Business, Legal & Accounting Glossary
The process of identifying, measuring and communicating financial information about an entity to permit informed judgements and decisions by users of the information.
Accounting (ACCG) definition: A systematic way of recording and reporting financial transactions for a business or organisation.
Accountancy (profession) or accounting (methodology) is the measurement, statement or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision-makers to make resource allocation decisions within companies, organizations, and public agencies. The terms derive from the use of financial accounts.
Accounting is the discipline of measuring, communicating and interpreting financial activity. Accounting is also widely referred to as the “language of business”.
Financial accounting is one branch of accounting and historically has involved processes by which financial information about a business is recorded, classified, summarised, interpreted, and communicated; for public companies, this information is generally publicly-accessible. By contrast management accounting information is used within an organisation and is usually confidential and accessible only to a small group, mostly decision-makers. Tax Accounting is the accounting needed to comply with jurisdictional tax regulations.
Practitioners of accountancy are known as accountants. There are many professional bodies for accountants throughout the world. Many allow their members to use titles indicating their membership or qualification level. Examples are Chartered Certified Accountant (ACCA or FCCA), Chartered Accountant (FCA, CA or ACA), Management Accountant (ACMA, FCMA or AICWA), Certified Public Accountant (CPA) and Certified General Accountant (CGA or FCGA).
Auditing is a related but separate discipline, with two sub-disciplines: internal auditing and external auditing. External auditing is the process whereby an independent auditor examines an organisation’s financial statements and accounting records in order to express an opinion as to the truth and fairness of the statements and the accountant’s adherence to Generally Accepted Accounting Principles (GAAP), or International Financial Reporting Standards (IFRS), in all material respects. Internal auditing aims at providing information for management usage, and is typically carried out by auditors employed by the company, and sometimes by external service providers.
Accounting/accountancy attempts to create accurate financial reports that are useful to managers, regulators, and other stakeholders such as shareholders, creditors, or owners. The day-to-day record-keeping involved in this process is known as bookkeeping.
Accounting scholarship is the academic discipline which studies accounting/accountancy.
Accounting is practice and body of knowledge primarily concerned with:
It is a systematic process of identifying, recording, measuring, classifying, verifying, summarising, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm’s assets, liabilities and owners’ equity.
Accounting provides information on the:
Accounting is an information system which identifies, records, analyzes, interprets and communicates the economic data of a financial entity. Accounting consists of three basic activities – it identifies, records, and communicates the economic events of an organization to interested users. Let’s take a closer look at these three activities.
Many events are happening each day in a business. Some of them are affecting the financial position of the business whereas, some don’t. Events affecting the financial position of a business i.e. Assets=Liability+ Owner’s Equity, are called Economic events and supposed to be recorded in the accounting system. To identify economic events; a company selects the economic events relevant to its business. Examples of economic events are the sale of snack chips PepsiCo, Providing of telephone services by AT & T, and payment of wages by Ford Motors Company. Examples of non-economic events of the same companies might be appointing a new manager by PepsiCo and departure of a trusted employee from AT & T.
Once a company like PepsiCo identifies economic events, it records those events in order to provide a history of its financial activities. Recording consists of keeping a systematic, chronological diary of events, measured in dollars and cents. Recording comes through a process called double-entry accounting system. The system consists of recording, summarizing, checking mathematical accuracy and preparing statement of financial position.
Finally, PepsiCo communicates the collected information to interested users by means of accounting reports. The most common of these reports are called Financial Statements. Parties interested into business’s financial information can be classified into three main categories. The interested parties are Internal, External and Government. To make the reported financial information meaningful, PepsiCo reports the recorded data in a standardized way. It accumulates information resulting from similar transactions. For example, PepsiCo accumulates all sales transactions over a certain period of time and reports the data as one amount in the company’s financial statements such data are said to be reported in the aggregate. By presenting the recorded data in the aggregate, the accounting process simplifies a multitude of transactions and makes a series of activities understandable and meaningful.
