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Dec 17, 2011 - In the process of preparing its financial statements for the year ending December 31, 20X3, England deter

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Saturday, December 17, 2011

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The Reporting Cycle

ACCOUNTING

Your goals for this “reporting cycle” chapter are to learn about:

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Preparation of financial statements. The accounting cycle and closing process. The nature of "optional" reversing entries. Classified balance sheets. The importance of business liquidity and the concept of an operating cycle. Now Available:

Purchase the Financial Accounting Textbook (Chapters 1-16) for $59.95 here.

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t 2011 (6) t December (3) The Reporting Cycle

Preparing financial statements

Accounting ACCOUNTANCY November (3)

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The previous chapter presented adjustments that might be needed at the end of each accounting period. These adjustments were necessary to bring a company's books and records current in anticipation of calculating and reporting income and financial position. This chapter begins by illustrating how such adjustments would be used to actually prepare financial statements. Assume that England Tours Company began operation early in 20X3. In the process of preparing its financial statements for the year ending December 31, 20X3, England determined that various adjusting entries were needed. These adjusting journal entries are shown on the following page. The numbers are all "assumed." But, if it is unclear as to why any one of these entries might be needed, definitely review the detailed discussion in the previous chapter. The illustration shows 1) England's trial balance before the adjusting entries, 2) the adjusting journal entries, 3) the posting of the adjusting journal entries to the general ledger, and 4) the adjusted trial balance. If England attempts to prepare its financial statements based only on the unadjusted trial balance, the reported information would be incomplete and incorrect. the adjusting process Most of the time, a company will prepare its trial balance, analyze the trial balance for potential adjustments, and develop a list of necessary adjusting entries. Knowing what to adjust is not necessarily intuitive. It usually requires hands-on review by someone who is very knowledgeable about the business. As a practical matter, a company should not allow anyone and everyone to have access to the accounting system for purposes of entering year-end adjustments; too many errors and rogue entries will appear. Instead, a company will usually have a defined process where proposed entries are documented on a form (sometimes called a journal voucher). These forms are submitted to a chief accountant/controller for review and approval. The approved journal vouchers then serve as supporting documents to authorize data entry into the accounting system.

financial statements The adjusted trial balance is ordinarily sufficient to facilitate preparation of financial statements. Take time to trace the amounts from England's adjusted trial balance to the following statements.

accounting software The financial statement preparation process is mostly mechanical, and easily automated. once the adjusting entries have been prepared and entered, every accounting software package will race through the steps of processing the data to produce the financial statements. As such, one might be inclined to discount the need to understand how to move amounts from an adjusted trial balance into a set of financial statements. In some respects that is true, just as it is true that one does not need to know how to add and subtract if they own a calculator. of course, there is value in understanding addition and subtraction even with a calculator. In the same light, please consider that understanding the flow of transactions into financial statements is essential. worksheet approach Occasionally, one may desire to prepare financial statements that take into account necessary adjustments, but without actually updating journals and ledgers. Why? A manager may desire monthly financial reports even though the business may not formally prepare and book adjusting entries every month. A worksheet approach can be used for this purpose. or, an auditor may use a worksheet to prepare financial statements that take into account recommended adjustments, before proposing that the actual journal/ledger be updated. The following illustrates a typical worksheet. The data and adjustments correspond to information previously presented for England. The first set of columns is the unadjusted trial balance. The next set of columns reveal the end-of-period adjustments. The information in the first two sets of columns is combined to generate the adjusted trial balance columns. The last three pairs of columns are the appropriate financial statement extensions of amounts from the adjusted trial balance columns. For example, Cash is an asset account with a debit balance, and is "appropriately" extended from the adjusted trial balance columns to the debit column of the balance sheet pair of columns. Likewise, Revenue is an income statement account with a credit balance; notice that it is extended to the income statement credit column. This extension of accounts should occur for every item in the adjusted trial balance. look at the worksheet, and consider the additional comments that follow. After all adjusted trial balance amounts have been extended to the appropriate financial statement columns, the income statement columns are subtotaled. If credits exceed debits, the company has more revenues than expenses (e.g., $32,800 vs. $30,200 = $2,600 net income)). or, an excess of debits over credits would represent a net loss. To complete the worksheet, the amount of net income or loss is entered in the lower portion of the income statement columns in a manner which causes total debits to equal total credits. England Tours had a $2,600 net income, and a debit is needed to balance the income statement pair. An offsetting credit is entered in the lower portion of the retained earnings columns. This credit represents income for the year that must be added to retained earnings to complete the preparation of a formal statement of retained earnings. Within the retained earnings columns, the subtotal indicates that ending retained earnings is $1,600 (noted by the excess of credits ($2,600) over debits ($1,000)); this amount is debited in the retained earnings columns and credited in the balance sheet columns, thereby bringing both sets of columns into balance.

