professional accounting bodies
A professional accounting body is an organization or association of accountants in a particular jurisdiction. Usually a person needs to be a member of such professional body to hold out to the public of the jurisdiction as an accountant. The desi ...
include the
American Institute of Certified Public Accountants (AICPA) and the other 179 members of the
International Federation of Accountants
The International Federation of Accountants (IFAC) is the global advocacy organization for the accountancy profession; mainly for the financial accounting and auditing professions. Founded in 1977, IFAC has more than 175 members and associates in ...
(IFAC),
including
Institute of Chartered Accountants of Scotland
The Institute of Chartered Accountants of Scotland (ICAS) is the world's first professional body of Chartered Accountants (CAs). It is a regulator, educator, influencer and thought leader.
ICAS act as a thought leader and voice of the professiona ...
(ICAS), Institute of Chartered Accountants of Pakistan (ICAP),
CPA Australia
CPA Australia ("Certified Practising Accountant") is a professional accounting body in Australia founded in 1886. As of 31 December 2020, it has 168,736 members working in 150 countries and regions around the world. CPA Australia currently has 1 ...
,
Institute of Chartered Accountants of India
The Institute of Chartered Accountants of India (ICAI) is India's largest professional accounting body under the administrative control of Ministry of Corporate Affairs, Government of India. It was established on 1 July 1949 as a statutory bod ...
,
Association of Chartered Certified Accountants
Founded in 1904, the Association of Chartered Certified Accountants (ACCA) is the global professional accounting body offering the Chartered Certified Accountant qualification (ACCA). It has 240,952 members and 541,930 future members worldwid ...
(ACCA) and
Institute of Chartered Accountants in England and Wales
The Institute of Chartered Accountants in England and Wales (ICAEW) is a professional membership organisation that promotes, develops and supports chartered accountants and students around the world. As of July 2022, it has over 198,000 members ...
(ICAEW). Some countries have a single professional accounting body (e.g. Brazil) and, in some other countries, professional bodies for subfields of the accounting professions also exist, for example the
Chartered Institute of Management Accountants
The Chartered Institute of Management Accountants (CIMA) is the global professional management accounting body based out of the UK. CIMA offers training and qualification in management accountancy and related subjects. It is focused on accountan ...
(CIMA) in the UK and
Institute of management accountants
The Institute of Management Accountants (IMA), formerly known as the National Association of Cost Accountants (NACA), is a professional organization of accountants.
History
IMA was founded in 1919 in Buffalo, New York as the National Associ ...
in the United States.
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.
Firms
Depending on its size, a company may be legally required to have their
financial statement
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s
audited
An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
by a qualified auditor, and audits are usually carried out by
accounting firms
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language ...
.
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
Arthur Andersen was an American accounting firm based in Chicago that provided auditing, tax advising, consulting and other professional services to large corporations. By 2001, it had become one of the world's largest multinational corporat ...
,
Deloitte
Deloitte Touche Tohmatsu Limited (), commonly referred to as Deloitte, is an international professional services network headquartered in London, England. Deloitte is the largest professional services network by revenue and number of profession ...
,
Ernst & Young
Ernst & Young Global Limited, trade name EY, is a multinational professional services partnership headquartered in London, England. EY is one of the largest professional services networks in the world. Along with Deloitte, KPMG and Pricewaterh ...
,
KPMG
KPMG International Limited (or simply KPMG) is a multinational professional services network, and one of the Big Four accounting organizations.
Headquartered in Amstelveen, Netherlands, although incorporated in London, England, KPMG is a net ...
and
PricewaterhouseCoopers
PricewaterhouseCoopers is an international professional services brand of firms, operating as partnerships under the PwC brand. It is the second-largest professional services network in the world and is considered one of the Big Four accounting ...
.
The
demise of Arthur Andersen following the
Enron scandal
The Enron scandal was an accounting scandal involving Enron Corporation, an American energy company based in Houston, Texas. Upon being publicized in October 2001, the company declared bankruptcy and its accounting firm, Arthur Andersen then on ...
reduced the Big Five to the
Big Four.