A vital element in communicating economic events is the accountant’s ability to analyze and interpret the reported information. Analyses involve use of ratios, percentages, graphs, and charts to highlight, significant financial trends and relationships. Interpretation involves explaining the uses, meaning and limitations of reported data.
Accounting is the process of identifying, measuring and communicating economic information so a user of the information may make informed economic judgments and decisions based on it.
Accounting is the degree of measurement of financial transactions which are transfers of legal property rights made under contractual relationships. Non-financial transactions are specifically excluded due to conservatism and materiality principles.
At the heart of modern financial accounting is the double-entry bookkeeping system. This system involves making at least two entries for every transaction: a debit in one account, and a corresponding credit in another account. The sum of all debits should always equal the sum of all credits, providing a simple way to check for errors. This system was first used in medieval Europe, although claims have been made that the system dates back to Ancient Rome or Greece.
According to critics of standard accounting practices, it has changed little since. Accounting reform measures of some kind have been taken in each generation to attempt to keep bookkeeping relevant to capital assets or production capacity. However, these have not changed the basic principles, which are supposed to be independent of economics as such. In recent times, the divergence of accounting from economic principles has resulted in controversial reforms to make financial reports more indicative of economic reality.
Accountancy’s infancy dates back to the earliest days of human agriculture and civilization (the Sumerians in Mesopotamia), when the need to maintain accurate records of the quantities and relative values of agricultural products first arose. Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents (Matt. 25:19). The Islamic Quran also mentions simple accounting for trade and credit arrangements (Quran 2: 282).
Twelfth-century A.D. Arab writer Ibn Taymiyyah mentioned in his book Hisba (literally, “verification” or “calculation”) detailed accounting systems used by Muslims as early as in the mid-seventh century A.D. These accounting practices were influenced by the Roman and the Persian civilisations that Muslims interacted with. The most detailed example Ibn Taymiyyah provides of a complex governmental accounting system is the Divan of Umar, the second Caliph of Islam, in which all revenues and disbursements were recorded. The Divan of Umar has been described in detail by various Islamic historians and was used by Muslim rulers in the Middle East with modifications and enhancements until the fall of the Ottoman Empire.
The first book on accounting was written by Benedetto Cotrugli (also known as Benedikt Kotruljević), a merchant from the Republic of Ragusa (modern Dubrovnik, Croatia). During his life in Italy, he met many merchants and decided to write 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, as a result of which his contributions to the field have been overlooked by the general public.
For this reason, Luca Pacioli (1445 – 1517), also known as Friar Luca dal Borgo, is credited for the “birth” of accounting. His Summa de arithmetica, geometrica, proportioni et proportionalita (Summa on arithmetic, geometry, proportions and proportionality, Venice 1494), a synthesis of the mathematical knowledge 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. Although Pacioli codified rather than invented this 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 journals and ledgers, and warned that a person should not go to sleep at night until the debits equalled the credits! His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses — the account categories that are reported on an organisation’s balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. His treatise also touches on a wide range of related topics from accounting ethics to cost accounting.
The first known book in the English language on accounting was published in London, England by John Gouge (or Gough) in 1543. It is described as A Profitable Treatyce called the Instrument or Boke to learn to know the good order of the kepyng of the famouse reconynge, called in Latin, Dare and Habere, and, in English, debtor and Creditor.
A short book of instructions was also published in 1588 by John Mellis of Southwark, England, in which he says, “I am but the renuer and reviver of an ancient old copies printed here in London the 14 of August 1543: collected, published, made, and set forth by one Hugh Oldcastle, Schoolmaster, who, as reappeared by his treatise, then taught Arithmetics, and this booke in Saint Ollaves parish in Marko Lane.” Mellis refers to the fact that the principle of accounts he explains (which is a simple system of double entry) is “after the former of Venice”.