The companion website includes a linked animation that presents the development of the worksheet on a step-by-step basis, and may further aid understanding of the worksheet's construction. ADDITIONAL examples The illustration shown assumed England Tours was formed early in 20X3. As such, there was no beginning retained earnings balance. one may wonder how the worksheet would be influenced by a beginning retained earnings balance. The following is an illustration of England's 20X4 worksheet, where the $1,600 ending retained earnings from 20X3 carries over to become the beginning balance for 20X4. The other numbers for 20X4 are all assumed. 20X4 Illustration With Beginning Retained Earnings Balance

One may also be curious to see how a net loss situation would be handled in the worksheet. The next illustration is for England's 20X5 worksheet. It is assumed that England lost $1,000 in 20X5. Notice how the expenses of $39,600 exceed revenues of $38,600 as evident in the income statement columns. The $1,000 balancing amount is reflected as a credit in the income statement and a debit to the retained earnings column. 20X5 Illustration With Net Loss

The Accounting Cycle and closing process

Reflecting on the accounting processes thus far described reveals the following typical steps: transactions are recorded in the journal journal entries are posted to appropriate ledger accounts a trial balance is constructed adjusting entries are prepared and posted an adjusted trial balance is prepared formal financial statements are produced (perhaps with the assistance of a worksheet) It appears that the accounting cycle is completed -- capturing transaction and event data and moving it through an orderly process that results in the production of useful financial statements. Importantly, one is left with substantial records that document each transaction (the journal) and each account's activity (the ledger). It is no wonder that the basic elements of this accounting methodology have endured for hundreds of years. There remains one final process known as the closing process. Closing has two objectives: OBJECTIVE 1: UPDATE RETAINED EARNINGS Closing is a mechanism to update the Retained Earnings account in the ledger to equal the end-ofperiod balance. Keep in mind that the recording of revenues, expenses, and dividends do not automatically produce an updating debit or credit to Retained Earnings. As such, the beginning- ofperiod retained earnings amount remains in the ledger until the closing process "updates" the Retained Earnings account for the impact of the period's operations. OBJECTIVE 2: RESET TEMPORARY ACCOUNTS Revenues, expenses, and dividends represent amounts for a period of time; one must "zero out" these accounts at the end of each period (as a result, revenue, expense, and dividend accounts are called temporary or nominal accounts). In essence, by zeroing out these accounts, they are reset to begin the next accounting period. In contrast, asset, liability, and equity accounts are called real accounts, as their balances are carried forward from period to period. For example, one does not "start over" each period reaccumulating assets like cash and so on; their balances carry forward. Closing involves a four-step process:

This process results in all revenues and expenses being "corralled" in Income Summary (the net of which represents the income or loss for the period). In turn, the income or loss is then swept to Retained Earnings along with the dividends. Recall that beginning retained earnings, plus income, less dividends, equals ending retained earnings; likewise, the closing process updates the beginning retained earnings to move forward to the end-of-period balance. Following are the closing entries for England Tours for 20X3. Compare the accounts and amounts to those that appeared in the 20X3 adjusted trial balance:

The effect of the above entries is to update the Retained Earnings account and cause a zero balance to occur in the temporary accounts. The Income Summary account is also "zeroed" out ($32,800 (cr.) = $30,200 (dr.) + $2,600 (dr.)). The following T-accounts reveal the effects of the closing entries:

POST CLOSING TRIAL bALANCE The post-closing trial balance reveals the balance of accounts after the closing process, and consists of balance sheet accounts only. The post-closing trial balance is a tool to demonstrate that accounts are in balance; it is not a formal financial statement. All of the revenue, expense, and dividend accounts were zeroed away via closing, and do not appear in the post-closing trial balance.

REVISITING SOFTwARE Many accounting software programs are based on data-base logic. These powerful tools allow the user to query with few restrictions. As such, one could request financial results for most any period of time (e.g., the 45 days ending october 15, 20XX), even if it related to a period several years ago. In these cases, the notion of closing the accounts becomes far less relevant. Very simply, the computer can mine all transaction data and pull out the accounts and amounts that relate to virtually any requested interval of time. Reversing Entries

Reversing entries are optional accounting procedures which may sometimes prove useful in simplifying record keeping. A reversing entry is a journal entry to "undo" an adjusting entry. Consider the alternative sets of entries on the following page. The first example does not utilize reversing entries. An adjusting entry was made to record $2,000 of accrued salaries at the end of 20X3. The next payday occurred on january 15, 20X4, when $5,000 was paid to employees. The entry on that date required a debit to Salaries Payable (for the $2,000 accrued at the end of 20X3) and Salaries Expense (for $3,000 earned by employees during 20X4). The next example revisits the same facts using reversing entries. The adjusting entry in 20X3 to record $2,000 of accrued salaries is the same as above. However, the first journal entry of 20X4 simply reverses the adjusting entry. on the following payday, january 15, 20X5, the entire payment of $5,000 is recorded as expense. Illustration Without Reversing Entries

