Welcome to the I Can't Sleep podcast,
Where I read random articles from across the web to bore you to sleep with my soothing voice.
I'm your host,
Benjamin Boster,
And today's episode is from a Wikipedia article titled Accounting.
Accounting,
Also known as accountancy,
Is the process of recording and processing information about economic entities,
Such as businesses and corporations.
Accounting measures the results of an organization's economic activities and conveys this information to a variety of stakeholders,
Including investors,
Creditors,
Management,
And regulators.
Practitioners of accounting are known as accountants.
The term accounting and financial reporting are often used interchangeably.
Accounting can be divided into several fields,
Including financial accounting,
Management accounting,
Tax accounting,
And cost accounting.
Financial accounting focuses on the reporting of an organization's financial information,
Including the preparation of financial statements to the external users of the information,
Such as investors,
Regulators,
And suppliers.
Management accounting focuses on the measurement,
Analysis,
And reporting of information for internal use by management to enhance business operations.
The recording of financial transactions so that summaries of the financials may be presented in financial reports is known as bookkeeping,
Of which double-entry bookkeeping is the most common system.
Accounting information systems are designed to support accounting functions and related activities.
Accounting has existed in various forms and levels of sophistication throughout human history.
The double-entry accounting system in use today was developed in medieval Europe,
Particularly in Venice,
And is usually attributed to the Italian mathematician and Franciscan friar Luca Pacioli.
Today accounting is facilitated by accounting organizations,
Such as standard setters,
Accounting firms,
And professional bodies.
Financial statements are usually audited by accounting firms and are prepared in accordance with Generally Accepted Accounting Principles,
GAAP.
GAAP is set by various standard-setting organizations,
Such as the Financial Accounting Standards Board,
FASB in the United States,
And the Financial Reporting Council in the United Kingdom.
As of 2012,
All major economies have plans to converge towards or adopt the International Financial Reporting Standards,
IFRS.
Accounting is thousands of years old and can be traced to ancient civilizations.
One early development of accounting dates back to ancient Mesopotamia and is closely related to developments in writing,
Counting,
And money.
There is also evidence of early forms of bookkeeping in ancient Iran,
And early auditing systems by the ancient Egyptians and Babylonians.
By the time of Emperor Augustus,
The Roman government had access to detailed financial information.
Many concepts related to today's accounting seem to be initiated in medieval Middle East.
For example,
Jewish communities used double-entry bookkeeping in the early medieval period,
And Muslim societies,
At least since the 10th century,
Also used many modern accounting concepts.
The spread of the use of Arabic numerals instead of the Roman numbers historically used in Europe increased efficiency of accounting procedures among Mediterranean merchants,
Who further refined accounting in medieval Europe.
With the development of joint-stock companies,
Accounting split into financial accounting and management accounting.
The first published work on double-entry bookkeeping system was the Summa de Arithmetica,
Published in Italy in 1494 by Luca Baccioli,
The father of accounting.
Accounting began to transition into an organized profession in the 19th century,
With local professional bodies in England merging to form the Institute of Chartered Accountants in England and Wales in 1880.
Both the words accounting and accountancy were in use in Great Britain by the mid-1800s,
And are derived from the words accompting and accountantship used in the 18th century.
In Middle English,
Used roughly between the 12th and the late 15th century,
The verb to account had the form accountant,
Which was derived from the Old French word aconter,
Which is in turn related to the Vulgar Latin word computare,
Meaning to reckon.
The base of computare is putare,
Which variously meant to prune,
To purify,
To correct an account,
And hence to count or calculate,
As well as to think.
The word accountant is derived from the French word compter,
Which is also derived from the Italian and Latin word computare.
The word was formerly written into English as accomptant,
But in process of time,
The word,
Which was always pronounced by dropping the p,
Became gradually changed both in pronunciation and in orthography to its present form.
Accounting has variously been defined as the keeping or preparation of the financial records of transactions in the firm,
The analysis,
Verification and reporting of such records,
And the principles and procedures of accounting.
It also refers to the job of being an accountant.
The word acountancy refers to the occupation or profession of an accountant,
Particularly in British English.
Accounting has several sub-fields or subject areas,
Including financial accounting,
Management accounting,
Auditing,
Taxation,
And accounting information systems.
Financial Accounting Financial accounting focuses on the reporting of an organization's financial information to external users of the information,
Such as investors,
Potential investors,
And creditors.
It calculates and records business transactions and prepares financial statements for the external users in accordance with generally accepted accounting principles.
Gap in turn arises from the wide agreement between accounting theory and practice,
And changes over time to meet the needs of decision makers.
Financial accounting produces past-oriented reports.