Standard-setters
Generally accepted accounting principles
Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
(GAAP) are accounting standards issued by national regulatory bodies. In addition, the
International Accounting Standards Board
The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation.
The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). ...
(IASB) issues the
International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...
(IFRS) implemented by 147 countries.
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
The International Ethics Standards Board for Accountants (IESBA) develops and promotes the International Code of Ethics for Professional Accountants (including International Independence Standards). The IESBA also supports debate on issues related ...
(IESBA)
sets the internationally appropriate principles-based ''Code of Ethics for Professional Accountants''; the
International Accounting Education Standards Board
The International Accounting Education Standards Board (IAESB) is an independent organisation within the fold of the International Federation of Accountants (IFAC). The board develops guidance to improve standards of education in accountancy.
The ...
(IAESB) sets professional accounting education standards;
and
International Public Sector Accounting Standards International Public Sector Accounting Standards (IPSAS) are a set of accounting standards issued by the IPSAS Board for use by public sector entities around the world in the preparation of financial statements. These standards are based on Interna ...
Board (IPSASB) sets accrual-based international public sector accounting standards.
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 United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
the
Financial Accounting Standards Board
The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
(FASB) issues the Statements of Financial Accounting Standards, which form the basis of
US GAAP
Generally Accepted Accounting Principles (GAAP or U.S. GAAP, pronounced like "gap") is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC) and is the default accounting standard used by companies based in the Unit ...
,
and in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
the
Financial Reporting Council
The Financial Reporting Council (FRC) is an independent regulator in the UK and Ireland based in London Wall in the City of London, responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and ...
(FRC) sets accounting standards.
However, as of 2012 "all major economies" have plans to
converge
Converge may refer to:
* Converge (band), American hardcore punk band
* Converge (Baptist denomination), American national evangelical Baptist body
* Limit (mathematics)
* Converge ICT, internet service provider in the Philippines
*CONVERGE CFD s ...
towards or adopt the IFRS.
Education, training and qualifications
Degrees
At least a
bachelor's degree
A bachelor's degree (from Middle Latin ''baccalaureus'') or baccalaureate (from Modern Latin ''baccalaureatus'') is an undergraduate academic degree awarded by colleges and universities upon completion of a course of study lasting three to six ...
in accounting or a related field is required for most accountant and
auditor
An auditor is a person or a firm appointed by a company to execute an audit.Practical Auditing, Kul Narsingh Shrestha, 2012, Nabin Prakashan, Nepal To act as an auditor, a person should be certified by the regulatory authority of accounting and au ...
job positions, and some employers prefer applicants with a
master's degree
A master's degree (from Latin ) is an academic degree awarded by universities or colleges upon completion of a course of study demonstrating mastery or a high-order overview of a specific field of study or area of professional practice. .
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,
and associate membership with the
Certified Public Accountants Association
The Certified Public Accountants Association (CPAA) (formerly Association of Certified Public Accountants and CPA UK) was formed in 1989 to represent the interests of certain accountants in the United Kingdom.
The association's National Administr ...
of the UK is available after gaining a degree in finance or accounting.
A
doctorate
A doctorate (from Latin ''docere'', "to teach"), doctor's degree (from Latin ''doctor'', "teacher"), or doctoral degree is an academic degree awarded by universities and some other educational institutions, derived from the ancient formalism ''l ...
is required in order to pursue a career in accounting
academia
An academy (Attic Greek: Ἀκαδήμεια; Koine Greek Ἀκαδημία) is an institution of secondary education, secondary or tertiary education, tertiary higher education, higher learning (and generally also research or honorary membershi ...
, for example, to work as a university
professor
Professor (commonly abbreviated as Prof.) is an Academy, academic rank at university, universities and other post-secondary education and research institutions in most countries. Literally, ''professor'' derives from Latin as a "person who pr ...
in accounting.
