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Abm Lesson 1

Accounting is the process of identifying, recording, and communicating economic events of an organization to interested users. It has evolved over thousands of years from simple record keeping in ancient Mesopotamia to the modern system of double-entry bookkeeping developed in 14th century Italy. Key developments include the emergence of the accounting profession in Scotland in the 19th century and the establishment of standardized accounting practices and regulatory bodies in the 20th century to bring greater transparency and comparability to financial reporting on a global scale.

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74 views

Abm Lesson 1

Accounting is the process of identifying, recording, and communicating economic events of an organization to interested users. It has evolved over thousands of years from simple record keeping in ancient Mesopotamia to the modern system of double-entry bookkeeping developed in 14th century Italy. Key developments include the emergence of the accounting profession in Scotland in the 19th century and the establishment of standardized accounting practices and regulatory bodies in the 20th century to bring greater transparency and comparability to financial reporting on a global scale.

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Fundamentals of Accountancy business and management

Lesson 1: Introduction to Accounting

Define accounting
“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an organization to
interested users.” (Weygandt, J. et. al)

Nature of Accounting
According to Accounting Theory: “Accounting is a systematic recording of financial transactions and the presentation of the
related information to appropriate persons.”

Based on this definition it can derive the following basic features of accounting:

• Accounting is a service activity. Accounting provides assistance to decision makers by providing them financial reports
that will guide them in coming up with sound decisions.
• Accounting is a process: A process refers to the method of performing any specific job step by step according to the
objectives or targets.
• Accounting is both an art and a discipline. Accounting is the art of recording, classifying, summarizing and finalizing
financial data.
• Accounting deals with financial information and transactions: Accounting records financial transactions and data,
classifies these and finalizes their results given for a specified period of time, as needed by their users. At every stage, from
start to finish, accounting deals with financial information and financial information only. It does not deal with non-
monetary or non-financial aspects of such information.
• Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As
service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has
evolved to meet the need for financial information as required by various interested groups.

History of Accounting
Accounting is as old as civilization itself. It has evolved in response to various social and economic needs of men. Accounting
started as a simple recording of repetitive exchanges. The history of accounting is often seen as indistinguishable from the
history of finance and business.

Following is the evolution of accounting:


• The Cradle of Civilization
Around 3600 B.C., record-keeping was already common from Mesopotamia, China and India to Central and South America.
The oldest evidence of this practice was the “clay tablet” of Mesopotamia which dealt with commercial transactions at the
time such as listing of accounts receivable and accounts payable.

• 14th Century - Double-Entry Bookkeeping


The most important event in accounting history is generally considered to be the dissemination of double entry
bookkeeping by Luca Pacioli (‘The Father of Accounting’) in 14th century Italy. Pacioli was much revered in his day, and was a
friend and contemporary of Leonardo da Vinci. The Italians of the 14th to 16th centuries are widely acknowledged as the
fathers of modern accounting and were the first to commonly use Arabic numerals, rather than Roman, for tracking business
accounts. Luca Pacioli wrote Summa de Arithmetica, the first book published that contained a detailed chapter on double-
entry bookkeeping.

• French Revolution (1700s)


The thorough study of accounting and development of accounting theory began during this period. Social upheavals
affecting government, finances, laws, customs and business had greatly influenced the development of accounting.

• The Industrial Revolution (1760-1830)


Mass production and the great importance of fixed assets were given attention during this period.

• 19th Century – The Beginnings of Modern Accounting in Europe and America


The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria granted a Royal Charter to the
Institute of Accountants in Glasgow, creating the profession of the Chartered Accountant (CA).
In the late 1800s, chartered accountants from Scotland and Britain came to the U.S. to audit British investments. Some of
these accountants stayed in the U.S., setting up accounting practices and becoming the origins of several U.S. accounting
firms. The first national U.S. accounting society was set up in 1887. The American Association of Public Accountants was the
forerunner to the current American Institute of Certified Public Accountants (AICPA).

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In this period rapid changes in accounting practice and reports were made. Accounting standards to be observed by
accounting professionals were promulgated. Notable practices such as mergers, acquisitions and growth of multinational
corporations were developed.
A merger is when one company takes over all the operations of another business entity resulting in the dissolution of
another business. Businesses expanded by acquiring other companies. These types of transactions have challenged
accounting professionals to develop new standards that will address accounting issues related to these business
combinations.
• The Present - The Development of Modern Accounting Standards and Commerce
The accounting profession in the 20th century developed around state requirements for financial statement audits. Beyond
the industry's self-regulation, the government also sets accounting standards, through laws and agencies such as the
Securities and Exchange Commission (SEC). As economies worldwide continued to globalize, accounting regulatory bodies
required accounting practitioners to observe International Accounting Standards. This is to assure transparency and
reliability, and to obtain greater confidence on accounting information used by global investors.
Nowadays, investors seek investment opportunities all over the world. To remain competitive, businesses everywhere feel
the need to operate globally. The trend now for accounting professionals is to observe one single set of global accounting
standards in order to have greater transparency and comparability of financial data across borders.

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