For example,
Financial statements are often published six to ten months after the end of the accounting period,
On an annual or quarterly basis,
Generally about the organization as a whole.
Management Accounting Management accounting focuses on the measurement analysis and reporting of information that can help managers in making decisions to fulfill the goals of an organization.
In management accounting,
Internal measures and reports are based on cost-benefit analysis,
And are not required to follow the generally accepted accounting principle.
In 2014,
CIMA created the Global Management Accounting Principles,
GMAPs.
As a result of research from across 20 countries and five continents,
The principles aim to guide best practice in the discipline.
Management accounting produces past-oriented reports,
With time spans that vary widely,
But it also encompasses future-oriented reports such as budgets.
Management accounting reports often include financial and non-financial information,
And may,
For example,
Focus on specific products and departments.
Intercompany Accounting Intercompany accounting focuses on the measurement analysis and reporting of information between separate entities that are related,
Such as a parent company and its subsidiary companies.
Intercompany accounting concerns record-keeping of transactions between companies that have common ownership,
Such as a parent company and a partially or wholly owned subsidiary.
Intercompany transactions are also recorded in accounting when business is transacted between companies with a common parent company subsidiaries.
Auditing Auditing is the verification of assertions made by others regarding a payoff,
And in the context of accounting,
It is the unbiased examination and evaluation of the financial statements of an organization.
Audit is a professional service that is systematic and conventional.
An audit of financial statements aims to express or disclaim an independent opinion on the financial statements.
The auditor expresses an independent opinion on the fairness with which the financial statements presents the financial position,
Results of operations,
And cash flows of an entity,
In accordance with the Generally Accepted Accounting Principles,
And in all material respects.
An auditor is also required to identify circumstances in which the Generally Accepted Accounting Principles have not been consistently observed.
Information Systems An accounting information system is a part of an organization's information system used for processing accounting data.
Many corporations use artificial intelligence-based information systems.
The banking and finance industry uses AI and fraud detection.
The retail industry uses AI for customer services.
AI is also used in the cybersecurity industry.
It involves computer hardware and software systems using statistics and modeling.
Many accounting practices have been simplified with the help of accounting computer-based software.
An Enterprise Resource Planning ERP system is commonly used for a large organization and provides a comprehensive,
Centralized,
Integrated source of information that companies can use to manage all major business processes,
From purchasing to manufacturing to human resources.
These systems can be cloud-based and available on demand via application or browser,
Or available as software installed on specific computers or local servers,
Often referred to as on-premise.
Tax Accounting Tax accounting in the United States concentrates on the preparation,
Analysis,
And presentation of tax payments and tax returns.
The U.
S.
Tax system requires the use of specialized accounting principles for tax purposes,
Which can differ from the generally accepted accounting principles for financial reporting.
U.
S.
Tax law covers four basic forms of business ownership – sole proprietorship,
Partnership,
Corporation,
And limited liability company.
Taxed and personal income are taxed at different rates,
Both varying according to income levels and including varying marginal rates taxed on each additional dollar of income and average rates set as the percentage of overall income.
Forensic Accounting Forensic accounting is a specialty practice area of accounting that describes engagements that result from actual or anticipated disputes of litigation.
Forensic means suitable for use in a court of law,
And it is to that standard and potential outcome that forensic accountants generally have to work.
Political Campaign Accounting Political campaign accounting deals with the development and implementation of financial systems and the accounting of financial transactions in compliance with laws governing political campaign operations.
This branch of accounting was first formally introduced in the March 1976 issue of the Journal of Accountancy.
Professional accounting bodies include the American Institute of Certified Public Accountants AICPA and the other 179 members of the International Federation of Accountants IFAC,
Including Institute of Chartered Accountants of Scotland ICAS,
Institute of Chartered Accountants of Pakistan ICAP,
CPA Australia,
Institute of Chartered Accountants of India,
Association of Chartered Certified Accountants ACCA,
And Institute of Chartered Accountants in England and Wales ICAEW.
Some countries have a single professional accounting body,
And in some other countries professional bodies or sub-fields of the accounting professions also exist.
For example,
The Chartered Institute of Management Accountants CIMA in the UK and Institute of Management Accountants in the United States.
Many of these professional bodies offer education and training,
Including qualification and administration for various accounting designations,
Such as Certified Public Accountant,
AICPA,
And Chartered Accountant.
Depending on its size,
A company may be legally required to have their financial statements audited by a qualified auditor,
And audits are usually carried out by accounting firms.
Accounting firms grew in the United States and Europe in the late 19th and early 20th century,
And through several mergers there were large international accounting firms by the mid-20th century.
Further large mergers in the late 20th century led to the dominance of the auditing market by the Big Five accounting firms,
Arthur Anderson,
Deloitte,
Ernst & Young,
KPMG,
And PricewaterCoopers.
