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Accounting

Accounting

Accounting Definition

Accounting may be defined as the process of identifying, measuring, recording (see Bookkeeping), and communicating economic information about an organization or other entity, in order to permit informed judgments by users of the information.

Introduction

Accounting has a well-defined body of knowledge and rather definitive procedures. Nevertheless, standard setters continue to refine existing techniques and develop new approaches. Such activity is needed in part because of innovative business practices, newly enacted laws, and socioeconomic changes. Better insights, new concepts, and enhanced perceptions have also influenced the development of accounting theory and practices.

Accounting Cycle

Modern accounting entails a seven-step accounting cycle. The first three steps fall under the bookkeeping function—that is, the systematic compiling and recording of financial transactions. (Read about the bookkeeping cycle here).

Step Four

Once bookkeeping procedures have been completed, the accountant prepares certain adjustments to recognize events that, although they did not occur in conventional form, are in substance already completed transactions.

The following are the most common circumstances that require adjustments: accrued revenue (for example, interest earned but not yet received); accrued expense (wage cost incurred but not yet paid); unearned revenue (earning subscription revenue that had been collected in advance); prepaid expense (expiration of a prepaid insurance premium); depreciation (recognizing the cost of a machine as expense spread over its useful economic life); inventory (recording the cost of goods sold on the basis of a period’s purchases and the change between beginning and ending inventory balances); and receivables (recognizing bad-debt expenses on the basis of expected uncollected amounts).

Steps Five and Six

Once the adjustments are calculated, the accountant prepares an adjusted trial balance—one that combines the original trial balance with the effects of the adjustments (step five). With the balances in all the accounts thus updated, financial statements are then prepared (step six). The balances in the accounts are the data that make up the organization’s financial statements.

Step Seven

The final step is to close noncumulative accounts. This procedure involves a series of bookkeeping debits and credits to transfer sums from income-statement accounts into owners’ equity accounts. Such transfers reduce to zero the balances of noncumulative accounts so that these accounts can receive new debit and credit amounts that relate to the activity of the next business period.

Accounting Information

Accounting information can be classified into two categories: financial accounting or public information and managerial accounting or private information:
Read about Financial Accounting here.
Read about Financial Accounting here.

Specialized Accounting

Of the various specialized areas of accounting that exist, the three most important are auditing, income taxation, and nonbusiness organizations. Auditing is the examination, by an independent accountant, of the financial data, accounting records, business documents, and other pertinent documents of an organization in order to attest to the accuracy of its financial statements. Read about Auditing here

The second specialized area of accounting is income taxation. Read about income taxation here

A third area of specialization is accounting for nonbusiness organizations, such as universities, hospitals, churches, trade and professional associations, and government agencies. Read about accounting for nonbusiness organizations here

Financial Reporting

Traditionally, the function of financial reporting was to provide proprietors with information about the companies that they owned and operated. Read about financial reporting here

Accounting Principles

Accounting as it exists today may be viewed as a system of assumptions, doctrines, tenets, and conventions, all encompassed by the phrase “generally accepted accounting principles.”Read about accounting principles here

The Balance Sheet

Of the two traditional types of financial statements, the balance sheet relates to an entity’s position, and the income statement relates to its activity. The balance sheet provides information about an organization’s assets, liabilities, and owners’ equity as of a particular date (such as the last day of the accounting or fiscal period). Read about income balance sheet here

The Income Statement

The traditional activity-oriented financial statement issued by business enterprises is the income statement.

Other Financial Statements

The income statement excludes the amount of assets withdrawn by the owners; in a company such withdrawn assets are called dividends. A separate activity-oriented statement, the statement of retained earnings, discloses income and redistribution to owners.

A third important activity-oriented financial statement is the statement of cash flows. This statement provides information not otherwise available in either an income statement or a balance sheet; it presents the sources and the uses of the enterprise’s funds by operating activities, investing activities, and financing activities. The statement identifies the cash generated or used by operations; the cash exchanged to buy and sell plant and equipment; the cash proceeds from stock issuances and long-term borrowings; and the cash used to pay dividends, to purchase the company’s outstanding shares of its own stock, and to pay off debts.