A book described as The Merchants Mirrour, or directions for the perfect ordering and keeping of his accounts formed by way of Debitor and Creditor, after the (so termed) Italian manner, by Richard Dafforne, accountant, published in 1635, contains many references to early books on the science of accountancy. In a chapter in this book, headed “Opinion of Book-keeping’s Antiquity,” the author states, on the authority of another writer, that the form of book-keeping referred to had then been in use in Italy about two hundred years, “but that the same, or one in many parts very like this, was used in the time of Julius Caesar, and in Rome long before.” He gives quotations of Latin book-keeping terms in use in ancient times, and refers to “ex Oratione Ciceronis pro Roscio Comaedo”; and he adds:
“That the one side of their booke was used for Debitor, the other for Creditor, is manifest in a certain place, Naturalis Historiae Plinii, lib. 2, cap. 7, where hee, speaking of Fortune, saith thus:
Huic Omnia Expensa.
Huic Omnia Feruntur accepta et in tota Ratione mortalium sola.
Utramque Paginam facit.”
An early Dutch writer appears to have suggested that double-entry book-keeping was even in existence among the Greeks, pointing to scientific accountancy having been invented in remote times.
There were several editions of Richard Dafforne’s book – the second edition in 1636, the third in 1656, and another in 1684. The book is a very complete treatise on scientific accountancy, beautifully prepared and containing elaborate explanations. The numerous editions tend to prove that the science was highly appreciated in the 17th century. From this time on, there has been a continuous supply of literature on the subject, many of the authors styling themselves accountants and teachers of the art, and thus proving that the professional accountant was then known and employed.
The expectations for qualification in the profession of accounting vary between different jurisdictions and countries.
Accountants may be certified by a variety of organisations or bodies, such as the Association of Accounting Technicians (AAT) , British qualified accountancy bodies including the Chartered Institute of Management Accountants (CIMA), Association of Chartered Certified Accountants (ACCA) and Institute of Chartered Accountants, and are recognised by titles such as Chartered Management Accountant (ACMA or FCMA) Chartered Certified Accountant (ACCA or FCCA) and Chartered Accountant (UK, Australia, New Zealand, Canada, India, Pakistan, South Africa, Ghana), Certified Public Accountant (Ireland, Japan, US, Singapore, Hong Kong, the Philippines), Certified Management Accountant (Canada, U.S.), Certified General Accountant (Canada), or Certified Practicing Accountant (Australia). Some Commonwealth countries (Australia and Canada) often recognise both the certified and chartered accounting bodies. The majority of “public” accountants in New Zealand and Canada are Chartered Accountants; however, Certified General Accountants are also authorised by legislation to practice public accounting and auditing in all Canadian provinces, except Ontario and Quebec, as of 2005. There is, however, no legal requirement for an accountant to be a paid-up member of one of the many Institutes and other bodies which are effectively a form of professional trade union.
The “Big Four auditors” are the largest multinational accountancy firms.
These firms are associations of the partnerships in each country rather than having the classical structure of holding company and subsidiaries, but each has an international ‘umbrella’ organization for coordination (technically known as a Swiss Verein).
Before the Enron and other accounting scandals in the United States, there were five large firms and were called the Big Five: Arthur Andersen, PricewaterhouseCoopers, KPMG, Deloitte Touche Tohmatsu and Ernst & Young.
On June 15, 2002, Arthur Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron. Nancy Temple (Andersen Legal Dept.) and David Duncan (Lead Partner for the Enron account) were cited as the responsible managers in this scandal as they had given the order to shred relevant documents. Since the U.S. Securities and Exchange Commission does not allow convicted felons to audit public companies, the firm agreed to surrender its licenses and its right to practice before the SEC on August 31, 2002. A plurality of Arthur Andersen joined KPMG in the US and Deloitte & Touche outside of the US. Historically, there had also been groupings referred to as the “Big Six” (Arthur Andersen, plus Coopers & Lybrand before its merger with Price Waterhouse) and the “Big Eight” (Ernst and Young prior to their merger were Ernst & Whinney and Arthur Young and Deloitte & Touche was formed by the merger of Deloitte, Haskins and Sells with the firm Touche Ross).
Enron turned out to be only the first of a series of accounting scandals that enveloped the accounting industry in 2002.
