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Accountancy  or accounting is the system of recording, verifying, and reporting of the value of assets, liabilities, income, and expenses in the books of account (ledger) to which debit and credit entries (recognizing transactions) are chronologically posted to record changes in value (see bookkeeping). Such financial information is primarily used by lenders, managers, investors, tax authorities and other decision makers to make resource allocation decisions between and within companies, organizations, and public agencies. Accounting has been defined by the AICPA as " The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof." 
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 organization and is usually confidential and accessible only to a small group, mostly decision-makers. Open-book Accounting aims to improve accounting transparency. Tax Accounting is the accounting needed to comply with jurisdictional tax regulations. Accounting scholarship is the academic discipline which studies the theory of accountancy.
Practitioners of accountancy are known as accountants. Professional bodies for accountants allow their members to use titles indicating their membership or qualification level: Chartered Certified Accountant (ACCA or FCCA), Chartered Accountant (FCA, CA or ACA), International Accountant (FAIA or AAIA), Management Accountant (ACMA, FCMA or AICWA), Certified Public Accountant (CPA) and Certified General Accountant (CGA or FCGA).
The related, but separate financial audit comprises internal and external audit. External audit - carried out by independent auditors - examines the financial statements and accounting records in order to express an opinion as to the truth and fairness and adherence to Generally Accepted Accounting Principles (GAAP), or International Financial Reporting Standards (IFRS). Internal audit aims at providing information for management usage, and is typically carried out by employees.
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.
Critical approaches such as Social accounting challenge conventional accounting, in particular financial accounting, for giving a narrow image of the interaction between society and organisations, and thus artificially constraining the subject of accounting. Social accounting in particular argues that organisations ought to account for the social and environmental effects of their economic actions. Accounting should thus not only embrace descriptions of purely economic events, not be exclusively expressed in financial terms, aim at a broader group of stakeholders and broaden its purpose beyond reporting financial success.
Accountancy's infancy dates back to the earliest days of human agriculture and civilization (the Sumerians in Mesopotamia, and the Egyptian Old Kingdom). Ancient economic thought of the Near East facilitated the creation of accurate records of the quantities and relative values of agricultural products, methods that were formalized in trading and monetary systems by 2000 BC. Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents. The Islamic Quran also mentions simple accounting for trade and credit arrangements.
In the twelfth-century A.D., the 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 civilizations 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.
Luca Pacioli (1445 - 1517), also known as Friar Luca dal Borgo, is credited for the "birth" of accountancy. His Summa de arithmetica, geometrica, proportioni et proportionalita (Summa on arithmetic, geometry, proportions and proportionality, Venice 1494), was a textbook for use in the abbaco schools of northern Italy, where the sons of merchants and craftsmen were educated. It was a compendium of the mathematical knowledge of his time, and includes the first printed 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 equaled 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 organization'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 famous 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:
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 organizations 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),Association of International Accountants (AIA)and Institute of Chartered Accountants, and are recognized by titles such as Chartered Management Accountant (ACMA or FCMA) Chartered Certified Accountant (ACCA or FCCA), International Accountant (AAIA or FAIA) and Chartered Accountant (UK, Ireland, Australia, New Zealand, Canada, India, Pakistan, South Africa, Ghana), Certified Public Accountant (Japan, US, Singapore, Hong Kong, the Philippines), Certified Management Accountant (Canada, U.S.), Certified General Accountant (Canada, Caribbean, China, Hong Kong, Bermuda), or Certified Practicing Accountant (Australia). Some Commonwealth countries (Australia and Canada) often recognize 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 authorized by legislation to practice public accounting and auditing in all Canadian provinces, except Ontario and Quebec, as of 2005. In the United States, the professional organization for all Certified Public Accountants is the American Institute of Certified Public Accountants,<ref (AICPA). There is, however, no legal requirement for an accountant to be a paid-up member of one of the many Institutes.
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 (later overturned) 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).
The accounting scandals at Enron and other high profile companies in the USA and Europe have had, and continue to have, far-reaching consequences for the 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).
See list of accounting topics for complete listing.
Accounting principles, rules of conduct and action are described by various terms such as concepts, conventions, tenets, assumptions, axioms and postulates.
The following list is intended to give some idea of the breadth and scope of the accountancy profession:
The most general definition of an audit is an evaluation of a person, organization, system, process, project or product. Audits are performed to ascertain the validity and reliability of information, and also provide an assessment of a system's internal control. The goal of an audit is to express an opinion on the person/organization/system etc. under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements - a concept influenced by both quantitative and qualitative factors.
Traditionally audits were mainly associated with gaining information about financial systems and the financial records of a company or a business (see financial audit). However recently auditing has begun to include other information about the system, such as information about environmental performance. As a result there are now professions that conduct environmental audits.
