Accountancy,
or accounting, is the
process of communicating financial information about a business entity to
users such as shareholders andmanagers.[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]
The American Institute of Certified
Public Accountants (AICPA)
defines accountancy 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 double-entry
bookkeepingfirst 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,
andgovernment 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.
