EEssay title - Financial Accounting And Accountants

Essay title - Financial Accounting And Accountants

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Introduction to accounting

Accounting is the measurement, disclosure or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makes to make resource allocation decisions within company's organizations, and public agencies. The terms derive from the use of financial accountants (wikipedia)

In other words we can say that the Accounting is the process of creating the financial reports that are very useful to the owners, regulators, and the managers of the business as well as to the shareholders and creditors. This day to day record keeping involved in this process is known as Bookkeeping.

The definitions are above saying that the accounting is the art of measuring, communicating and interpreting financial activity. We can refer accounting as the language of business. Financial accounting is a branch of accounting and it historically involved in the process by the financial information about a business is recorded, interpreted, summarized, classified and communicated. Accounting information is used within an organization is usually confidential and accessible only to the internal affairs of the company. But for the public companies, this information is generally publicly accessible. The financial information need for the jurisdictional tax regulators are done by Tax Accounting.

The History And Origin Of Accounting In Business

The history of accounting is as old civilization. Accountants invented writing, participated in the development of money and banking, invented double entry bookkeeping that fueled the Italian renaissance, saved many industrial revolution inventors and entrepreneurs from bankruptcy, helped develop the confidence in capital market necessary for western capitalism, and are central to the information revolution firms required accountants to provide the information necessary to avoid bankruptcy and their role developed into a profession. Big business required capital markets that depended on accurate and useful information. This was supplied by the expanding accounting profession.

The first book on accounting was written by a Croatian merchant 'Benedette Cotrugli', from the city Dubrovnik. The name of the book is Della Mercatura et del Mercante Perfetto (On trade and the perfect merchant) in which he elaborated on the principles of the modern double-entry book-keeping. He finished his lifework in 1458. However, his work was not published until 1573. For this reason Luca Pacioli (1445 - 1573), is credited for the Birth of Accounting. His Summa de arithmetic, geometry, proportions and proportionality, Venice 1494, a synthesis of the mathematical knowledge of his time, includes the first published description of his time, includes the first published description of the method of keeping accounts that Venetian merchants used at that time, known as the double entry accounting system. He is widely regarded as the Father of Accounting. The system he published included most of the accounting cycle as we know it today. He described the use of the journals and ledgers, and warned that a person should not to go to sleep at night until the debits equaled to the credits. He demonstrated year end closing entries and proposed that a trial balance be used to prove a balanced ledger. His treatise also topics from accounting ethics to cost accounting. Accounting history is summarized in eight chapters. In some ways accounting hasn't changed much since Pacioli wrote the first textbook. On the other hand accounting has been a leader of the Information Revolution. Many aspects of 21^st century accounting will be unrecognizable by today's professional leaders. Understanding the role of financial and managerial needs today and in the future requires an understanding of the past.

Major Developments In Accounting History

7500 BC - Agriculture and tokens - the first accounting records.

Simple tokens were associated with agricultural sites, clay balls of various shapes (round, oval etc.) representing specific goods (e.g., 2 round tokens could inventory and the beginning of the concept of numbers)

5^th Century BC - The development of Greek banking.

By 575 BC Athens started to mint coins. Financial transactions were made only in coined money. Money changing was the most common financial activity. Bankers accepted deposits and made loans

1 AD - Roman Empire.

With the rise of Julius Caesar, the republic was replaced by the empire. At the start of new era, the age of Augustus was the Pax Romana, an era of peace and prosperity - one definition of the Golden Age of Rome. Augustus reformed the money and tax systems. Taxes included general sales tax, a land tax, and a flat-rate poll or head tax

From 1000 - Italian merchants extend trade from England to the Far East and improve bookkeeping.

The most successful merchants developed complex trading networks across Europe and the Mediterranean, often using partnerships. Bills of exchange and clearing houses were established in major European trading centers

1160 - 1200 - Tally sticks.

Tallies evolved into credit instruments in England. Tallies were wooden sticks, notched to represent specific sums of money. The sticks would be split in two to serve as a receipt. These would be used for lending and the English Exchequer issued tally sticks as a form of credit

By 1300 - Double entry bookkeeping.