Illustration With Reversing Entries

The net impact with reversing entries still records the correct amount of salary expense for 20X4 ($2,000 credit and $5,000 debit, produces the correct $3,000 net debit to Salaries Expense). It may seem odd to credit an expense account on january 1, because, by itself, it makes no sense. The credit only makes sense when coupled with the subsequent debit on january 15. Notice from the following diagram that both approaches produce the same final results:

BY COMPARING THE ACCOUNTS AND AMOUNTS, NOTICE THAT THE SAME END RESULT IS PRODUCED! In practice, reversing entries will simplify the accounting process. For example, on the first payday following the reversing entry, a "normal" journal entry can be made to record the full amount of salaries paid as expense. This eliminates the need to give special consideration to the impact of any prior adjusting entry. Reversing entries would ordinarily be appropriate for those adjusting entries that involve the recording of accrued revenues and expenses; specifically, those that involve future cash flows. Importantly, whether reversing entries are used or not, the same result is achieved! Classified Balance Sheets

The balance sheet reveals the assets, liabilities, and equity of a company. In examining a balance sheet, always be mindful that all components listed in a balance sheet are not necessarily at fair value. Some assets are carried at historical cost, and other assets are not reported at all (such as the value of a company's brand name, patents, and other internally developed resources). Nevertheless, careful examination of the balance sheet is essential to analysis of a company's overall financial condition. To facilitate proper analysis, accountants will often divide the balance sheet into categories or classifications. The result is that important groups of accounts can be identified and subtotaled. Such balance sheets are called "classified balance sheets." The asset side of the balance sheet may be divided into as many as five separate sections (when applicable): Current assets; long-term investments; Property, plant and equipment; Intangible assets; and other assets. The contents of each category are determined based upon the following general rules:

Current Assets include cash and those assets that will be converted into cash or consumed in a relatively short period of time; specifically, those assets that will be converted into cash or consumed within one year or the operating cycle, whichever is longer. The operating cycle for a particular company is the period of time it takes to convert cash back into cash (i.e., purchase inventory, sell the inventory on account, and collect the receivable); this is usually less than one year. In listing assets within the current section, the most liquid assets should be listed first (i.e., cash, short-term investments, and receivables). These are followed with inventories and prepaid expenses. Long-term Investments include land purchased for speculation, funds set aside for a plant expansion program, funds redeemable from insurance policies (e.g., cash surrender value of life insurance), and investments in other entities. Property, Plant, and Equipment includes the land, buildings, and equipment productively in use by the company. Intangible Assets lack physical existence, and include items like purchased patents and copyrights, "goodwill" (the amount by which the fair value of a purchased business exceeds that entity's identifiable net assets), rights under a franchise agreement, and similar items. Other Assets is the section used to report asset accounts that just don't seem to fit elsewhere, such as a special long-term receivable. LIAbILITIES Just as the asset side of the balance sheet may be divided, so too for the liability section. The liability section is customarily divided into: Current Liabilities are those obligations that will be liquidated within one year or the operating cycle, whichever is longer. Normally, current liabilities are paid with current assets. Long-term Liabilities relate to any obligation that is not current, and include bank loans, mortgage notes, certain deferred taxes, and the like. Importantly, some long-term notes may be classified partially as a current liability and partially as a long-term liability. The portion classified as current would be the principal amount to be repaid within the next year (or operating cycle, if longer). Any amounts due after that period of time would be shown as a long-term liability. EQUITY The appropriate financial statement presentation for equity depends on the nature of the business organization for which it is prepared. Businesses generally may be organized as sole proprietorships, partnerships or corporations. The illustrations in this book generally assume that the business is incorporated. Therefore, the equity section consists of: Capital Stock includes the amounts received from investors for the stock of the company. The investors become the owners of the company, and that ownership interest is represented by shares that can be transferred to others (without further involvement by the company). In actuality, the legalese of stock issues can become quite involved, and one is apt to encounter expanded capital stock related accounts (such as preferred stock, common stock, paid-in-capital in excess of par, and so on). Those advanced issues are covered in subsequent chapters. Retained Earnings should be familiar, representing the accumulated income less the dividends. In essence, it is the profit that has been retained and plowed back (reinvested) into expansion of the business.