The demise of Arthur Anderson following the Enron scandal reduced the Big Five to the Big Four.
Generally accepted accounting principles are accounting standards issued by national regulatory bodies.
In addition,
The International Accounting Standards Board,
IASB,
Issues the International Financial Reporting Standards,
IFRS,
Implemented by 147 countries.
Standards for international audit and assurance,
Ethics,
Education,
And public sector accounting are all set by independent standard settings boards,
Supported by IFAC.
The International Auditing and Assurance Standards Board sets international standards for auditing,
Assurance,
And quality control.
The International Ethics Standards Board of Accountants,
IESBA,
Sets the internationally appropriate principles-based Code of Ethics for professional accountants.
The International Accounting Education Standards Board,
IAESB,
Sets professional accounting standards.
And International Public Sector Accounting Standards Board,
IPSASB,
Sets accrual-based international public sector accounting standards.
Organizations in individual countries may issue accounting standards unique to the countries.
For example,
In Australia,
The Australian Accounting Standards Board manages the issuance of the accounting standards in line with IFRS.
In the United States,
The Financial Accounting Standards Board,
FASB,
Issues the Statements of Financial Accounting Standards,
Which form the basis of US GAAP.
And in the United Kingdom,
The Financial Reporting Council,
FRC,
Sets accounting standards.
However,
As of 2012,
All major economies have plans to converge towards or adopt the IFRS.
At least a bachelor's degree in accounting or a related field is required for most accountant and auditor job positions,
And some employers prefer applicants with a master's degree.
A degree in accounting may also be required for or may be used to fulfill the requirements for membership to professional accounting bodies.
For example,
The education during an accounting degree can be used to fulfill the American Institute of CPA's AICPA 150 semester hour requirement.
An associate member with the Certified Public Accountants Association of the UK is available after gaining a degree in finance or accounting.
A doctorate is required in order to pursue a career in accounting academia,
For example to work as a university professor in accounting.
The Doctor of Philosophy,
PhD,
And the Doctor of Business Administration,
DBA,
Are the most popular degrees.
The PhD is the most common degree for those wishing to pursue a career in academia,
While DBA programs generally focus on equipping business executives for business or public careers requiring research skills and qualifications.
Professional accounting qualifications include the Chartered Accountant designations and other qualifications including certificates and diplomas.
In Scotland,
Chartered Accountants of ICAS undergo continuous professional development and abide by the ICAS Code of Ethics.
In England and Wales,
Chartered Accountants of the ICAEW undergo annual training and are bound by the ICAEW's Code of Ethics and subject to its disciplinary procedures.
In the United States,
The requirements for joining the AICPA as a Certified Public Accountant are set by the Board of Accountancy of each state,
And members agree to abide by the AICPA's Code of Professional Conduct and Bylaws.
The ACCA is the largest global accountancy body with over 320,
000 members,
And the organization provides an IFRS stream and a UK stream.
Accountants must pass a total of 14 exams,
Which are arranged across three levels.
Accounting research is research in the effects of economic events on the process of accounting,
The effects of reported information on economic events,
And the roles of accounting in organizations and society.
It encompasses a broad range of research areas,
Including financial accounting,
Management accounting,
Auditing,
And taxation.
Accounting research is carried out both by academic researchers and practicing accountants.
Methodologies in academic accounting research include archival research,
Which examines subjective data collected from repositories,
Experimental research,
Which examines data the researcher gathered by administering treatments to subjects,
Analytical research,
Which is based on the act of formally modeling theories or substantiating ideas in mathematical terms,
Interpretive research,
Which emphasizes the role of language,
Interpretation and understanding in accounting practice,
Highlighting the symbolic structures and taken-for-granted themes,
Which pattern the world in distinct ways,
Critical research,
Which emphasizes the role of power and conflict in accounting practice,
Case studies,
Computer simulation,
And field research.
Empirical studies document that leading accounting journals publish in total fewer research articles than comparable journals in economics and other business disciplines,
And consequently accounting scholars are relatively less successful in academic publishing than their business school peers.
Due to different publication rates between accounting and other business disciplines,
A recent study based on academic author rankings concludes that the competitive value of a single publication in a top-ranked journal is highest in accounting and lowest in marketing.
Accounting records are key sources of information and evidence used to prepare,
Verify,
And or audit the financial statements.
They also include documentation to prove asset ownership for creation of liabilities and proof of monetary and non-monetary transactions.
Accounting records can take on many forms and include,
Among other camps,
Ledgers,
Journals,
Bank statements,
Contracts and agreements,
Verification statements,
Transportation receipts,
Invoices,
Vouchers.