In financial accounting, an audit is an independent assessment of the fairness by which a company's financial statements are presented by its management. It is performed by competent, independent and objective person or persons, known as auditors or accountants, who then issue an auditor's report on the results of the audit.
Such systems must adhere to generally accepted standards set by governing bodies that regulate businesses. It simply provides assurance for third parties or external users that such statements present 'fairly' a company's financial condition and results of operations.
Quality audits are performed to verify the effectiveness of a quality management system. This is part of certifications such as ISO 9001. They are essential to verify existence of objective evidence of processes, to assess how successfully processes have been implemented, for judging the effectiveness of achieving any defined target levels, provide evidence concerning reduction and elimination of problem areas, and are a hands-on management tool for achieving continual improvement in an organisation.
For the benefit of the organization, quality auditing should not only report non-conformances and corrective actions, but also highlight areas of good practice. In this way other departments may share information and amend their working practices as a result, also enhancing continual improvement.
In the US, audits of publicly-listed companies are governed by rules laid down by the Public Company Accounting Oversight Board (PCAOB). Such an audit is called an Integrated Audit, and auditors have the additional responsibilities of expressing opinions on management's assessment of the firm's internal control, and on the effectiveness of internal control over financial reporting based on their (the auditors') own assessment.
There are two types of auditors:
The four largest accounting firms in the world are collectively referred to as the Big Four. They are as follows:
There are many other audit firms competing with the big four for major audit engagements. Competition has intensified in response to independence issues and other legislative requirements introduced as a consequence of the Arthur Andersen Scandal. In the US and Australia, these firms are referred to as "mid-tier". Some of these include: BDO International, Moore Stephens LLP, Grant Thornton International, McGladrey & Pullen, Dauby O'Connor & Zaleski, LLC, PKF, Pitcher Partners, Johnson Lambert & Co. LLP, Beard Miller Company, DFK International, Horwath International, and UHY firm.
In the UK the medium sized firms are also referred to as mid-tier. Many of these firms are international and increasingly are competing for work against the Big Four, especially following the recent large auditing scandals.
While the four major audit firms listed above provide audit services to the largest corporations in America, audit firms around the world are also in partnership with the Big Four. Since corporations held offices in other parts of the world, they tend to be audited by affiliates of the Big Four to maintain consistency and uniformity in their application of auditing standards.
Bookkeeping (book-keeping or book keeping) is the recording of the value of assets, liabilities, income, and expenses in the daybooks, journals, and ledgers, which debit and credit entries are chronologically posted to record changes in value. Bookkeeping is often mistaken for accounting, which is the system of recording, verifying, and reporting such information. Practitioners of accounting are called accountants.
Bookkeeping is undertaken by individuals and organizations including companies and legal persons. It refers to "keeping records of what is bought, sold, owed, and owned; what money comes in, what goes out, and what is left."  Bookkeeping is parted into accounting periods, and bookkeepers' work is closely related to that of accountants.
Individual and family bookkeeping involves keeping track of income and expenses in a cash account record, checking account register, or savings account passbook. Individuals who borrow or lend money track how much they owe to others or are owed from others.
Bookkeeping may be performed using paper and a pen or pencil or using computer software.
A bookkeeper (or book-keeper), sometimes called an accounting clerk in the United States, is a person who records the day-to-day financial transactions of an organization. A bookkeeper is usually responsible for writing up the "daybooks." The daybooks consist of purchase, sales, receipts and payments. The bookkeeper is responsible for ensuring all transactions are recorded in the correct daybook, suppliers ledger, customer ledger and general ledger. The bookkeeper brings the books to the trial balance stage. An accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.
Two common bookkeeping systems used by businesses and other organizations are the single-entry bookkeeping system and the double-entry bookkeeping system. Single-entry bookkeeping uses only income and expense accounts, recorded primarily in a revenue and expense journal. Single-entry bookkeeping is adequate for many small businesses. Double-entry bookkeeping requires posting (recording) each transaction twice, using debits and credits.
The primary bookkeeping record in single-entry bookkeeping is the cash book, which is similar to a checking (cheque) account register but allocates the income and expenses to various income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as inventory and travel expenses.
Sample revenue and expense journal for single-entry bookkeeping
|No.||Date||Description||Revenue||Expense||Sales||Sales Tax||Services||Inventory||Advert.||Freight||Office Suppl||Misc|
|1041||7/13||Printer- Advert flyers||450.00||450.00|
|1042||7/13||Wholesaler - inventory||380.00||380.00|
|- Taxable sales||400.00||32.00|
|- Out-of-state sales||165.00|
|- Service sales||265.00|
Simple bookkeeping for individuals and families involves recording income, expenses and current balance in a cash record book or a checking account register.
