Accounting Overview

(Part I)

For thousands of years, individuals, businesses and governments have kept records of their assets – valuable things they own, like gold or wheat – and their liabilities – what they owe to others. These records indicate that at all levels of development people desire information about their efforts and accomplishments.

The process of identifying, measuring and communicating economic information needed to make informed economic judgments and decisions is called accounting (accountancy). Accounting records dating back several thousand years have been found in various parts of the world.

Accountancy’s infancy dates back to the earliest days of human agriculture and civilization. Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew [`mæθju:], in the Parable [`pærəb^əl] of the Talents. The Islamic Quran [kO:`rα:n] also mentions simple accounting for trade and credit arrangements.

An Italian monk Fra Luca Pacioli [frα: `lu:ka pα:`t∫O:li] (1445 – 1517) is credited for the “birth” of accountancy. 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, liabilities, capital, income, and expenses. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger.

Accounting is frequently called “the language of business” because of its ability to communicate financial information about an organization. Accounting is important to business for two reasons: it helps managers plan and control a company’s operations, and it helps outsiders evaluate the business.

Practitioners of accountancy are known as accountants. Some people mistakenly think of accountants as dull functionaries toiling in a back room, endlessly adding numbers. However, the highest-ranking private accountants typically have the title of controller or financial vice president. They hold the reins on virtually every aspect of a company’s financial operations and usually report directly to the president.

Accounting process consists of two parts: bookkeeping, which is mechanical process of recording, classifying, and posting financial entries into the ledger; and accounting itself, that is interpreting of financial data, making financial statements; designing accounting information system within a business and advising Management on financial matters.

The employees of a typical firm’s accounting department perform many functions. Their work is varied, ranging from routine bookkeeping, the clerical function of recording transactions, to high-level decision making. One of their biggest jobs is financial planning, which involves forecasting sales, costs, expenses, and profits. These forecasts enable management to spot problems and opportunities and to allocate resources intelligently. In addition a company’s accountants are involved in analyzing production costs so that management will know exactly what the company spends to produce a given product.