OTHER ENTITY FORMS There is nothing that requires that a business activity be conducted through a corporation. A sole proprietorship is an enterprise owned by one person. If the preceding classified balance sheet illustration was instead being prepared for a sole proprietorship, it would look the same except that the equity section would consist of a single owner's capital account (instead of capital stock and retained earnings). If several persons are involved in a business that is not incorporated, it is likely a partnership. Again, the balance sheet would be unchanged except for the equity section; the equity section would be divided into separate accounts for each partner (representing each partner's residual interest in the business). Recent years have seen a spate of legislation creating variants of these entity forms (limited liability companies/llC, limited liability partnerships/llP, etc.), but the overall balance sheet structure is relatively unaffected. The terminology used to describe entity forms and equity capital structure also varies considerably around the world, but there is very little substantive difference in the underlying characteristics or the general appearance and content of the balance sheet. NOTES TO THE FINANCIAL STATEMENTS Financial statements, by themselves, may not tell the whole story. Many important details about a company cannot be described in money on the balance sheet. Notes are used to describe accounting policies, major business events, pending lawsuits, and other facets of operation. The principle of full disclosure means that financial statements result in a fair presentation and that all facts which would influence investors' and creditors' judgments about the company are disclosed in the financial statements or related notes. oftentimes, the notes will be more voluminous than the financial statements themselves.

Business Liquidity and the Operating Cycle

Investors and creditors must be mindful of a company's liquidity. Liquidity is the ability of a firm to meet its near-term obligations as they come due. Inadequate liquidity can spell doom, even for a company with bright long-term prospects and significant noncash assets. WoRKInG caPItaL Working capital is the difference between current assets and current liabilities. The illustration for Classy Company revealed current assets of $450,000 and current liabilities of $150,000. Thus, working capital is $300,000 ($450,000 - $150,000). For obvious reasons, one would hope to find a positive amount of working capital. If not, it may be an indication of financial stress. Of course, care should be taken in drawing blanket conclusions about a firm's condition based solely upon an examination of a single number. Could a firm have negative working capital, and still be in great shape? Yes! For instance, the firm may have a standby letter of credit at a bank that enables it to borrow money as needed to meet near-term obligations. or, some companies are in great shape even though they have negative working capital. Consider a fast food restaurant that has virtually no receivables (most sales are for cash) and a very low inventory (bread and milk don't store well). The only current assets may consist of cash, nominal inventories, and some prepaid items. Nevertheless, they may have current liabilities in the form of significant accounts payable and short-term debt. How do they survive? The velocity of their cash flow may be very fast, as they hopefully turn large volumes of business at high profit margins. This enables the spinning of enough free cash flow to pay obligations as they come due and have money left over to reinvest in growing other business locations. So, working capital is important to monitor. Just be careful about blanket conclusions based on any single measure. cuRREnt RatIo Is $1,000,000 of working capital a lot? Maybe, maybe not. $1,000,000 is but a drop in the bucket to a corporate giant, and that amount of working capital could signal the end. on the other hand, a "mom and pop" business could be doing grand with far less than $1,000,000. So, it really depends on the ratio of current assets to current liabilities. The current ratio is used to express the relative amount of working capital. It is calculated by dividing current assets by current liabilities: Current Ratio = Current assets /Current Liabilities Classy Company has a current ratio of 3:1 ($450,000/$150,000). Be advised that ratios can be manipulated. If Classy wished to increase its current ratio, it could just pay off a little debt. For instance, if it paid off $50,000 of accounts payable with cash, then current assets and current liabilities would each decline by $50,000, and the revised current ratio would "improve" to 4:1 (($450,000 -$50,000)/($150,000 - $50,000)). A company could possess a large amount of inventory that is not easily sold. Thus, the current ratio (which includes inventory) could signal no problem, all the while the company is struggling to pay its bills. A tougher ratio is the quick ratio. This ratio provides a more stringent test of debtpaying ability by dividing only a firm's quick assets (cash, short-term investments, and accounts receivable) by current liabilities: Quick Ratio = (Cash + Short-term Investments + Accounts Receivable)/Current Liabilities Classy Company has a quick ratio of 1.5:1 (($100,000 + $50,000 + $75,000)/$150,000).

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Monday, December 12, 2011

Accounting

AccountingDefinition The systematic recording, reporting, and analysis of financial transactions of a business. The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles. Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit.

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ACCOUNTANCY Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. [1] The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable. [2] The principles of accountancy are applied to business entities in three divisions of practical art, named accounting, bookkeeping, and auditing. [3] Accountancy is defined by the Oxford English Dictionary (OED) as "the profession or duties of an accountant". Accounting is defined by the American Institute of Certified Public Accountants (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." [4] Accounting is thousands of years old; the earliest accounting records, which date back more than 7,000 years, were found in Mesopotamia (Assyrians). The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced. [5] Early accounts served mainly to assist the memory of the businessperson and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so doubleentry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information. [6] This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors. [7] Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, owner-managers and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accounting and provides information to present and potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting in a given jurisdiction is called Generally Accepted Accounting Principles, or GAAP. Other rules include International Financial Reporting Standards, or IFRS [8], or US GAAP.

