Accounting has been around for as long as money itself, indeed, even before the invention of money. The history of accounting, in fact, dates back to the earliest civilizations of Mesopotamia, Egypt, and Babylon.
Some of the earliest known writings discovered by archaeologists are accounts of ancient tax records on clay tablets from Egypt and Mesopotamia dating back as early as 3300 to 2000 BCE. Historians believe that the need to record trade and business transactions gave rise to the development of accounting systems.
Accounting tells you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business are actually making money.
Luca Pacioli is considered the Father of Accounting and Bookkeeping owing to his contributions to the development of accounting as a recognized profession. Pacioli was an Italian mathematician and a friend of Leonardo da Vinci.
Pacioli revolutionized the way businesses conceived of their operations by introducing the double-entry system of accounting. The fundamentals of Pacioli's double-entry bookkeeping have remained unchanged for over five centuries.
Accounting, as a modern profession, was fully established by the late 19th century and recognized by the Institute of Chartered Accountants in England and Wales. The institute was also responsible for the creation of the many systems of accounting still in vogue today.
A Definition Of Accounting
Pacioli defined his system of accounting as "the practice of recording a business transaction in two equal parts called debit and credit entries. Debit refers to the left column and credit refers to the right column in an accounting journal.”
The primary focus of accounting is the presentation of financial information as general-purpose financial statements. These statements include balance sheets, income statements, and so on. They are disseminated to people outside the company and are prepared according to the generally accepted accounting principles or GAAP.
GAAP are a set of rules that encompass the details, complexities, and legalities of business and corporate accounting.
Compliance with GAAP guidelines is necessary for the maintenance of transparency and standardization in the financial reporting process. GAAP embodies 10 key concepts:
- Principle of regularity
- Principle of consistency
- Principle of sincerity
- Principle of the permanence of methods
- Principle of non-compensation
- Principle of prudence
- Principle of continuity
- Principle of periodicity
- Principle of materiality
- Principle of utmost good faith
Investopedia defines accounting as the recording, organization, and understanding of financial information. The process of accounting includes summarizing, analyzing, and reporting financial transactions to oversight agencies, regulators, and tax collection entities.
Accounting vs Bookkeeping
Despite many overlaps between the domains of accounting and bookkeeping, there is a fundamental difference between the two. Some scholars consider bookkeeping as an arm of accounting.
However, bookkeeping is essentially the management of records and categories of financial transactions. On the other hand, accounting is using this financial data for analysis, strategy, and tax planning.
Operating Principles of Modern Accounting
The basic accounting concepts operate on a few principles summarized here.
Principle of Revenues
Business revenues are earned and recorded at the point of sale (PoS). This concept is sometimes called the “revenue recognition principle.”
Principle of Expenses
The expense principle, or expense recognition principle, states that an expense occurs at the time at which the business accepts goods or services from another entity.
Principle of Matching
The matching principle states that you should match each item of revenue with an item of expense. Examples may include: if you are selling a variety of food, you could count the expense of the individual ingredients at the time the product is bought by a customer. When the principles of revenue, expense, and matching are put in practice by businesses, the latter are operating under the accrual accounting method.
Principle of Costs
According to the cost principle, the historical cost of an item in the books should be used and not the resell cost. Examples include: a real estate business or a vehicle business should list the historical costs of the property or the car and not their current fair market value of the property.
Principle of Objectivity
This principle lays down how businesses should use only factual, verifiable data in the books, never a subjective measurement of values. The subjective data may seem better than the verifiable data. However, it is always good to use verifiable data.
Types of Accounting
Recording, managing, and maintaining a statement of accounts is common across all forms of accounting. However, it is also important to acquire knowledge of the different types of accounting practices.
Financial accountants are specialists in maintaining a statement of a company's financial transactions. A financial statement is recorded, summarized, and presented, in the form of a financial report or statement, such as an income statement of a balance sheet, using standardized guidelines.
Business accounting requires both financial and managerial accounting. Managerial accounting operates under the same principle of financial accounting with two important exceptions:
- A managerial accounting statement is meant for internal use only.
- Such a statement is more frequently generated — on a quarterly or a monthly basis.
Managerial accountants mostly devote their time to the production of reports citing regular updates on a company's financial status and health.
Tax accounting is meant to guide individuals or businesses on how to get the most out of their tax returns. This branch of accounting is regulated by the Income Tax Department Department, Ministry of Finance (Government of India).
When businesses try to gauge how to increase their margins of profits or whether raising prices is advisable, it is called cost accounting. It involves the analysis of costs associated with output production so as to better decide on pricing, expenses, and inventory.
Cost accounting is connected to managerial accounting as managers use cost accounting reports for making better business decisions. Cost accounting is also linked with financial accounting because balance sheets are usually compiled based on cost data.
The analysis of a company's unpaid bills and liabilities and ensuring that a company is not stuck with paying for them with all their cash is the domain of credit accounting. Credit accountants have a challenging task as they usually have the unenviable task of telling someone something they don't want to hear (for example: advising a company to borrow less).
One of the more popular branches of accounting today, forensic accounting encompasses fraud investigation, claims and dispute resolution, and other areas that involve legal matters.
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Constituents of Accounting
Apart from the important task of enforcing standards, the various aspects of accounting are covered by professionals in specialized aspects of the discipline.
It is the job of an accountant to prepare financial statements, analyze and maintain financial records. Accountants manage a company's finances, performing a number of tasks that may include the management of payroll, taxes, and other payments.
The maintenance and production of a company's financial records are the job descriptions of an accounting clerk. Accounting clerks enter the financial information into the company's database, in compliance with company standards, check the data for accuracy, and/or produce statements or reports based on this data. They are also called bookkeeping clerks or auditing clerks.
There are overlaps in the duties of a financial auditor and those of an accountant in that both of them are responsible for the preparation, analysis, and management of financial records. However, auditors typically work for an accounting or payroll service, rather than working for one particular company. An auditor also assesses the performance of a company’s accountant.
Chief Financial Officer
The chief financial officer (CFO) is responsible for managing the finances of an organization, including financial planning, maintaining and analyzing financial records, management of the accounting department. The CFO reports to the chief executive officer (CEO) of the organization.
Also called a comptroller, a controller oversees the various accounting activities for a particular company. A controller may be tasked with the preparation of a company's financial statement and budget, the processing of financial data, and/or the preparation of taxes. The controller reports to the CFO of a company.
Evaluating if a business entity is a good candidate for investments is the primary job of a financial analyst. Financial analysts make recommendations to a bank, company, various investors, or some other interested entity about a prospective investment.
Each accounting role requires an accounting certification in the chosen field. Obtaining such a certificate gives the candidate an edge on uncertified ones. If you are truly interested in the world of accounting and the accountant's job fascinates you, then use this basic guide to navigate towards your professional goals.