What is accounting?
Many people think of accounting as a highly technical field which can be understood only by professional accountants. Actually, nearly everyone practices accounting in one form or another on an almost daily basis. Accounting is the art of measuring, communicating, and interpreting financial activity. Whether you are preparing a household budget, balancing your checkbook, preparing your income tax return, or running General Motos, you are working with accounting concepts and accounting information.
Accounting has often been called the “language of business.” In recent years, corporate profits have become a topic of considerable public interest. What are “corprte profits”? What levels of corporate profits are necessary to finance the development of new products, new jobs, and economic growth? One cannot hope to answer such questions without understanding the accounting concepts and terms involved in the measurement of income.
Since a language is a means of social communication, it is logical that a languag should change to meet the changing needs of society. In accounting, too, changes and improvements are continually being made. For example, as society has become increasingly interested in measurements more meaningful and more reliable.
We live in a ear of accountability. Although accounting has nade its most dramatic progress in the field of business, the accounting functions is vital to every unit of ur society. An individual must accont for his or her income, and must file income tax reutrns. Often an individual must supply personal accounting information in order to buy a car or home, to quality for a college scholarship, to secure a credit card, or to obtain a bank loan. Large corporations are accountable to their stockholders, to governmental agencies, and to the public. The federal government, the states, the cities, the school districts,: all must use accounting as a basic for controlling their resources and measuring their accomplishments. Accounting is equally essential to the successful operation of a business, a university, a fraternity, a social prgrram, or a city.
In very election the voters must make decisions at the ballot box on issues involving accounting concepts; therefore, some knowledge of accounting is needed by all citizens if they are to act intelligently in meeting the challenges of our society. The objectives of this this text is to help you develop your knowledge of accounting an dyour ability to use accounting information in making economic and polical decisions.
The Purpose of Nature of Accounting
The underlying purpose of accounting is to provide financial information about an economic entity. The financial information provided by an accounting systems is needed by managerial decision makers to help them plan and control the activities of the economic entity. Financial information is also needed by outsiders ----- owners, creditors, potential investors, the government, and the public ----- who have supplied money to the business or who have some other interest in the business that will be served by information about its financial position and operating results.
Bookkeeping and Accounting
There is some confusion over the differenct between “bookkeeping” and “accounting.” This is partly due to the fact that the two are related.
Bookkeeping is the reccording of business data in a prescribed manner. A bookkeeper may be responsible for keeping all of the records of a business of only a small segment, such as a portion of the customer accounts in a department store. Much of the work of the bookkeeper is clerical in nature and is increasingly being handled by mechanical and electronic equipment.
Accounting is primarily concerned with the design of the system of records, the preparation of reports based on the recorded data, and the interpretation of the reports. Accountants often direct and review the work of bookkeepers. The large the firm, the greater is the number of levels of responsibility and authority. The work of accountants at the beginning levels may possibly include some bookkeeping. In any event, the accountant must have a much higher level of knowledge, conceptual, and analytical skill than is a required of the book keeper.
Specialized Accounting Fields
As in many other areas of human activity during the twentieth century, a number of specialized fields in accounting have evolved as a result of technoligical advances and accelerated economic growth. The most important accounting fields are described briefly in the following paragraphs. Financial accounting is concerned with the recording of transactions for a business enterprise or other economic unit and the periodic preparation of various reports from such records. The reports, which may be for general purposes or for a special purpose, provide useful information for managers, owners, creditors, governmental agencies, and the general public. Of particular importance to financial accountants are the rules of accounting, termed general accepted accounting principles. Corporate enterprises must employ such priciples in preparing their annual reports on profitability and financial status for theirstockholers and the investing public. Comparability of financial reports is essential if the nation’s resources are to be divided among business organization is a socially desirable manner.