Contents [hide] 1 Theory 2 Etymology 3 History 3.1 Token accounting in ancient Mesopotamia 3.2 Early Accounting in India 3.3 Accounting in the Roman Empire 3.4 Islamic accounting and algebra 3.5 Luca Pacioli and double-entry bookkeeping 3.6 Accounting in the internet era 4 Accounting scandals 5 Notes and references

[edit] Theory The basic accounting equation is assets = liabilities + stockholders' equity. This is the balance sheet. The foundation for the balance sheet begins with the income statement, which is revenues - expenses = net income or net loss. This is followed by the retained earnings statement, which is beginning retained earnings + net income - dividends = ending retained earnings or beginning retained earnings - net loss - dividends = ending retained earnings. The current ratio is current assets divided by current liabilities. The debt to total assets ratio is total assets divided by total liabilities.

[edit] Etymology The word "Accountant" is derived from the French word Compter, which took its origin from the Latin word Computare. The word was formerly written in 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[9] (see also comptroller).

[edit] History [edit] Token accounting in ancient Mesopotamia

Map of the Middle East showing the Fertile Crescent circa 3rd millennium BC The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned. [5]

Accounting tokens made of clay, from Susa, Uruk period, circa 3500 BCE. Department of Oriental Antiquities, Louvre. The invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind. [10]

Globular token envelope with a cluster of accounting tokens. Clay, Susa, Uruk period (4000 to 3100 BCE). Department of Oriental Antiquities, Louvre.

Economic tablet with numeric signs. Proto-Elamite script in clay, Susa, Uruk period (3200 BC to 2700 BCE). Department of Oriental Antiquities, Louvre.

[edit] Early Accounting in India Early references to accounting concepts are found in the Vedas: Vikraya is found in the Atharvaveda and the Nirukta denoting ‘sale’. Sulka in the Rig veda clearly means ‘price’. In the Dharma Sutras it denotes a ‘tax’. [11]

[edit] Accounting in the Roman Empire

Part of the Res Gestae Divi Augusti from the Monumentum Ancyranum (Temple of Augustus and Rome) at Ancyra, built between 25 BCE 20 BCE. The Res Gestae Divi Augusti (Latin: "The Deeds of the Divine Augustus") is a remarkable account to the Roman people of the Emperor Augustus' stewardship. It listed and quantified his public expenditure, which encompassed distributions to the people, grants of land or money to army veterans, subsidies to the aerarium (treasury), building of temples, religious offerings, and expenditures on theatrical shows and gladiatorial games. It was not an account of state revenue and expenditure, but was designed to demonstrate Augustus' munificence. The significance of the Res Gestae Divi Augusti from an accounting perspective lies in the fact that it illustrates that the executive authority had access to detailed financial information, covering a period of some forty years, which was still retrievable after the event. The scope of the accounting information at the emperor's disposal suggests that its purpose encompassed planning and decision-making. [12] The Roman historians Suetonius and Cassius Dio record that in 23 BC, Augustus prepared a rationarium (account) which listed public revenues, the amounts of cash in the aerarium (treasury), in the provincial fisci (tax officials), and in the hands of the publicani (public contractors); and that it included the names of the freedmen and slaves from whom a detailed account could be obtained. The closeness of this information to the executive authority of the emperor is attested by Tacitus' statement that it was written out by Augustus himself. [13]

Roman writing tablet from the Vindolanda Roman fort of Hadrian's Wall, in Northumberland (1st-2nd century AD) requesting money to buy 5,000 measures of cereal used for brewing beer. Department of Prehistory and Europe, British Museum. Records of cash, commodities, and transactions were kept scrupulously by military personnel of the Roman army. An account of small cash sums received over a few days at the fort of Vindolanda circa 110 CE shows that the fort could compute revenues in cash on a daily basis, perhaps from sales of surplus supplies or goods manufactured in the camp, items dispensed to slaves such as cervesa (beer) and clavi caligares (nails for boots), as well as commodities bought by individual soldiers. The basic needs of the fort were met by a mixture of direct production, purchase and requisition; in one letter, a request for money to buy 5,000 modii (measures) of braces (a cereal used in brewing) shows that the fort bought provisions for a considerable number of people. [14] The Heroninos Archive is the name given to a huge collection of papyrus documents, mostly letters, but also including a fair number of accounts, which come from Roman Egypt in 3rd century CE. The bulk of the documents relate to the running of a large, private estate[15] is named after Heroninos because he was phrontistes (Koine Greek: manager) of the estate which had a complex and standarised system of accounting which was followed by all its local farm managers. [16] Each administrator on each sub-division of the estate drew up his own little accounts, for the day-to-day running of the estate, payment of the workforce, production of crops, the sale of produce, the use of animals, and general expenditure on the staff. This information was then summarized as pieces of papyrus scroll into one big yearly account for each particular sub—division of the estate. Entries were arranged by sector, with cash expenses and gains extrapolated from all the different sectors. Accounts of this kind gave the owner the opportunity to take better economic decisions because the information was purposefully selected and arranged. [17] Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents. [18]