Sample checking account register (United States, 2003)
|AD=Automatic Deposit, AP=Automatic Payment, ATM=Teller Machine, DC=Debit Card|
|DATE||TRANSACTION DESCRIPTION||PAYMENT AMOUNT||/||FEE||DEPOSIT AMOUNT||BALANCE|
Daybook is a descriptive and chronological (diary-like) record of day-to-day financial transactions or a book of original entry rarely kept for the entries are now contained in original documents such as invoices and supporting documents. Daybook's details must be entered formally into journals to enable posting to ledgers. Daybooks include:
Sales daybook of the sales invoices.
Sales credits daybook of the sales credit notes.
Purchases daybook of the purchase invoices.
Purchases credits daybook of the purchase credit notes.
Cash daybook, usually known as cash book, of cash received and paid out. It may comprise two daybooks: receipts daybook of cash received, and payments daybook of cash paid out.
Journal is a formal and chronological record of financial transactions before their values are accounted in general ledger as debits and credits. If daybooks are not kept, the journals are books of original entry, where the transactions are first recorded, hence often considered synonymous with daybooks. Special journals include: sales, purchases, cash receipts, cash disbursements, and payroll. General journal is a record of the entries not included in other journals.
Ledger (or book of final entry) is a record of accounts, each recorded individually (on a separate page) with its balance. (Ledger is also a book holding such records.) Unlike the journal listing chronologically all financial transactions without balances, the ledger summarizes values of one type of financial transactions per account, which constitute the basis for the balance sheet and income statement. Ledgers include:
Customer ledger of financial transactions with a customer.
Supplier ledger of financial transactions with a supplier.
Debtors Ledger/Customers Ledger/Sales Ledger/Accounts Receivable Ledger
Creditors Ledger/Suppliers Ledger/Purchases Ledger/Accounts Payable Ledger
General Ledger/Nominal Ledger
Computerized bookkeeping removes many of the paper "books" that are used to record transactions and usually enforces double entry bookkeeping. Computer software increases the speed at which bookkeeping can be performed.
Online bookkeeping allows source documents and data to reside in web-based applications which allow remote access for bookkeepers and accountants. All entries made into the online software are recorded and stored in a remote location. The online software can be accessed from any location in the world and permit the bookkeeper or data entry person to work out of the office rather than in the office. The paperwork can either be delivered to the bookkeeper. Or a company can scan its business documents and upload them to a secure location or into an online bookkeeping application on a regular basis. This allows the bookkeeper to work remotely with these documents to update the books. Users of this technology include:
|US English||Int. English|
|Checking Account||Current Account|
Footing and cross-footing are bookkeeping terms for summing a table of numbers by column (down) and by row (across), respectively. Other names for these terms are casting and cross-casting and totting and cross-tot.
In management accounting, cost accounting is that part of management accounting which establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision making to reduce a company's costs and improve its profitability. As a form of management accounting, cost accounting need not follow standards such as GAAP, because its primary use is for internal managers, rather than external users, and what to compute is instead decided pragmatically.
Costs are measured in units of nominal currency by convention. Cost accounting can be viewed as translating the Supply Chain (the series of events in the production process that, in concert, result in a product) into financial values.
There are various managerial accounting approaches:
Classical Cost Elements are:
Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.
In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes.
Some costs tend to remain the same even during busy periods, unlike variable costs which rise and fall with volume of work. Over time, the importance of these "fixed costs" has become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early twentieth century, these costs were of little importance to most businesses. However, in the twenty-first century, these costs are often more important than the variable cost of a product, and allocating them to a broad range of products can lead to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing.
For example: A company produced railway coaches and had only one product. To make each coach, the company needed to purchase $60 of raw materials and components, and pay 6 laborers $40 each. Therefore, total variable cost for each coach was $300. Knowing that making a coach required spending $300, managers knew they couldn't sell below that price without losing money on each coach. Any price above $300 became a contribution to the fixed costs of the company. If the fixed costs were, say, $1000 per month for rent, insurance and owner's salary, the company could therefore sell 5 coaches per month for a total of $3000 (priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each), and make a profit of $500 in both cases.
In modern cost accounting, the concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of GAAP (Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product.
This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor.
An important part of standard cost accounting is a variance analysis which breaks down the variation between actual cost and standard costs into various components (volume variation, material cost variation, labor cost variation, etc.) so managers can understand why costs were different from what was planned and take appropriate action to correct the situation.
As time went on, standard cost accounting lost its usefulness for management decision making due to a variety of reasons:
As a result of the above, using standard cost accounting to analyze management decisions can distort the unit cost figures in ways that can lead managers to make decisions that do not reduce costs or maximize profits. For this reason, managers often use the terms "direct costs" and "indirect costs" to replace the standard costing, to better reflect the way allocation of overhead is actually calculated. Indirect costs (often large) are usually allocated in proportion to either labor cost, other direct costs, or some physical resource utilization.
