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Accounting
1. accounting
Definition
The systematic recording, reporting, and analysis of financial transactions of a business. The person in
charge of accounting is known as an accountant, and this individual is typically required to follow a set of
rules and regulations, such as the Generally Accepted Accounting Principles. Accounting allows a
company to analyze the financial performance of the business, and look at statistics such as net profit.
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Accounting History
The name that looms largest in early accounting history is Luca Pacioli, who in 1494 first
described the system of double-entry bookkeeping used by Venetian merchants in
his Summa de Arithmetica, Geometria, ProportionietProportionalita. Of course, businesses
and governments had been recording business information long before the Venetians. But it
was Pacioli who was the first to describe the system
of debits and credits in journals and ledgers that is still the basis of today's accounting
systems.
The industrial revolution spurred the need for more advanced cost accounting systems, and
the development of corporations created much larger classes of external capital providers -
shareowners and bondholders - who were not part of the firm's management but had a
vital interest in its results. The rising public status of accountants helped to transform
accounting into a profession, first in the United Kingdom and then in the United States. In
1887, thirty-one accountants joined together to create the American Association of Public
Accountants. The first standardized test for accountants was given a decade later, and
the first CPAs were licensed in 1896.
The Great Depression led to the creation of the Securities and Exchange Commission (SEC)
in 1934. Henceforth all publicly-traded companies had to file periodic reports with the
Commission to be certified by members of the accounting profession. The American
Institute of Certified Public Accountants (AICPA) and its predecessors had responsibility for
setting accounting standards until 1973, when the Financial Accounting Standards
Board (FASB) was established. The industry thrived in the late 20th century, as the large
accounting firms expanded their services beyond the traditional auditing function to many
forms of consulting.
The Enron scandals in 2001, however, had broad repercussions for the accounting industry.
2. One of the top firms, Arthur Andersen, went out of business and, under the Sarbanes-Oxley
Act, accountants faced tougher restrictions on their consulting engagements. One of the
paradoxes of the profession, however, is that accounting scandals generate more work for
accountants, and demand for their services continued to boom throughout the early part of
the 21st century. (For details on this and other scandals see, The Biggest Stock Scams Of
All Time.)
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Uses of accounting
1. Accounting provides a vital service by supplying the information decision makers need to make
reasoned choices among the alternative uses of scarce resources in the conduct of business and
economic activities.
2. Evaluation of financial performance by managers, inventors, creditors, government agencies, analysts
and other users.
3. Analysis of cash flows.
4. Planning and control of internal operations by decision makers.
Users of accounting -
Existing investors
Potential investors
Managers within the co. and others charged with governance
Government agencies (regulatory and tax, for e.g.)
Debtors
Creditors
Banks
Staff of the co.
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What are limitations of accounting?
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Best Answer - Chosen by Voters
I. Accounting is only one source of information and primarily provides information
based on financial terms: Although this information is vital, decisions cannot be
3. based solely on a monetary basis. Various decisions depend upon a diverse range of
issues being considered. A unique combination of Quantitative as well as Qualitative
factors should be considered to ensure an effective decision making process.
II. The historical perspective of financial accounting: In order to obtain a recent
estimate of an entity’s financial performance, the corporate managers carefully
scrutinize financial accounting information. In retrospect, this information is based on
past performance. The information does provide clarity on the monetary issues but
does not provide a definite insight into the strategic future; as the future holds various
changes in terms of technology, economic situations as well as political scenarios
etc. Such factors in relation to accounting are unpredictable. Therefore, a careful
balance between historical accounting as well as the future forecasted outlook is
required.
III. Historical cost accounting vs. underlying value in use: Some items loose their
monetary value over a period of time, but under the financial accounting rules need
to be included in financial reports. Though mentioned year after year in the books as
monetary figures, the information may be unreliable due to the historical assumptions
made on the item’s measurability criterion. For example, a machine in a textile factory
is considered to have a useful life which extends over a period of ten years in
monetary terms; however, after the period of ten years, the machine may still have
the same value as prior years and contribute significantly to the overall operability of
the factory.
IV. Inability to reflect the true value of strategic management: Various factors such as
goodwill and natural circumstances influence the operations of an enterprise;
however, these elements are difficult to measure thus, leading to their unavoidable
exclusion from financial reports. For example companies depend upon their
shareholders, who in turn depend on the performance of the Chief Executive Officers.
Although the CEOs may have been hired by the company based upon prior
performance, their future performances are not reliably measurable as they may
continually vary. In the initial stages, it may be impossible to measure whether the
CEO’s presence will deter or appeal to the shareholders, which in turn will influence
the profitability of the enterprise.
V. Measuring Volatility of external factors: Financial accounting information does not
take into consideration volatile and ever increasing changes in the natural and
commercial environment. Although scarcely measurable in monetary terms, their
unstable nature may have adverse effects if included within the financial reports and
have a volatile and cosmetic impact upon the earnings of the firm. For example,
tariffs on trade, duties and other environmental issues can have significant short-term
volatile effects on the organisation.
VI. The effect of non-stable monetary unit: Based from region to region, accounting
information is generated at all enterprises based on the assumption that the
monetary unit is stable over a period of time. In the real world scenario, the unit
fluctuates on a daily basis. Enterprises usually decide on a flat rate to calculate their
financing and investing needs. However, this can have adverse impacts which cannot
be communicated to shareholders, if the unit has high fluctuations. For example:
Indonesia 1995 US$ 1 = RP 6000, 1997 US$ 1 = RP 12000, 1999 US$ 1 = RP 9000.
(Figures are approximates, just to provide an insight into the argument about the
effects of the fluctuations)
4. Importance of accounting----
The significance of accounting has never been more apparent than in today's market, with the
struggling economy and the job market in decline. Though the loss of jobs may be happening in
many fields the one that continues to stay strong is accounting. The reasons for this are the same
reasons that accounting is such an important aspect in the economy and in society.
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Before we can begin to understand the importance of accounting, we first must understand
what accounting is. Accounting can be defined as the theory and system of setting up, maintaining,
and auditing the books of a firm. It is the art of analyzing the financial position of a business through
its sales, purchases, and overhead. These records must be kept in chronological order and must be
summarized in a useful format. It is also responsible for identifying information on the transactions,
analyzing it and then interpreting each and every document.
Now that we have begun to understand what accounting means we can begin to examine
how important accounting really is. The first way in which it is important is that an accounting
education can be applied to any job industry. For instance a secretary uses accounting in managing
a company's check book. Also the executives of this same company must be able to analyze the
success of their business through analyzing the accounting statements from the past and present.
These are just two of the many job positions found in any company that must have some knowledge
of accounting. Another reason that accounting is important to all business majors is because of the
fact that the business world has now come under much scrutiny. As a result they are held much
more accountable for their financial practices. This has occurred because of the events of the Enron
and WorldCom scandals. For this reason nearly all businesses require their employees to have a
general knowledge of accounting.
Another way in which accounting is such an important aspect to any business is that
accountants are responsible for providing information that is used to determine the present and
future economic stability of the organization. It has been proven that these companies that use good
accounting practices have a competitive advantage over their opponents. Also they have the ability
to improve their decision making abilities. Those that do not use these practices face an inability to
compete in the market and make their decisions simply on a hunch.