[edit] Islamic accounting and algebra In the Qur’an, the word "account" (Arabic: hesab) is used in its generic sense, relating to one's obligation to account to God on all matters pertaining to human endeavour. According to the Qur’an, followers are required to keep records of their indebtedness (Sura 2, ayah 282), thus Islam provides general approval and guidelines for the recording and reporting of transactions. [19] The Islamic law of inheritance (Sura 4, ayah 11) defines exactly how the estate is calculated after death of an individual. The power of testamentary disposition is basically limited to one-third of the net estate (i.e. the assets remaining after the payment of funeral expenses and debts), providing for every member of the family by allotting fixed shares not only to wives and children, but also to fathers and mothers. [20] The complexity of this law served as an impetus behind the development of algebra (Arabic: al-jabr) by the Persian mathematician Muhammad ibn Mūsā al-Khwārizmī and other medieval Islamic mathematicians. Khwārizmī's "The Compendious Book on Calculation by Completion and Balancing" (Arabic: Hisab al-jabr w’al-muqabala, Baghdad, c. 825) devoted a chapter on the solution to the Islamic law of inheritance using linear equations. [21] In the 12th century, Latin translations of al-Khwārizmī's "Book of Addition and Subtraction According to the Hindu Calculation" (Arabic:Kitāb al-Jam wa-l-tafrīq bi-isāb al-Hind ) on the use of Indian numerals, introduced the decimal positional number system to the Western world. [22] The development of mathematics and accounting was intertwined during the Renaissance. Mathematics was in the midst of a period of significant development in the late 15th century. Hindu-Arabic numerals and algebra were introduced to Europe from Arab mathematics at the end of the 10th century by the Benedictine monk Gerbert of Aurillac, but it was only after Leonardo Pisano (also known as Fibonacci) put commercial arithmetic, Hindu-Arabic numerals, and the rules of algebra together in his Liber Abaci in 1202 that Hindu-Arabic numerals became widely used in Italy. [23]

[edit] Luca Pacioli and double-entry bookkeeping Main articles: Luca Pacioli and Double-entry bookkeeping system Bartering was the dominant practice for traveling merchants during the Middle Ages. When medieval Europe moved to a monetary economy in the 13th century, sedentary merchants depended on bookkeeping to oversee multiple simultaneous transactions financed by bank loans. One important breakthrough took place around that time: the introduction of double-entry bookkeeping, [24] which is defined as any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form. [25] The historical origin of the use of the words ‘debit’ and ‘credit’ in accounting goes back to the days of single-entry bookkeeping in which the chief objective was to keep track of amounts owed by customers (debtors) and amounts owed to creditors. ‘Debit,’ is Latin for ‘he owes’ and ‘credit’ Latin for ‘he trusts’. [26] The earliest extant evidence of full double-entry bookkeeping is the Farolfi ledger of 1299-1300. [24] Giovanno Farolfi & Company were a firm of Florentine merchants whose head office was in Nîmes who also acted as moneylenders to the Archbishop of Arles, their most important customer. [27] The oldest discovered record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts of the city of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and contains balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system. [28]

Portrait of Luca Pacioli, attributed to Jacopo de' Barbari, 1495, (Museo di Capodimonte). Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (Italian: "Details of Calculation and Recording"). It was written primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebra. [29] Although Luca Pacioli did not invent double-entry bookkeeping, [30] his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today. [31] Even though Pacioli's treatise exhibits almost no originality, it is generally considered as an important work, mainly because of its wide circulation, it was written in the vernacular Italian language, and it was a printed book. [32] According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books of account are at the direct basis of this system: the memoriale (Italian: memorandum), the giornale (Journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index. [33]

Pacioli's treatise gave instructions in how to record barter transactions and transactions in a variety of currencies – both being far more commonplace than they are today. It also enabled merchants to audit their own books and to ensure that the entries in the accounting records made by their bookkeepers complied with the method he described. Without such a system, all merchants who did not maintain their own records were at greater risk of theft by their employees and agents: it is not by accident that the first and last items described in his treatise concern maintenance of an accurate inventory. [34] The nature of double-entry can be grasped by recognizing that this system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription and calculation. One of its social effects was to proclaim the honesty of merchants as a group; one of its epistemological effects was to make its formal precision based on a rule bound system of arithmetic seem to guarantee the accuracy of the details it recorded. Even though the information recorded in the books of account was not necessarily accurate, the combination of the double entry system's precision and the normalizing effect that precision tended to create, produced the impression that books of account were not only precise, but accurate as well. Instead of gaining prestige from numbers, double entry bookkeeping helped confer cultural authority on numbers. [35] Double entry accounting means that each transaction requires the use of at least two accounts.