Accounting documents or document records regroup every document that plays a role in the preparation of financial statements for a company,
Like income statements and balance sheets.
They include records of monetary transactions,
Assets and liabilities,
Ledgers,
Journals,
Etc.
Accounting documents and records are the physical objects upon which transactions are entered and summarized.
Examples include such items as cancelled checks,
Paid bills,
Payrolls,
Subsidiary ledgers,
Bank reconciliations.
Accounting records can be in physical or electronic formats.
In some states,
Accounting bodies set rules on dealing with records from a presentation of financial statements or auditing perspective.
Rules vary in different countries and different industries have specific record-keeping requirements.
Accounting records are important for all types of accounting,
Including financial accounting,
Cost accounting,
As well as for different types of organizations,
Corporations,
Partnerships,
LLCs,
And for not-for-profits or for-profits.
In the U.
S.
,
The IRS prescribes the duration for which the accounting records need to be maintained and provides records retention guidelines in Code Section 6001 and Publication 583.
Some records,
Such as CPAs and auditor statements,
Are considered permanent records,
While some such as a list of accounts payable and employment applications are generally only required to be kept for seven or three years,
Respectively.
The companies in the soda ash industry in India are required to follow guidelines prescribed by the Institute of Cost and Works,
Accountants of India.
An accounting information system is a system of collecting,
Storing,
And processing financial and accounting data that are used by decision-makers.
An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology resources.
The resulting financial reports can be used internally by management or externally by other interested parties,
Including investors,
Creditors,
And tax authorities.
Accounting information systems are designed to support all accounting functions and activities,
Including auditing,
Financial accounting,
Reporting,
Managerial management accounting,
And tax.
The most widely adopted accounting information systems are auditing and financial reporting modules.
Traditionally,
Accounting is purely based on a manual approach.
The experience and skillfulness of an individual accountant are critical in accounting processes.
Even using the manual approach can be ineffective and inefficient.
Accounting information systems resolve many of the above issues.
AISs can support the automation of processing large amounts of data and produce timely and accurate information.
Early accounting information systems were designed for payroll functions in 1970s.
Initially,
Accounting information systems were developed in-house,
As no package solutions were available.
Package solutions were expensive to develop and difficult to maintain.
Therefore,
Many accounting practitioners preferred the manual approach rather than computer-based.
Today accounting information systems are more commonly sold as pre-built software packages from large vendors,
Such as Microsoft,
Sage Group,
SAP,
And Oracle,
Where it is configured and customized to match the organization's business processes.
Small businesses often use accounting lower-cost software packages,
Such as Tally.
Erp9,
MYOB,
And QuickBooks.
Large organizations would often use ERP systems.
As the need for connectivity and consolidation between other business systems increased,
Accounting information systems were merged with larger,
More centralized systems,
Enterprise resource planning.
Before,
With separate applications to manage different business functions,
Organizations had to develop complex interfaces for the systems to communicate with each other.
In ERP,
A system,
Such as an accounting information system,
Is built as a module integrated into a suite of applications that can include manufacturing,
Supply chain,
Human resources.
These modules are integrated together and are able to access the same data and execute complex business processes.
Today,
Cloud-based accounting information systems are increasingly popular for both SMEs and large organizations for lower costs.
With this adoption of accounting information systems,
Many businesses have removed low-skills,
Transactional,
And operational accounting roles.
An AIS typically follows a multi-tier architecture,
Separating the presentation to the user,
Application,
Processing,
And data management in distinct layers.
The presentation layer manages how the information is displayed to and viewed by functional users of the system,
Through mobile devices,
Web browsers,
Or client application.
The entire system is backed by a centralized database that stores all of the data.
This can include transactional data generated from the core business process,
Purchasing,
Inventory,
Accounting,
Or static,
Master data that is referenced when processing data,
Employee and customer account records,
And configuration settings.
As transactions occur,
The data is collected from the business events and stored into the system's database,
Where it can be retrieved and processed into information that is usually for making decisions.
The application layer retrieves the raw data held in the log database layer,
Processes it based on the configured business logic,
And passes it onto the presentation layer to display to the users.
For example,
Consider the accounts payable department when processing an invoice.
With an accounting information system,
An accounts payable clerk enters the invoice,
Provided by a vendor,
Into the system where it is then stored in the database.
When goods from the vendor are received,
A receipt is created and also entered into the AIS.
Before the accounts payable department pays the vendor,
The system's application processing tier performs a three-way matching,
Where it automatically matches the amounts on the invoice against the amounts on the receipt and the initial purchase order.
Once the match is complete,
An email is sent to an accounts payable manager for approval.
From here,
A voucher can be created,
And the vendor can ultimately be paid.
That concludes this episode of the I Can't Sleep podcast.