Accounting records of Giovanni Farolfi & Co. documented a complete double entry bookkeeping system in place.

1494 - Pacioli's Summa.

Codified double entry bookkeeping as the Venice system. Thanks to Gutenberg's printing press. Summa was printed and spread throughout Europe

1600 - East India Company Founded.

Company had monopoly trading rights for much of Asia. Thomas Stevens was the first accountant for the company. This successful company had much to do with the rise of England as a mercantile power

1762 - Barings Bank Founded.

Britain's oldest merchant bank

1770 - 1772 - Josiah Wedgwood became a cost accountant.

The famous potter set up his first plant in 1754. to avoid bankruptcy during a recession, Wedgwood studied his books, manufacturing cost structure, overhead, and his market structure. He became an accounting pioneer and the firm survived to the present day.

1831 - Accounting profession gets recognized.

The Bankruptcy Act of 1831 in Britain allowed accountants to be appointed official Assignees, the first government recognition

1844 - Incorporation of business by registration

The British Companies Act of 1844 established the incorporation of business by formal registration and required the annual appointment of auditors to examine the accounts and balance sheet of all public companies

1936 - 1938 - Regulation of financial accounting.

The committee on Accounting Procedure (CAP) created; the term generally accepted accounting principles (GAAP) used for the first time; the SEC in Accounting Series Release No. 4 delegated authority to establish accounting standards to the private sector; the CAP assumed this authority and began to issue Accounting Research Bulletins (ARBs)

1953 - Computer Accounting

Arthur Anderson computerized the payroll of a General Electric plant using a UNIVAC I, starting the information age for business. The computer revolution became global and the Big Eight discovered a source of expertise primarily for consulting

1959 - APB Formed

The Accounting Principles Board (APB) replaced the CAP for issuing accounting standards. It suffered from many of the same weakness as the CAP, but issued several important opinions

1973 - FASB Formed

Based on the recommendation of the Wheat Commission, the financial Accounting Standards Board (FASB) was formed to solve the weakness of APB. It was establishes as an independent body, seven full-time members, a research staff, and through due process. To date, the FASB has issued about 140 pronouncements

1979 - Electronic Spreadsheet

Dan Brinklin and Bob Frankston wrote 'VisiCalc' for the Apple II, the first electronic spreadsheet, the most important business application for the PC

These developments lead the Accounting to the modern era, of e-Accounting and Accounting Software. E-Accounting is the application of online and Internet technologies to the business accounting function. E-Accounting is electronic enablement of accounting and accounting process which are traditionally manual and paper-based. Accounting software records the daily transactions of a business and produces information that helps business owners reduce the amount of time spent on administration, thereby reducing the cost of running a business. The main players in the Irish accounting software are Sage, Big Red Book

Accounting Concepts

Going Concern Concept

The going concern concept implies that the business will continue to operate for the foreseeable future. In this case we can assume that the business will get the appropriate value for its fixed assets.

But if the business is not going through going concern, then the business is forced to sale its properties on a very less value, therefore the business will not get the actual assets value, when the business is going to close down in the near future.

For example, a business that is not going concern, the financial statement of 31^st December 2005, the assets would be shown at a total value of 50,000. It is known, however the business will forced to close down in May 2006, only five months later, and the assets are expected to be sold for only 10,000.

The Dual Aspect Concept

One of this concept's aspects is represented by the assets of the business and the other by the claims against them. And this concept says that these two aspects are always equal to each other. The equation for the dual aspect concept is

ASSETS = CAPITAL + LIABILITIES

For example, assume that the amount invested to the business and the money owed by the business. The sum of both of this helps us to calculate the assets of a company own

Consistency Concept

The consistency concept says that when the business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way. It means the role of strategy of accounting of a company has to be followed as the same ways it goes on. However this concept does not mean that the business has to follow the method until the business closes down.

The Accruals Concept

Accrual concept says that net profit is the difference between income and the expenses. The practical equation for accrual concept is:

REVENUES - EXPENSES = NET PROFIT

This is to determine the expenses used up to obtain the income are referred to as matching expenses against revenues. This concept is particularly misunderstood by people who have not studied accounting.