The
Doctor of Philosophy
A Doctor of Philosophy (PhD, Ph.D., or DPhil; Latin: or ') is the most common Academic degree, degree at the highest academic level awarded following a course of study. PhDs are awarded for programs across the whole breadth of academic fields ...
(PhD) and the
Doctor of Business Administration
The Doctor of Business Administration (DBA) is either a professional doctorate or a research doctorate, depending on the granting university, awarded on the basis of advanced study, examinations, project work, and research in business administrati ...
(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
An executive officer is a person who is principally responsible for leading all or part of an organization, although the exact nature of the role varies depending on the organization. In many militaries and police forces, an executive officer, o ...
for business or public careers requiring research skills and qualifications.
Professional qualifications
Professional accounting qualifications include the
Chartered Accountant designations and other qualifications including certificates and diplomas.
In Scotland, chartered accountants of
ICAS undergo
Continuous Professional Development
Professional development is learning to earn or maintain professional credentials such as academic degrees to formal coursework, attending conferences, and informal learning opportunities situated in practice. It has been described as intensive ...
and abide by the ICAS code of ethics. In England and Wales, chartered accountants of the
ICAEW
The Institute of Chartered Accountants in England and Wales (ICAEW) is a professional membership organisation that promotes, develops and supports chartered accountants and students around the world. As of July 2022, it has over 198,000 members ...
undergo annual training, and are bound by the ICAEW's
code of ethics
Ethical codes are adopted by organizations to assist members in understanding the difference between right and wrong and in applying that understanding to their decisions. An ethical code generally implies documents at three levels: codes of bus ...
and subject to its disciplinary procedures.
In the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, the requirements for joining the
AICPA as a
Certified Public Accountant
Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant in other English-speaking countries. In the United Sta ...
are set by the Board of Accountancy of each
state
State may refer to:
Arts, entertainment, and media Literature
* ''State Magazine'', a monthly magazine published by the U.S. Department of State
* ''The State'' (newspaper), a daily newspaper in Columbia, South Carolina, United States
* ''Our S ...
, 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.
Research
Accounting research is
research
Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization and analysis of evidence to increase understanding of a topic, characterized by a particular att ...
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.
It encompasses a broad range of research areas including
financial accounting
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, s ...
,
management accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is th ...
,
auditing
An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
and
taxation
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
.
[Oler, Derek K., Mitchell J. Oler, and Christopher J. Skousen. 2010. "Characterizing Accounting Research." ''Accounting Horizons'' 24 (4): 635–670.]
Accounting research is carried out both by academic researchers and practicing accountants.
Methodologies
In its most common sense, methodology is the study of research methods. However, the term can also refer to the methods themselves or to the philosophical discussion of associated background assumptions. A method is a structured procedure for bri ...
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 theories
A theory is a rational type of abstract thinking about a phenomenon, or the results of such thinking. The process of contemplative and rational thinking is often associated with such processes as observational study or research. Theories may be s ...
or substantiating ideas in mathematical terms";
interpretive __NOTOC__
An interpretive discussion is a discussion in which participants explore and/or resolve interpretations often pertaining to text (literary theory), texts of any medium containing significant ambiguity in meaning.
Education
Interpretiv ...
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
Critical or Critically may refer to:
*Critical, or critical but stable, medical states
**Critical, or intensive care medicine
*Critical juncture, a discontinuous change studied in the social sciences.
*Critical Software, a company specializing in ...
research, which emphasizes the role of power and conflict in accounting practice;
case studies
A case study is an in-depth, detailed examination of a particular case (or cases) within a real-world context. For example, case studies in medicine may focus on an individual patient or ailment; case studies in business might cover a particular fi ...
;
computer simulation
Computer simulation is the process of mathematical modelling, performed on a computer, which is designed to predict the behaviour of, or the outcome of, a real-world or physical system. The reliability of some mathematical models can be dete ...
; and
field research
Field research, field studies, or fieldwork is the collection of raw data outside a laboratory, library, or workplace setting. The approaches and methods used in field research vary across disciplines. For example, biologists who conduct fie ...