Managers using the standard cost for 40 coaches per month would likely reject an order for 100 coaches (to be produced in one month) if the selling price was only $300 per unit, seeing that it would result in a loss of $25 per unit. If they analyzed the fixed vs. variable cost distinction, they would see clearly that filling this order would result in a contribution to fixed costs of $240 per coach ($300 selling price less $60 materials) and would result in a net profit for the month of $13,400 (($240 x 100) - 10,600).
As business became more complex and began producing a greater variety of products, the use of cost accounting to make decisions to maximize profitability came under question. Management circles became increasingly aware of the Theory of Constraints in the 1980s, and began to understand that "every production process has a limiting factor" somewhere in the chain of production. As business management learned to identify the constraints, they increasingly adopted throughput accounting to manage them and "maximize the throughput dollars" (or other currency) from each unit of constrained resource.
|Overhead Cost by Department||Total Cost||Hours Available per month||Cost per hour|
|Metal shop||$ 3,300.00||160||$20.63|
|Standard Cost Accounting Analysis||Streetcars||Rail coach|
|Foundry Time (hrs)||3.0||2.0|
|Metalwork Time (hrs)||1.5||4.0|
|Foundry Cost||$136.88||$ 91.25|
|Metalwork Cost||$ 30.94||$ 82.50|
|Raw Material Cost||$120.00||$ 60.00|
|Profit per Unit||$ (7.81)||$116.25|
|Throughput Cost Accounting Analysis||Decline Contract||Take Contract|
|Metal shop Hours||160||159|
|Streetcar Revenue||$ 0||$ 4,200|
|Coach Raw Material Cost||$(2,400)||$(2,040)|
|Streetcar Raw Material Cost||$ 0||$(1,800)|
Activity-based costing (ABC) is a system for assigning costs to products based on the activities they require. In this case, activities are those regular actions performed inside a company. "Talking with customer regarding invoice questions" is an example of an activity performed inside most companies.
Accountants assign 100% of each employee's time to the different activities performed inside a company (many will use surveys to have the workers themselves assign their time to the different activities). The accountant then can determine the total cost spent on each activity by summing up the percentage of each worker's salary spent on that activity.
A company can use the resulting activity cost data to determine where to focus their operational improvement efforts. For example, a job based manufacturer may find that a high percentage of their workers are spending their time trying to figure out a hastily written customer order. Via ABC, the accountants now have a currency amount that will be associated with the activity of "Researching Customer Work Order Specifications". Senior management can now decide how much focus or money to budget for the resolutions of this process deficiency. Activity-based management includes (but is not restricted to) the use of activity-based costing to manage a business.
This method is used particularly for short-term decision-making. Its principal tenets are:
Thus it does not attempt to allocate fixed costs in an arbitrary manner to different products. The short-term objective is to maximize contribution per unit. If constraints exist on resources, then Managerial Accounting dictates that marginal cost analysis be employed to maximize contribution per unit of the constrained resource (see Development of Throughput Accounting, above)
Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance and reporting the results to interested users.
Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. Managerial accounting provides accounting information to help managers make decisions to manage the business.
In short, Financial Accounting is the process of summarizing financial data taken from an organization's accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization.
Financial accountancy is governed by both local and international accounting standards.
Financial accountants produce financial statements based on Generally Accepted Accounting Principles [GAAP] of a respective country.
Financial accounting serves following purposes:
The trial balance which is usually prepared using the Double-entry accounting system forms the basis for preparing the financial statements. All the figures in the trial balance are rearranged to prepare a profit & loss statement and balance sheet. There are certain accounting standards that determine the format for these accounts (SSAP, FRS, IFS). The financial statements will display the income and expenditure for the company and a summary of the assets, liabilities, and shareholders or owners’ equity of the company on the date the accounts were prepared to.
Assets, Expenses, and Withdrawals have normal debit balances (when you debit these types of accounts you add to them)...remember the word AWED which represents the first letter of each type of account.
Liabilities, Revenues, and Capital have normal credit balances (when you credit these you add to them).
0 = Dr Assets Cr Owners' Equity Cr Liabilities . _____________________________/\____________________________ . . / Cr Retained Earnings (profit) Cr Common Stock \ . . _________________/\_______________________________ Cr Revenue . . \________________________/ \______________________________________________________/ increased by debits increased by credits Crediting a credit Thus -------------------------> account increases its absolute value (balance) Debiting a debit Debiting a credit Thus -------------------------> account decreases its absolute value (balance) Crediting a debit
When you do the same thing to an account as its normal balance it increases; when you do the opposite, it will decrease. Much like signs in math: two positive numbers are added and two negative numbers are also added. It is only when you have one positive and one negative (opposites) that you will subtract.
Internal auditing is a profession and activity involved in helping organisations achieve their stated objectives. It does this by utilizing a systematic methodology for analyzing business processes, procedures and activities with the goal of highlighting organizational problems and recommending solutions. Professionals called internal auditors are employed by organizations to perform the internal auditing activity.
