Accounting and Bookkeeping

I

Introduction

Accounting and Bookkeeping, the process of identifying, measuring, recording, and communicating economic information about an organization or other entity, in order to permit informed judgments by users of the information. Bookkeeping encompasses the record-keeping aspect of accounting and therefore provides much of the data to which accounting principles are applied in the preparation of financial statements and other financial information.

Personal record keeping often uses a simple single-entry system, in which amounts are usually recorded in column form. Such entries include the date of the transaction, its nature, and the amount of money involved. Record keeping of organizations, however, is based on a double-entry system, whereby each transaction is recorded on the basis of its dual impact on the organization’s financial position or operating results or both. Information relating to the financial position of an enterprise is presented on a balance sheet, while disclosures about operating results are displayed on an income statement. Information relating to an organization’s liquidity—namely, how it obtains and spends cash—is shown on a statement of cash flows. These three financial statements provide information about past performance, which in turn becomes a basis for readers to try to project what might happen in the future.

II

History

Bookkeeping and record-keeping methods, created in response to the development of trade and commerce, are preserved from ancient and medieval sources. Double-entry bookkeeping began in the commercial city-states of medieval Italy and was well developed by the time of the earliest preserved double-entry books, from 1340 in Genoa.

The first published accounting work was written in 1494 by the Venetian monk Luca Pacioli. Although it disseminated rather than created knowledge about double-entry bookkeeping, Pacioli's work summarized principles that have remained essentially unchanged. Additional accounting works were published during the 16th century in Italian, German, Dutch, French, and English, and these works included early formulations of the concepts of assets, liabilities, and income.

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The Industrial Revolution of the mid-1700s created a need for accounting techniques that would be adequate to handle mechanization, factory-manufacturing operations, and the mass production of goods and services. With the emergence in the mid-19th century of large, publicly owned business corporations, owned by absentee stockholders and administered by professional managers, the role of accounting was further redefined.

Starting in the mid-20th century, machines—particularly computers—performed many of the bookkeeping functions that are vital to accounting systems. The widespread use of computers broadened the scope of bookkeeping, and the term data processing now frequently encompasses bookkeeping.

III

Accounting Information

Accounting information can be classified into two categories: financial accounting, consisting of public information, and managerial accounting, consisting of private information. Financial accounting includes information disseminated to parties that are not part of the enterprise proper, such as stockholders, creditors, customers, suppliers, regulatory commissions, financial analysts, and trade associations. Such information relates to the financial position, the liquidity, and the profitability of an enterprise.

Managerial accounting deals with information that is not generally disseminated outside a company, such as salary costs, profit targets, and cost of materials per unit produced. Whereas the general-purpose financial statements of financial accounting are assumed to meet the basic information needs of most external users, managerial accounting provides a wide variety of specialized reports for division managers, department heads, project directors, section supervisors, and other managers within a company.

A

Specialized Accounting

Of the various specialized areas of accounting that exist, the three most important are auditing, income taxation, and nonbusiness organizations. Auditing is the examination, by an independent accountant, of the financial data, accounting records, business documents, and other pertinent documents of an organization in order to attest to the reasonableness of its financial statements. Businesses and not-for-profit organizations in the United States engage certified public accountants (CPAs) to perform audit examinations. Large private and public enterprises sometimes also maintain an internal audit staff to conduct auditlike examinations, which often are as much concerned with operating efficiency and managerial effectiveness as with the accuracy of the accounting data.

The second specialized area of accounting is income taxation. Preparing an income-tax return by filling out one or more forms entails collecting information and presenting data in a coherent manner; therefore, both individuals and businesses frequently hire accountants to determine their taxes. Tax rules, however, are not identical with accounting practices. Tax regulations are based on laws that are enacted by legislative bodies, interpreted by the courts, and enforced by designated administrative bodies. Much of the information required in calculating taxable income and the amount of tax due, however, is also needed in accounting, and many techniques of computing are common to both areas.

Not all accounting involves for-profit organizations. A third area of specialization is accounting for nonbusiness organizations, such as universities, hospitals, churches, trade and professional associations, and government bodies. These organizations differ from business enterprises in that they receive resources on some nonreciprocating basis—that is, without paying for such resources. They do not have a profit orientation, and they have no defined ownership interests as such. As a result, these organizations call for differences in record keeping, in accounting measurements, and in the format of their financial statements.