[edit] Accounting in the internet era In the IETF RFCs the act of accounting is usually defined as the act of collecting information on resource usage for the purpose of trend analysis, auditing, billing, or cost allocation. For example when a user uses a connectivity service paid with a pay-per-view approach the accounting process is based on a metering of the resource usage by the user (usually time spent with an active connection or the amount of data tranferred using that connection). The accounting is hence the recording of this connectivity service consumption for subsequent charging of the service itself.

[edit] Accounting scandals Main article: Accounting scandals The year 2001 witnessed a series of financial information frauds involving Enron Corporation, auditing firm Arthur Andersen, the telecommunications company WorldCom, Qwest and Sunbeam, among other well-known corporations. These problems highlighted the need to review the effectiveness of accounting standards, auditing regulations and corporate governance principles. In some cases, management manipulated the figures shown in financial reports to indicate a better economic performance. In others, tax and regulatory incentives encouraged over-leveraging of companies and decisions to bear extraordinary and unjustified risk. [36] The Enron scandal deeply influenced the development of new regulations to improve the reliability of financial reporting, and increased public awareness about the importance of having accounting standards that show the financial reality of companies and the objectivity and independence of auditing firms. [36] In addition to being the largest bankruptcy reorganization in American history, the Enron scandal undoubtedly is the biggest audit failure. [37] The scandal caused the dissolution of Arthur Andersen, which at the time was one of the five largest accounting firms in the world. It involved a financial scandal of Enron Corporation and their auditors Arthur Andersen, which was revealed in late 2001. After a series of revelations involving irregular accounting procedures conducted throughout the 1990s, Enron filed for Chapter 11 bankruptcy protection in December 2001. [38] One consequence of these events was the passage of Sarbanes-Oxley Act in 2002, as a result of the first admissions of fraudulent behavior made by Enron. The act significantly raises criminal penalties for securities fraud, for destroying, altering or fabricating records in federal investigations or any scheme or attempt to defraud shareholders. [39] Another example of corporate fraud was the case of Australian telecommunications company One-tel. The financial manager, Jodee Rich was subsequently charged with fraud and spent several years in jail after fraudulently stating the companies financial position, to encourage investment by some of Australia's richest people including James Packer and Lachlan Murdoch. [40]When it collapsed in 2001, One-tel lost its shareholders in excess of 920 million dollars.

[edit] Notes and references Business and economics portal

Look up accountancy or accounting in Wiktionary, the free dictionary.