.
[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
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language ...
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
Academic publishing is the subfield of publishing which distributes academic research and scholarship. Most academic work is published in academic journal articles, books or theses. The part of academic written output that is not formally publ ...
than their
business school
A business school is a university-level institution that confers degrees in business administration or management. A business school may also be referred to as school of management, management school, school of business administration, o ...
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.
Scandals
The year 2001 witnessed a series of financial information frauds involving
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional companies. ...
, auditing firm
Arthur Andersen
Arthur Andersen was an American accounting firm based in Chicago that provided auditing, tax advising, consulting and other professional services to large corporations. By 2001, it had become one of the world's largest multinational corporat ...
, the telecommunications company
WorldCom
MCI, Inc. (subsequently Worldcom and MCI WorldCom) was a telecommunications company. For a time, it was the second largest long-distance telephone company in the United States, after AT&T. Worldcom grew largely by acquiring other telecommunic ...
,
Qwest
Qwest Communications International, Inc. was a United States telecommunications carrier. Qwest provided local service in 14 western and midwestern U.S. states: Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dako ...
and
Sunbeam
A sunbeam, in meteorological optics, is a beam of sunlight that appears to radiate from the position of the Sun. Shining through openings in clouds or between other objects such as mountains and buildings, these beams of particle-scattered sunl ...
, among other well-known corporations. These problems highlighted the need to review the effectiveness of
accounting standards
Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
, auditing regulations and
corporate governance
Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions th ...
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.
[Astrid Ayala and Giancarlo Ibárgüen Snr.: "A Market Proposal for Auditing the Financial Statements of Public Companies" (Journal of Management of Value, ]Universidad Francisco Marroquín
Francisco Marroquín University (Spanish: ''Universidad Francisco Marroquín''), also known by the abbreviation UFM, is a private, secular university in Guatemala City, Guatemala. It describes its mission as "to teach and disseminate the ethical, ...
, March 2006) p. 41
UFM.edu.gt
/ref>
The Enron scandal
The Enron scandal was an accounting scandal involving Enron Corporation, an American energy company based in Houston, Texas. Upon being publicized in October 2001, the company declared bankruptcy and its accounting firm, Arthur Andersen then on ...
deeply influenced the development of new regulations
Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For ...
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
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
reorganization in American history, the Enron scandal undoubtedly is the biggest audit failure causing the dissolution of Arthur Andersen
Arthur Andersen was an American accounting firm based in Chicago that provided auditing, tax advising, consulting and other professional services to large corporations. By 2001, it had become one of the world's largest multinational corporat ...
, 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
Chapter 11 of the United States Bankruptcy Code (Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, wheth ...
bankruptcy protection in December 2001.
One consequence of these events was the passage of the Sarbanes–Oxley Act
The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations.
The act, (), also known as the "Public Company Accounting Reform and Investor Protecti ...
in the United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
in 2002, as a result of the first admissions of fraudulent behavior made by Enron. The act significantly raises criminal penalties for securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in los ...
, 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
The Kellogg School of Management at Northwestern University (also known as Kellogg) is the business school of Northwestern University, a private research university in Evanston, Illinois. Founded in 1908, Kellogg is one of the oldest and most p ...
, Evanston, Illinois, February, 2005) p. 5
Fraud and error
Accounting fraud
In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compens ...
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.
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
Negligence (Lat. ''negligentia'') is a failure to exercise appropriate and/or ethical ruled care expected to be exercised amongst specified circumstances. The area of tort law known as ''negligence'' involves harm caused by failing to act as a ...
.
The primary responsibility for the prevention and detection of fraud and errors rests with the entity's management.
See also
* Accounting information system
An accounting as an information system (AIS) is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking acco ...
* Accounting records
Accounting records are key sources of information and evidence used to prepare, verify and/or audit the financial statements. They also include documentation to prove asset ownership for creation of liabilities and proof of monetary and non monetar ...
References
External links
*
Operations Research in Accounting
on the Institute for Operations Research and the Management Sciences website
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