This is likely to have far-reaching consequences for the U.S. accounting industry. Application of International Accounting Standards originating in International Accounting Standards Board headquartered in London and bearing more resemblance to UK than current US practices is often advocated by those who note the relative stability of the UK accounting system (which reformed itself after scandals in the late 1980s and early 1990s). Accounting reform of a far more comprehensive sort is advocated by those who see issues with capitalism or economics, and seek ecological or social accountability.
The accounting profession, which is largely self-regulated, has suffered through a series of fiascoes since the late 1990s, resulting in a call for major changes in accounting standards. The Financial Accounting Standards Board (FASB) has served since 1973 as one of the organizations responsible for establishing standards of financial accounting and reporting. Although the FASB is a private organization, its standards are recognized as authoritative by the securities and exchange commission (SEC) and the American Institute of Certified Public Accountants. In the late 1990s and early 2000s, debacles involving major accounting firms required the FASB and the SEC, as well as other regulatory organizations, to consider new rules designed to improve financial reporting. Between 1996 and 2002, investors lost an estimated $200 billion in earnings restatements and stock meltdowns following failures in auditing processes. A number of high-profile auditing failures decreased confidence in the accounting profession. Among these failures were incidents involving such companies as Bausch and Lomb, Rite Aid, Cendant, Sunbeam, Waste Management, Superior Bank, and Dollar General.
One of the most highly publicized accounting failures in this period involved Houston-based Enron Corporation and its accountant, Arthur Andersen, L.L.P. Enron suffered a collapse in the third quarter of 2001 that resulted in the largest bankruptcy in U.S. history and numerous lawsuits alleging violations of federal securities laws. Thousands of Enron employees lost 401(k) retirement plans that held company stock. The controversy extended to Arthur Andersen, which was accused of overlooking significant sums of money that had not been represented on Enron’s books. Arthur Andersen was later found guilty on federal charges that it obstructed justice by destroying thousands of Enron documents. Enron reported annual revenues of about $101 billion between 1985 and 2000. On December 18, 2000, Enron’s stock sold for $84.87 per share. Stock prices fell throughout 2001, however, and on October 16, 2001, the company reported losses of $638 million in the third quarter alone. During the next six weeks, company stock continued to fall, and by December 2, 2001, Enron stock dropped to below $1 per share after the largest single-day trading volume for any stock listed on either the New York Stock Exchange or the NASDAQ.
Initial allegations focused upon the role of Arthur Andersen. The company was one of the “Big Five” accounting firms in the United States, and it had served as Enron’s auditor for sixteen years. Arthur Andersen also served as a consultant to Enron, thus raising serious questions regarding conflicts of interests between the two companies. According to court documents, Enron and Arthur Andersen had improperly categorized hundreds of millions of dollars as increases in shareholder equity, thereby misrepresenting the true value of the corporation. Arthur Andersen also did not follow generally accepted accounting principles (GAAP) when it considered Enron’s dealings with related partnerships. These dealings, in part, allowed Enron to conceal some of its losses.
Arthur Andersen was also accused of destroying thousands of Enron documents that included not only physical documents but also computer files and e-mail files. After an investigation by the U.S. Justice Department, the firm was indicted on obstruction of justice charges in March 2002. After a six-week trial, Arthur Andersen was found guilty on June 16, 2002. The company was placed on probation for five years and was required to pay a $500,000 fine. Some analysts also questioned whether the company could survive after this series of incidents.
The accounting issues in the Enron case extended beyond Enron and Arthur Andersen. Prior to this case and since 1977, the accounting field was supervised considerably by the Public Oversight Board (POB). When SEC chairman Harvey L. Pitt in 2002 made a series of inquiries about the system of self-regulation in the accounting profession, he did not consult the POB. The POB voted to disband, effective May 1, 2002. After the Enron case, the FASB emerged in the public spotlight as the leader of the system of self-regulation and has taken a significant role in the reform of accounting rules. In January 2003, the FASB announced new accounting rules designed to force U.S. companies to move billions of dollars from off-balance-sheet entities into the companies’ balance sheets. The SEC has also stepped up its oversight of company accounting.
They send me an accounting every month.
He was unable to give a clear accounting for his actions.
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This glossary post was last updated: 9th October, 2021 | 43 Views.