Wikibooks has a book on the topic of Accountancy 1. ^ Elliot, Barry & Elliot, Jamie: Financial accounting and reporting, Prentice Hall, London 2004, ISBN 0-273-70364-1, p. 3, Books.Google.co.uk 2. ^ Elliot, Barry & Elliot, Jamie: Financial accounting and reporting, Prentice Hall, London 2004, ISBN 0-273-70364-1, p. 3 3. ^ Goodyear, Lloyd Earnest: Principles of Accountancy, Goodyear-Marshall Publishing Co., Cedar Rapids, Iowa, 1913, p.7 Archive.org 4. ^ Singh Wahla, Ramnik. AICPA committee on Terminology. Accounting Terminology Bulletin No. 1 Review and Résumé. 5. ^ a b Friedlob, G. Thomas & Plewa, Franklin James, Understanding balance sheets, John Wiley & Sons, NYC, 1996, ISBN 0-471-13075-3, p.1 6. ^ Carruthers, Bruce G., & Espeland, Wendy Nelson, Accounting for Rationality: DoubleEntry Bookkeeping and the Rhetoric of Economic Rationality, American Journal of Sociology, Vol. 97, No. 1, July 1991, pp. 40-41,44 46, 7. ^ Lauwers, Luc & Willekens, Marleen: "Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli" (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.302), KUleuven.be 8. ^ www.ifrs.com 9. ^ Pixley, Francis William: Accountancy — constructive and recording accountancy (Sir Isaac Pitman & Sons, Ltd, London, 1900), p4 10. ^ Oldroyd, David & Dobie, Alisdair: Themes in the history of bookkeeping, The Routledge Companion to Accounting History, London, July 2008, ISBN 978-0-415-41094-6, Chapter 5, p. 96 11. ^ svtuition.org 12. ^ Oldroyd, David: The role of accounting in public expenditure and monetary policy in the first century AD Roman Empire, Accounting Historians Journal, Volume 22, Number 2, Birmingham, Alabama, December 1995, p.124, Olemiss.edu 13. ^ Oldroyd, David: The role of accounting in public expenditure and monetary policy in the first century AD Roman Empire, Accounting Historians Journal, Volume 22, Number 2, Birmingham, Alabama, December 1995, p.123, Olemiss.edu 14. ^ Bowman, Alan K., Life and letters on the Roman frontier: Vindolanda and its people Routledge, London, January 1998, ISBN 978-0-415-92024-7, p. 40-41,45 15. ^ Farag, Shawki M., The accounting profession in Egypt: Its origin and development, University of Illinois, 2009, p.7 Aucegypt.edu 16. ^ Rathbone, Dominic: Economic Rationalism and Rural Society in Third-Century AD Egypt: The Heroninos Archive and the Appianus Estate, Cambridge University Press, ISBN 0-52103763-8, 1991, p.4 17. ^ Cuomo,Serafina: Ancient mathematics, Routledge, London, ISBN 978-0-415-16495-5, July 2001, p.231 18. ^ Matt. 25:19 19. ^ Lewis, Mervyn K.: Islam and accounting, Wiley-Blackwell, Oxford, 2001, p. 113, VT.edu 20. ^ Lewis, Mervyn K.: Islam and accounting, Wiley-Blackwell, Oxford, 2001, p. 109 ,VT.edu 21. ^ Gandz, Solomon (1938). "The Algebra of Inheritance: A Rehabilitation of Al-Khuwarizmi". Osiris (University of Chicago Press) 5: 319–91. doi:10.1086/368492 22. ^ Struik, Dirk Jan (1987), A Concise History of Mathematics (4th ed.), Dover Publications, ISBN 0-486-60255-9 23. ^ Alan Sangster, Greg Stoner & Patricia McCarthy: "The market for Luca Pacioli's Summa Arithmetica" (Accounting, Business & Financial History Conference, Cardiff, September 2007) p. 1–2 24. ^ a b Heeffer, Albrecht (November 2009). "On the curious historical coincidence of algebra and double-entry bookkeeping". Foundations of the Formal Sciences. Ghent University. p. 11. http://logica.ugent.be/albrecht/thesis/FOTFS2008-Heeffer.pdf. 25. ^ Mills, Geofrey T. "Early accounting in Northern Italy: The role of commercial development and the printing press in the expansion of double-entry from Genoa, Florence and Venice" (The Accounting Historians Journal, June 1994) 26. ^ Thiéry, Michel: Did you say Debit?, Assumption University (Thailand), AU-GSB eJournal, Vol. 2 No. 1, June 2009, p.35, AU.edu 27. ^ Lee, Geoffrey A., The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299-1300, Accounting Historians Journal, Vol. 4, No. 2, 1977 p.80 University of Mississippi 28. ^ Lauwers, Luc & Willekens, Marleen: "Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli" (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.300), KUleuven.be 29. ^ Alan Sangster, Greg Stoner & Patricia McCarthy: "The market for Luca Pacioli's Summa Arithmetica" (Accounting, Business & Financial History Conference, Cardiff, September 2007) p.1–2, Cardiff.ac.uk 30. ^ Carruthers, Bruce G., & Espeland, Wendy Nelson, Accounting for Rationality: DoubleEntry Bookkeeping and the Rhetoric of Economic Rationality, American Journal of Sociology, Vol. 97, No. 1, July 1991, pp. 37 31. ^ vSangster, Alan: "The printing of Pacioli's Summa in 1494: how many copies were printed?" (Accounting Historians Journal, John Carroll University, Cleveland, Ohio, June 2007) 32. ^ Lauwers, Luc & Willekens, Marleen: "Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli" (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.292), KUleuven.be 33. ^ Lauwers, Luc & Willekens, Marleen: "Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli" (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.296), KUleuven.be 34. ^ Alan Sangster, Using accounting history and Luca Pacioli to teach double entry, Middlesex University Business School, September 2009, p.9, Cardiff.ac.uk 35. ^ Poovey, Mary "A history of the modern fact" (University of Chicago Press, 1998) Ch.2 p.30, 58 & 54 36. ^ a b Astrid Ayala and Giancarlo Ibárgüen Snr.: "A Market Proposal for Auditing the Financial Statements of Public Companies" (Journal of Management of Value, Universidad Francisco Marroquín, March 2006) p. 41, UFM.edu.gt 37. ^ Bratton, William W. "Enron and the Dark Side of Shareholder Value" (Tulane Law Review, New Orleans, May 2002) p. 61 38. ^ "Enron files for bankruptcy". BBC News. http://news.bbc.co.uk/1/hi/business/1688550.stm. Retrieved 2008-03-15.

2001-12-03.

39. ^ Aiyesha Dey, and Thomas Z. Lys: "Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods (Kellogg School of Management, Evanston, Illinois, February, 2005) p. 5 40. ^ Cratchley, Drew (20 November 2009). "One.Tel saga not over for James Packer and Lachlan Murdoch". The Daily Telegraph. http://www.dailytelegraph.com.au/business/news/onetel-saga-not-over-for-james-packerand-lachlan-murdoch/story-e6frez80-1225800268330?from=public_rss.

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