Regulations and Standards in the United States

Until 1973, accounting principles in the United States had traditionally been established by certified public accountants. Read about Accounting Regulations and Standards in the United States

Source: “Accounting and Bookkeeping”Microsoft® Encarta® Online Encyclopedia

History of Accounting

According to the Cambridge Dictionary of Classical Civilization:

“It has been argued that the absence of double-entry book-keeping was a crucial factor limiting the evolution of rational ECONOMIC management in the ancient world. The non-survival of the vast majority of financial accounts limits our ability to challenge this assertion, but there is ample evidence as early as the classical period of a concern for accurate financial recording. In Athens, for example, public accounts were displayed in the city. The income and expenditure for a series of 5th-century BC buildings (e.g. the PARTHENON and the Propylaia) and sculptural projects (e.g. the statues of Athena Parthenos and Athena Promachos) were cut onto marble slabs and displayed in public areas such as the ACROPOLIS. These accounts are usually at the macro-scale, suggesting that they summarize payments made elsewhere. For example, quarrying of marble is entered as a block entry.

However, in the Erechtheion accounts from the end of the 5th century there are entries for named sculptors working on specific figures in the frieze. Records of the pôlêtai, the officials responsible for public finances, have been recovered during excavations in the Agora. Records of commercial transactions can be found scratched onto the bases of exported Athenian pottery. These can list the size of consignments and their value in drachmai and obols (and occasionally in other currencies such as Persic obols on Cyprus).

Work on estate records from Ptolemaic and Roman Egypt has revealed some sophistication in accounting practices. For example, the HERONINOS archive of the Appianus estate in the Fayûm (3rd century AD) consists of monthly accounts compiled by a series of managers. They record cash receipts and offset them with total disbursements, including cash salaries and food payments for estate employees and casual payments for specified tasks, along with other cash expenses and lists of tools and foodstuffs held in the granaries of the estate. These detailed records could have had a primary function of limiting the scope of managers for defrauding absentee landowners. However, the records also indicate a more advanced economic understanding, for instance in the ability of managers to deal with internal transfers of produce and labour between separate units of the estate, and in the arrangement of transactions by type, not by date. The conclusion is that Greek and Roman accounting, though primitive by modern standards, could nonetheless have allowed the profitability of larger economic enterprises to be assessed.”

Literature Review on Ethics and Accounting

In the Encyclopedia of Public Administration and Public Policy, [1] Lorenzo Patelli offers the following summary about the topic of Ethics and Accounting: As a discipline concerned with the provision of information to support users’ judgments and decisions, accounting is inherently connected to ethics. This entry examines this connection by providing a descriptive analysis of the most prevalent ethics topics in accounting research. Specifically, the topics are described relative to four fundamental areas of accounting, namely, financial, managerial, tax, and government accounting. Furthermore, the entry presents the major resources that can be used by students, professionals, and policy makers to investigate the ethical issues in accounting. Finally, the entry identifies the forces that influence future directions of accounting research and practice regarding ethics.

Related Fields

Related topics include:

Bookkeeping

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Accounting

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Accounting Ethics

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Public Accountant

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Accounting Principles

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Related Fields

Related topics include:

Income Distribution

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Bankruptcy

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Inequality

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Accounting

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Accounting Ethics

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Public Accountant

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Accounting Principles

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Accounting

Introduction

Accounting

This entry provides an overview of the legal framework of accounting, with a description of the most significant features of accounting at international level.