The scope of internal auditing within an organization is broad and may involve topics such as the efficacy of operations, the reliability of financial reporting, deterring and investigating fraud, safeguarding assets, and compliance with laws and regulations.
Internal auditing frequently involves measuring compliance with the entity's policies and procedures. However, Internal auditors are not responsible for the execution of company activities; they advise management and the Board of Directors (or similar oversight body) regarding how to better execute their responsibilities. As a result of their broad scope of involvement, internal auditors may have a variety of higher educational and professional backgrounds.
Publicly-traded corporations typically have an internal auditing department, led by a Chief Audit Executive ("CAE") who generally reports to the Audit Committee of the Board of Directors, with administrative reporting to the Chief Executive Officer.
The profession is unregulated, though there are a number of international standard setting bodies, an example of which is the Institute of Internal Auditors ("IIA"). The IIA has established Standards for the Professional Practice of Internal Auditing and has over 150,000 members representing 165 countries, including approximately 65,000 Certified Internal Auditors.
The Internal Auditing profession evolved steadily with the progress of management science after World War II. It is conceptually similar in many ways to financial auditing by public accounting firms, quality assurance and banking compliance activities. Much of the theory underlying internal auditing is derived from management consulting and public accounting professions. With the implementation in the United States of the Sarbanes-Oxley Act of 2002, the profession's growth accelerated, as many internal auditors possess the skills required to help companies meet the requirements of the law.
To perform their role effectively, internal auditors require organizational independence from management, to enable unrestricted evaluation of management activities and personnel. Although internal auditors are part of company management and paid by the company, the primary customer of internal audit activity is the entity charged with oversight of management's activities. This is typically the Audit Committee, a sub-committee of the Board of Directors. To provide independence, most Chief Audit Executives report to the Chairperson of the Audit Committee and can only be replaced with the concurrence of that individual.
Internal auditing activity is primarily directed at improving internal control. Under the COSO Framework, internal control is broadly defined as a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following internal control categories:
Management is responsible for internal control. Managers establish policies and processes to help the organization achieve specific objectives in each of these categories. Internal auditors perform audits to evaluate whether the policies and processes are designed and operating effectively and provide recommendations for improvement.
Internal auditors may assist management with compliance with the Sarbanes-Oxley Act (SOX). One 2007 industry survey indicated that internal audit functions complete all SOX testing at 36% of SEC-listed companies.
Internal auditing professional standards require the function to monitor and evaluate the effectiveness of the organization's Risk management processes. Risk management relates to how an organization sets objectives, then identifies, analyzes, and responds to those risks that could potentially impact its ability to realize its objectives.
Under the COSO enterprise risk management (ERM) Framework, risks fall under strategic, operational, financial reporting, and legal/regulatory categories. Management performs risk assessment activities as part of the ordinary course of business in each of these categories. Examples include: strategic planning, marketing planning, capital planning, budgeting, hedging, incentive payout structure, and credit/lending practices. Sarbanes-Oxley regulations also require extensive risk assessment of financial reporting processes. Corporate legal counsel often prepares comprehensive assessments of the current and potential litigation a company faces. Internal auditors may evaluate each of these activities, or focus on the processes used by management to report and monitor the risks identified. For example, internal auditors can advise management regarding the reporting of forward-looking operating measures to the Board, to help identify emerging risks.
In larger organizations, major strategic initiatives are implemented to achieve objectives and drive changes. As a member of senior management, the Chief Audit Executive (CAE) may participate in status updates on these major initiatives. This places the CAE in the position to report on many of the major risks the organization faces to the Audit Committee, or ensure management's reporting is effective for that purpose.
Internal auditors may help companies establish and maintain Enterprise Risk Management processes. Internal auditors also play an important role in helping companies execute a SOX 404 top-down risk assessment. In these latter two areas, internal auditors typically are part of the project team in an advisory role.
Internal auditing activity as it relates to corporate governance is generally informal, accomplished primarily through participation in meetings and discussions with members of the Board of Directors. Corporate governance is a combination of processes and organizational structures implemented by the Board of Directors to inform, direct, manage, and monitor the organization's resources, strategies and policies towards the achievement of the organizations objectives. The internal auditor is often considered one of the "four pillars" of corporate governance, the other pillars being the Board of Directors, management, and the external auditor.
A primary focus area of internal auditing as it relates to corporate governance is helping the Audit Committee of the Board of Directors (or equivalent) perform its responsibilities effectively. This may include reporting critical internal control problems, informing the Committee privately on the capabilities of key managers, suggesting questions or topics for the Audit Committee's meeting agendas, and coordinating carefully with the external auditor and management to ensure the Committee receives effective information.