Auditing is a field of activity involving an independent review of the accounting records. In conducting an audit, public accountants examine the records supporting the financial reports of an enterprise and give an opinion regarding their fairness and reliability. An important element of “fairness and reliability” is adherence to generally accepted accounting principles. In addition to retaining public accountants for a period audit, many corporations have their own permanent staff of internal auditors. Their principle responsibility is to determine if the various operating divisions are following management’s policies and procedures.
Cost accounting emphasizes the determination and the control of costs. It is concerned primarily with the costs of manufacturing processes and of manufactured products. In addition, one of the most important duties of the cost accountants is to gather and explain cost data, both actual and prospective. Management uses these data in controlling current operations and in planning for the future.
Management accounting uses both historical and estimated data in assisting management in daily operations and in planning future operations. It deals with specific problems that confront enterprise managers at various organizational levels. The management accountant is frequently concerned with identifying alternative courses of action and then helping to select the best one. For example, the accountant may assist the company treasurer in preparing plans for future financing, or may develop data for use by the sales manager in determining the selling price to be placed on a new product. In recent yearsm public accountants have realized that their training and experience uniquely quality them to advise management personnel on policies and administration. This rapital growing field of specialization by CPAs is frequently called management advisory services or administrative services.
Tax accounting encompansses the preparation of tax returns and consideration of the tax consequences of proposed business transactions or alternative courses of action. Accountants specialize in the this field, particularly in the aera of tax planning, must be familiar with the tax statutes affecting their employer or clients and also must keep up to date on administrative regulations and court decisions on tax cases.
Accounting systems is the special field concerned with the design and implementation of procedures for the accumulation and reporting of financial data. The systems accountant must devise appropriate “checks and balances” so safeguard business assets and provide for information flow that will be efficient and helpful to management. Familiarity with uses and relative merits of various types of data processing equipment is also essential. Budgetary accounting presents the plan of financial operations for a period and, through records and summaries, provide comparions of actual operations with the predetermined plan. A combination of planning and controlling future operations, it is sometimes considered to be a part of management accounting.
International accounting is concerned with the special problems associated with the international trade of multinational business organizations. Accountants specializing in this area must be familiar with the influences that custom, law, and taxation of various countries bring to bear on international operations and accounting principles.
Not-for-profit accounting specializes in recording and reporting the transactions of various governmental units and other not-for-profit organizations such as churches, charities and educational institutions. An essential elements is an accounting system that will insure strict adherence on the part of management to restrictions and other requirements imposed by law, by other institutions, or by individual donors. Social accouting is the newest field of accounting and is the most difficult to describe in a few word. There have been increasing demands on the profession for measurement of social costs and benefits which have previously been considered to be unmeasurable. One of the engagements in this field involved the measurement of traffic patterns in densely populated section of the nation. This effort was part of a government study to determine the best use of transportation funds, not only in terms of facilitating trade but also of assuring a good environment for the area’s residents. Other innovation engagements have dealt with the best use of welfare funds in large city, with the public use of state parks, with wildlife in state game preserves, and with statewide water and air pollution.
There is some overlapping among the various fields, and leaders in any particular field are likely to be well versed in related areas. There is also a considerable degree of specialization within a particular field. For example, in auditing one may become an expert in a single tyoe of business enterprise such as department stores or public utilities. In tax accounting one may become a specialist in oil and gas producing companies. In systems one may become an expert in electroni data processing equipment.
Opportunities in Accounting
The rapid development of accounting theory and technique during the current century has been accompanied by an expansion of the career opportunities in accounting and an increasing number of professional trained accountants. Among the factors contributing to this growth have been the increase in number, size, and complexity of business corporations; the imposition of new and increasingly complex taxes, partivularly the federal income tax; and other governmental restrictions on business operations.
The following table indicates the growth of the profession of accountancy relative to the growth of three other major professions:
Rate of increase in Employment
During the period 1960---1990, the profession of accountancy grew to approximately one and a half times its size in 1960. As the complexity of the business and social environment continues to increase, employment and advancement opportunities in the profession of accountancy expected to continue to grow and expand.