Related Work and Conclusions

Accounting

Accounting

Accounting

Accounting

Resources

See Also

  • Change in accounting method
  • Generally Accepted Accounting Principles
  • Generally Accepted Auditing Standards
  • Installment method
  • Interim statements
  • Percentage of completion method
  • Purchase method of accounting
  • T-Account
  • Trial (Trial balance)

Resources

See Also

  • Cost (Cost accounting)

Resources

See Also

  • Cash basis accounting

Resources

See Also

  • Accrual basis
  • Accrue (Taxation)

Resources

See Also

References (Papers)

  • Buying Teams, Andres Sawicki, Jan 2015
  • Copyright, Consumerism, And The Cloud: Proposing Standards-Essential Technology To Support First Sale In Digital Copyright, Marco Puccia, Jan 2015
  • Una Nueva Generación: ¿Por Qué Las Medianas Empresas Deben Reducir Su Dependencia Bancaria Y Apostar Por El Mav?, John Pineda Galarza, Nov 2014
  • Contingent Consideration, Contingent Liabilities And Indemnities In Acquisitions (Outline), Robert H. Wellen, Nov 2014
  • Striking Over The Risks Of Retirement Savings, Anne M. Tucker, Oct 2014
  • A Proposal For An Elective Tax Benefits Transfer System, Ronald W. Blasi, Oct 2014

Resources

See Also

Further Reading

Resources

Notes and References

  1. Entry about Ethics and Accounting in the Encyclopedia of Public Administration and Public Policy (2015, Routledge, Oxford, United Kingdom)

See Also

Further Reading

  • Global Encyclopedia of Public Administration, Public Policy, and Governance (2018, Springer International Publishing, Germany)

Resources

See Also

Bookkeeping in the World

Further Reading

Johnston, A. W. (1981) Trademarks on Greek Vases; Langdon, M. K. (1991) Poletai records, in G. V. Lalonde et al., Inscriptions: horoi, poletai records, leases of public lands (Athenian Agora, 19) 53–143; Macve, R. H. (1985) Some glosses on ‘Greek and Roman accounting’, in P. A. Cartledge and F. D. Harvey, eds., Crux 233–64; Rathbone, D. (1991) Economic Rationalism and Rural Society in Third-century AD Egypt.

Hierarchical Display of Accounting

Business And Competition > Accounting
Business And Competition > Accounting > Management accounting
Economics > Economic analysis > Economic analysis > Input-output analysis
Economics > National accounts > National accounts
Business And Competition > Management > Financial management > Financial analysis
Education And Communications > Information technology and data processing > Computer systems > Computer applications > Business data processing
Economics > National accounts > National accounts > Regional accounting
Finance > Public finance and budget policy > Public finance > Public accounting
Finance > Budget > Implementation of the budget > Financial year
Business And Competition > Business classification > Branch of activity > Trust company
Economics > National accounts > National accounts > Economic accounts for agriculture
Economics > National accounts > Accounting system

Accounting

Concept of Accounting

See the dictionary definition of Accounting.

Characteristics of Accounting

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Resources

Translation of Accounting

Thesaurus of Accounting

Business And Competition > Accounting > Accounting
Business And Competition > Accounting > Management accounting > Accounting
Economics > Economic analysis > Economic analysis > Input-output analysis > Accounting
Economics > National accounts > National accounts > Accounting
Business And Competition > Management > Financial management > Financial analysis > Accounting
Education And Communications > Information technology and data processing > Computer systems > Computer applications > Business data processing > Accounting
Economics > National accounts > National accounts > Regional accounting > Accounting
Finance > Public finance and budget policy > Public finance > Public accounting > Accounting
Finance > Budget > Implementation of the budget > Financial year > Accounting
Business And Competition > Business classification > Branch of activity > Trust company > Accounting
Economics > National accounts > National accounts > Economic accounts for agriculture > Accounting
Economics > National accounts > Accounting system > Accounting

See also

Hierarchical Display of Accounting

Business And Competition

Accounting

Concept of Accounting

See the dictionary definition of Accounting.

Characteristics of Accounting

[rtbs name=”xxx-xxx”]

Resources

Translation of Accounting

Thesaurus of Accounting

Business And Competition > Accounting

See also

  • Economist
  • Economics science researcher
  • Economics analyst
  • Business economist

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