Based on a risk assessment of the organization, internal auditors, management and oversight Boards determine where to focus internal auditing efforts. Internal auditing activity is generally conducted as one or more discrete projects. A typical internal audit project involves the following steps:
Project length varies based on the complexity of the activity being audited and Internal Audit resources available. Many of the above steps are iterative and may not all occur in the sequence indicated.
By analyzing and recommending business improvements in critical areas, auditors help the organization meet its objectives. In addition to assessing business processes, specialists called Information Technology (IT) Auditors review information technology controls.
Internal auditing standards require the development of a plan of audit engagements (projects) based on a risk assessment, updated at least annually. The input of senior management and the Board is typically included in this process. Many departments update their plan of engagements throughout the year as risks or organizational priorities change.
This effort helps ensure the audit activity is aligned with the organization’s objectives, by answering two key questions: First, what goals are the organization trying to accomplish in the upcoming period? Second, how can the Internal Audit Department assist the organization in achieving these goals?
Internal auditors often conduct a series of interviews of senior management to identify potential engagements. Changes in people, processes, or systems often generate audit project ideas. Various documents are reviewed, such as strategic plans, financial reports, consulting studies, etc. Further, the results of prior audits and resolution of open issues are considered. For example, even if a business area is important, prior audit work and the nature and status of open issues may render further audit effort unnecessary. If the organization has a formal enterprise risk management (ERM) program, the risks identified therein help limit the amount of separate risk assessment performed by Internal Audit.
The preliminary plan of engagements is documented and prioritized. Audit resources and expertise are then considered and a final plan is presented to senior management and the Audit Committee. The presentations vary based on the needs of the stakeholders and may include the following:
The measurement of the internal audit function can involve a balanced scorecard approach. Internal audit functions are primarily evaluated based on the quality of counsel and information provided to the Audit Committee and top management. However, this is primarily qualitative and therefore difficult to measure. “Customer surveys” sent to key managers after each audit project or report can be used to measure performance, with an annual survey to the Audit Committee. Scoring on dimensions such as professionalism, quality of counsel, timeliness of work product, utility of meetings, and quality of status updates are typical with such surveys.
Quantitative measures can also be used to measure the function’s level of execution and qualifications of its personnel. Key measures include:
Plan completion: This is a measure of the degree to which the annual plan of engagements is completed, measured at a point in time. This may be measured using the number of projects completed, weighted by the planned size of each project, with estimates for projects in-progress. Measured throughout the year, it is compared against the percentage of the year elapsed.
Report issuance: This is a measure of the time elapsed from completion of testing to issuance of the final audit report, including management’s action plans. This can be measured in average days or percentage of reports issued within a certain standard, such as 30 days. Establishing expectations for the timing of management’s response to report recommendations is critical. In addition, the scope and degree of change involved in the report’s action plans are key variables. For example, a report for a single retail store requiring only the store manager’s action might take 3-5 days to issue. However, a report consolidating findings from 20 retail stores, with action plans with national implications determined by top management, may take 30-60 days in complex organizations.
Issue closure: Reported audit findings are often called “issues” or “deficiencies.” Professional standards require audit functions to track reported findings to resolution, which effectively requires the maintenance of an issues follow-up database. The number of days that reported issues remain open, or open after their agreed-upon closure date, are key measures. In addition, reporting database statistics such as the number of issues open (unresolved), closed (resolved), and issues opened/closed during a given period are useful statistics.
Staff qualifications: This can be measured through the percentage of staff with professional certifications, graduate degrees, and overall years of experience.
Staff utilization rate: This is measured as the percentage of time spent on projects, as opposed to administrative time such as training or vacation. Many internal audit departments track time by audit project. This is typically captured in a database or spreadsheet.
Staffing level: The number of positions filled relative to the authorized staffing level. Due to the challenge of finding qualified staff, departments may have rotational programs to bring in management to complete tours in the function or be "guest" auditors. Audit departments also "co-source," meaning they obtain contract auditors from service providers.
Developing and retaining quality professionals is a key concern in the profession. Key methods for developing and retaining internal audit staff personnel include:
The Chief Audit Executive (CAE) typically reports the most critical issues to the Audit Committee quarterly, along with management's progress towards resolving them. Critical issues typically have a reasonable likelihood of causing substantial financial or reputational damage to the company. For particularly complex issues, the responsible manager may participate in the discussion. Such reporting is critical to ensure the function is respected, that the proper "tone at the top" exists in the organization, and to expedite resolution of such issues. It is a matter of considerable judgment to select appropriate issues for the Audit Committee's attention and to describe them in the proper context.
An information technology audit, or information systems audit, is an examination of the controls within an Information technology (IT) infrastructure. An IT audit is the process of collecting and evaluating evidence of an organization's information systems, practices, and operations. The evaluation of obtained evidence determines if the information systems are safeguarding assets, maintaining data integrity, and operating effectively and efficiently to achieve the organization's goals or objectives. These reviews may be performed in conjunction with a financial statement audit, internal audit, or other form of attestation engagement.
