Friday, 3 February 2012

Historical Perspective of Accounting

In 1494, an Italian Monks and Mathematicians by name “Luca Pacioli” was the the first to lay the foundation of the Double entry principle. This was done in his book title “Summa de Arithmetical Geometria et proportionalita. The book contained a section on double entry principle.

In 1504, a section of the book was later published separately titled “la Scuola Perfetta def Merchants” following the European Industrial revolution and the complex nature of business and scope. The double entry principle evolved to Accounting.

Accounting and Definitions
• Accounting: Accounting as a field is concerned with the collection and recording of financial data about an organization, analyzing the data collected for decision making and also report relevant information in a summary form to users of such information.
• Book-keeping: It is the art of collecting and recording of financial data about an organization. It is the recording process of accounting. This can take any form, e.g handwritten records, electronics devices or computerizes system.
Information collected on the source documents are recorded in the “books of Account”. The books of account consist of the ledger and subsidiary books – books of original entry.

Differences between Book-keeping and Accounting
Book-keeping is an aspect of accounting just as Arithmetic is a part of Mathematics.
• The main function of a book-keeper is to collect and record financial data while the accountant function goes beyond this to analyze data collected and make report useful to various users
• Book-keeping is an art of recording of day-to-day business transactions while accounting is a science as it has the ability to measure, evaluate, predict and also includes the design of accounting systems, the audit of financial statements, cost studies and preparation of various tax returns.

Importance of Accounting
1. Analysis purpose/decision making: All our business and economically informed decision making are based on sound analysis of financial statement which is a product of accounting information system. Investors both current and potential base their investment analysis on accounting information.
2. Record keeping: No economy will stand well economically if records are not well kept and acted upon. Accounting is one of the primary vehicles of record keeping. Even the government uses the records of companies to make fiscal and monetary policies.
3. Prevention of fraud and discovery of fraud: Fraud can only be discovered and prevented in an environment where there is good internal control in place , and a good internal control cannot be in place where there is no form of keeping track of events.
4. Getting of funds and loans: You cannot get loan from financial institutions if you cannot present your state of affairs in an acceptable manner. Accounting as a communication tool obviously have generally accepted formats which financial institutions and banks use as a basis for measuring the risk of a business.
5. Reputation and credit building: Reputation and business credit can be improved by the simple act of establishing and operating sound accounting information system in an organization.

Accounting Concepts and Principles
Accounting concepts are given rules, practices , and procedures otherwise known as Generally Accepted Accounting Principles (GAAP). They are:
1. Business Entity: Every economic unit, regardless of its legal form of existence, is treated as a separate entity (in accounting) from parties having proprietary or economic interest in it.
2. Going Concern: The assumption is that the business unit will operate in perpetuity i.e. the business is not expected to liquidate.
3. Periodicity: Although the results of a business unit cannot be determined with precision until its final liquidation, the users of financial statement or owners of the business required that the business be divided into accounting periods (usually one year) and that changes in position are measured over the periods.
4. Realization: This concept establishes the rule of the periodic recognition of revenue as soon as it is capable of objective measurement and the value of asset.
5. Matching Concepts: This concept holds that for any accounting period, the earned revenue and all the incurred cost that generated that revenue must be matched and reported for the period.
6. Consistency: This concept holds that when a company selects a method, it should continue (unless conditions warrant a change) to use that method in subsequent period, so that a comparison of accounting figures over time is meaningful.

Others are:
7. Objectivity
8. Fairness
9. Materiality
10. Prudence

Accounting Concepts and Conventions
Accounting conventions are the general norms and practices of the accounting profession which are expected to be complied with by accountants. The common conventions are:
1. Prudence
2. Consistency
3. Objectivity
4. Materiality

Prudence: This convention demands exercising great care in the recognition of profit while all losses are adequately provided for.
Consistency: The same as consistency in accounting principles.
Objectivity: This convention connotes independence of judgement on the part of the accountant preparing the financial statement.
Materiality: This holds that only items of material value are accorded their strict accounting treatment.

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