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 judgements 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 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 in a balance sheet, while disclosures about operating results are displayed in a profit and loss statement. Data relating to an organization’s liquidity and changes in its financial structure are shown in a statement of changes in financial position. Such financial statements are prepared to 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 development of counting frames and the abacus in China in the first centuries ad laid the basis for similarly advanced techniques in East Asia.

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.

The Industrial Revolution created a need for accounting techniques that were 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 held business corporations, owned by absentee shareholders and administered by professional managers, the role of accounting was further redefined.

Bookkeeping, which is a vital part of all accounting systems, was in the mid-20th century increasingly carried out by machines. 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 or public information and managerial accounting or internal information. Financial accounting includes information disseminated to parties that are not part of the enterprise proper—shareholders, creditors, customers, suppliers, regulatory bodies, financial analysts, and trade associations—although the information is also of interest to the company’s officers and managers. Such information relates to the financial position, liquidity (that is, ability to convert to cash), and profitability of an enterprise.

Managerial accounting deals with cost-profit-volume relationships, efficiency and productivity, planning and control, pricing decisions, capital budgeting, and similar matters that aid decision-making. This information is not generally disseminated outside the company. Whereas the general-purpose financial statements of financial accounting are assumed to meet 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.

A

Specialized Accounting

Of the various specialized areas of accounting that exist, the three most important are auditing, income taxation, and accounting for not-for-profit 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 accuracy of its financial statements. Large private and public enterprises sometimes also maintain an internal audit staff to conduct audit-like examinations, including some that are more concerned with operating efficiency and managerial effectiveness than with the accuracy of the accounting data.

The second specialized area of accounting is income taxation. Preparing an income tax form entails collecting information and presenting data in a coherent manner; therefore, both individuals and businesses frequently hire accountants to determine their tax position. Tax rules, however, are not identical with accounting theory and 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 taxes, however, is also needed in accounting, and many techniques of computing are common to both areas.

A third area of specialization is accounting for not-for-profit organizations, such as charities, universities, hospitals, Churches, trade and professional associations, and government agencies. These organizations differ from business enterprises in that they generally receive resources on some non-reciprocating basis (that is, without paying for such resources), they are not set up to create a distributable profit, and they usually have no share capital. As a result, these organizations call for differences in record-keeping, in accounting measurements, and in the format of their financial statements.