IT audits are also known as automated data processing (ADP) audits and computer audits. They were formerly called electronic data processing (EDP) audits.
An IT audit should not be confused with a financial statement audit. While there may be some abstract similarities, a financial audit's primary purpose is to evaluate whether an organization is adhering to standard accounting practices. The primary functions of an IT audit are to evaluate the system's efficacy and security protocols, in particular, to evaluate the organization's ability to protect its information assets and properly dispense information to authorized parties. The IT audit's agenda may be summarized by the following questions:
The IT audit focuses on determining risks that are relevant to information assets, and in assessing controls in order to reduce or mitigate these risks. By implementing controls, the effect of risks can be minimized, but cannot completely eliminate all risks.
Various authorities have created differing taxonomies to distinguish the various types of IT audits. Goodman & Lawless state that there are three specific systematic approaches to carry out an IT audit :
Others describe the spectrum of IT audits with five categories of audits:
And some lump all IT audits as being one of only two type: "general control review" audits or "application control review" audits.
The following are basic steps in performing the Information Technology Audit Process:
Auditing information security is a vital part of any IT audit. The broad scope of auditing information security includes such topics as data centers (the physical security of data centers and the logical security of databases), networks and application security. Like most technical realms, these topics are always evolving; IT auditors must constantly continue to expand their knowledge and understanding of the systems and environment& pursuit in system company
The concept of IT auditing was formed in the mid-1960s. Since that time, IT auditing has gone through numerous changes, largely due to advances in technology and the incorporation of technology into business.
Several information technology audit related laws and regulations have been introduced in the United States since 1977. These include the Gramm-Leach-Bliley Act, the Sarbanes-Oxley Act, theHealth Insurance Portability and Accountability Act, the London Stock Exchange Combined Code, King II, and the Foreign Corrupt Practices Act.
As the field is relatively young, not all jurisdictions have developed a pre-defined skill set that is required when evaluating the qualifications of IT audit personnel. Since auditors will be responsible for evaluating the controls affecting the recording and safekeeping of assets, it is recommended that IT personnel have detailed knowledge regarding information systems with a general understanding of accounting principles.
In the United States, usually it is considered desirable that IT audit personnel have received or qualify to receive the Certified Information Systems Auditor (CISA), Certified Internal Auditor (CIA), Certified Information Systems Security Professional (CISSP), Certified Public Accountant (CPA), Diploma in Information System Audit (DISA from the Institute of Chartered Accountants of India (ICAI-India)(ICAI)) and Certification and Accreditation Professional (CAP) credentials. The CISM and CAP credentials are the two newest security auditing credentials, offered by the ISACA and ISC2, respectively. Strictly speaking, only the CISA title would sufficiently demonstrate competences regarding both information technology and audit aspects.
Outside of the US, various credentials exist, with differing value and safeguards of professionalism. E.g., the Netherlands has the RE credential (as granted by the NOREA(Dutch site) IT-auditors' association), which among others requires a post-graduate IT-audit education from an accredited university, subscription to a Code of Ethics, and adherence to strict continuous education requirements.
Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.
In contrast to financial accountancy information, management accounting information is:
This is because of the different emphasis: management accounting information is used within an organization, typically for decision-making.
According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its Resource (economics)resources. Management accounting also comprises the preparation of financial reports for non management groups such as shareholder's, creditor's, regulatory agencies and tax authorities" (CIMA Official Terminology) The American Institute of Certified Public Accountants(AICPA) states that management accounting as practice extends to the following three areas:
The Institute of Certified Management Accountants(ICMA), states "A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking. Management Accountants therefore are seen as the "value-creators" amongst the accountants. They are much more interested in forward looking and taking decisions that will affect the future of the organization, than in the historical recording and compliance (scorekeeping) aspects of the profession. Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization, such as information management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc."
In the late 1980s, accounting practitioners and educators were heavily criticized on the grounds that management accounting practices (and, even more so, the curriculum taught to accounting students) had changed little over the preceding 60 years, despite radical changes in the business environment. Professional accounting institutes, perhaps fearing that management accountants would increasingly be seen as superfluous in business organizations, subsequently devoted considerable resources to the development of a more innovative skills set for management accountants.
The distinction between ‘traditional’ and ‘innovative’ management accounting practices can be illustrated by reference to cost control techniques. Cost accounting is a central method in management accounting, and traditionally, management accountants’ principal technique was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period.
While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based costing, which are designed with specific aspects of the modern business environment in mind. Lifecycle costing recognizes that managers’ ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product lifecycle (i.e., before the design has been finalised and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the product. Activity-based costing (ABC) recognizes that, in modern factories, most manufacturing costs are determined by the amount of ‘activities’ (e.g., the number of production runs per month, and the amount of production equipment idle time) and that the key to effective cost control is therefore optimizing the efficiency of these activities. Activity-based accounting is also known as Cause and Effect accounting.
Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events (such as machine breakdowns and quality control failures) is of far greater importance than (for example) reducing the costs of raw materials. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs, such as the provision of a service or the production of a product component.
Consistent with other roles in today's corporation, management accountants have a dual reporting relationship. As a strategic partner and provider of decision based financial and operational information, management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation's finance organization.
The activities management accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team. Examples of tasks where accountability may be more meaningful to the business management team vs. the corporate finance department are the development of new product costing, operations research, business driver metrics, sales management scorecarding, and client profitability analysis. Conversely, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation. One widely held view of the progression of the accounting and finance career path is that financial accounting is a stepping stone to management accounting. Consistent with the notion of value creation, management accountants help drive the success of the business while strict financial accounting is more of a compliance and historical endeavor.
A very rarely expressed alternative view of management accounting is that it is neither a neutral or benign influence in organizations, rather a mechanism for management control through surveillance. This view locates management accounting specifically in the context of management control theory.
Grenzplankostenrechnung (GPK) is a German costing methodology, developed in the late 1940's and 1950's, designed to provide a consistent and accurate application of how managerial costs are calculated and assigned to a product or service. The term Grenzplankostenrechnung, often referred to as GPK, has best been translated as either Marginal Planned Cost Accounting or Flexible Analytic Cost Planning and Accounting. 
The origins of GPK are credited to Hans George Plaut, an automotive engineer and Wolfgang Kilger, an academic, working towards the mutual goal of identifying and delivering a sustained methodology designed to correct and enhance cost accounting information. GPK is published in cost accounting textbooks, notably Flexible Plankostenrechnung und Deckungsbeitragsrechnung and taught at German-speaking universities today.
In the mid to late 1990s several books were written about accounting in the lean enterprise (companies implementing elements of the Toyota Production System). The term lean accounting was coined during that period. These books contest that traditional accounting methods are better suited for mass production and do not support or measure good business practices in just in time manufacturing and services. The movement reached a tipping point during the 2005 Lean Accounting Summit in Dearborn, MI. 320 individuals attended and discussed the merits of a new approach to accounting in the lean enterprise. 520 individuals attended the 2nd annual conference in 2006.
Resource Consumption Accounting is formally defined as a dynamic, fully integrated, principle-based, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. RCA emerged as a management accounting approach around 2000 and was subsequently developed at CAM-I the Consortium for Advanced Manufacturing–International, in a Cost Management Section RCA interest groupin December 2001. After spending the next seven years carefully refining and validating the approach through practical case studies and other research, a group of interested academics and practitioners established the RCA Institute to introduce RCA to the marketplace and raise the standard of management accounting knowledge by encouraging disciplined practices.
The most significant, recent direction in managerial accounting is throughput accounting; which recognizes the interdependencies of modern production processes. For any given product, customer or supplier, it is a tool to measure the contribution per unit of constrained resource . (For a detailed description of Throughput Accounting, see cost accounting).
Management accounting is an applied discipline used in various industries. The specific functions and principles followed can vary based on the industry. Management accounting principles in banking are specialized but do have some common fundamental concepts used whether the industry is manufacturing based or service oriented. For example, transfer pricing is a concept used in manufacturing but is also applied in banking. It is a fundamental principle used in assigning value and revenue attribution to the various business units. Essentially, transfer pricing in banking is the method of assigning the interest rate risk of the bank to the various funding sources and uses of the enterprise. Thus, the bank's corporate treasury department will assign funding charges to the business units for their use of the bank's resources when they make loans to clients. The treasury department will also assign funding credit to business units who bring in deposits (resources) to the bank. Although the funds transfer pricing process is primarily applicable to the loans and deposits of the various banking units, this proactive is applied to all assets and liabilities of the business segment. Once transfer pricing is applied and any other management accounting entries or adjustments are posted to the ledger (which are usually memo accounts and are not included in the legal entity results), the business units are able to produce segment financial results which are used by both internal and external users to evaluate performance.
There are a variety of ways to keep current and continue to build one's knowledge base in the field of management accounting. Certified Management Accountants (CMA's) are required to achieve continuing education hours every year, similar to a Certified Public Accountant. A company may also have research and training materials available for use in a corporate owned library. This is more common in "Fortune 500" companies who have the resources to fund this type of training medium.
There are also numerous journals, on-line articles and blogs available. Cost Management and the Institute of Management Accounting(IMA) site are sources which includes Management Accounting Quarterly and Strategic Finance publications. Indeed, management accounting is needed in an organization.
Listed below are the primary tasks/ services performed by management accountants. The degree of complexity relative to these activities are dependent on the experience level and abilities of any one individual.
There are several related professional qualifications and certifications in the field of accountancy including: