In the past, accountancy used to refer to the process of communicating information about the financial position and performance of a business to its owners. This communication was usually made in the form of financial statements such as the balance sheet and the income statement of a business.
The word accounting, on the other hand, is used to refer to one of the three principles of accountancy. Accounting was known as the process of reading and maintaining the financial records of a business.
This was separate from the other two principles of accountancy which were bookkeeping and auditing. Today, the words accountancy and accounting refer to the same thing. Accountancy or accounting is the process of identifying, measuring, processing, classifying, recording, and reporting financial information of a business.
This information is mainly reported in the form of five key financial statements.
These financial statements are prepared in accordance with relevant standards to provide useful information to the users of these financial statements. The two most important and most used accounting standards are IFRS and US GAAP.
Accounting is one of the key functions of every business. Every business around the world will have an accounting department to look after its transactions.
The size of the accounting department of a business depends on the size and nature of the business. For bigger businesses, the accounting department may have many more employees as compared to smaller businesses where one or two bookkeepers can be assigned to the tasks.
Similarly, businesses with a larger number of transactions per day will need more employees in their accounting department than those with fewer transactions.
History of Accountancy
Accountancy has a very old and rich history. The basis for the modern accounting principles was laid thousands of years ago in ancient Mesopotamia, a historical region in Asia.
The concept of accounting is believed to have been developed simultaneously as the concepts of counting, money, and writing were developed.
The ancient systems of accounting were later organized by the Romans. The modern concept of a double-entry bookkeeping system was first introduced by an Italian mathematician named Luca Pacioli in 1494.
He was the first to describe the concept of debits and credits in journals and ledgers. His work in the field of accounting earned him the title of “Father of accounting.” His work laid the foundation of modern accounting systems.
During the time of the industrial revolution in the mid to late 18th century, the need for a more advanced system of accounting arose.
The ancient accounting systems, while foundationally strong, did not provide a solution for the modern structures of corporations.
For example, corporations had complex structures of ownership that did not exist in ancient times. Investing in these corporations was also difficult due to the lack of information available to investors.
To tackle this problem and attract more investors, corporations adopted a system of reporting their financial activities by publishing financial statements.
In the beginning, these financial statements were limited to the balance sheet, income statement, and cash flow statement. The rise of the system of financial statements also gave rise to agency problems.
Agency problems arose because the shareholders of a corporation did not believe the management. This led to the development of a mainstream auditing system.
While the concept of auditing was already developed in ancient Egypt, it became mainstream during these times.
An accountant is a professional practitioner of accountancy. Accountants are competent professionals that have gone through different professional certification exams.
Accountants are members or associates of professional accounting bodies such as the Association of Chartered Certified Accountants (ACCA), the Institute of Chartered Accountants in England and Wales (ICAEW), etc.
In ancient times, accountants were viewed as solicitors that offered accounting services to their clients. However, in the mid-19th century, the Institute of Accountants in Glasgow petitioned Queen Victoria for a royal charter.
This allowed them to distinguish themselves as accountants rather than solicitors. Even before the petition, the accountant profession was distinct in Scotland. However, this petition allowed for accountants to be seen as professionals in accountancy rather than mere solicitors in the rest of the world as well.
This petition also laid the foundation for many professional accounting bodies such as the London Association of Accountants, later renamed to Association of Chartered Certified Accounts (ACCA) in the United Kingdom and the Certified Public Accountants (CPA) in the United States.
This was helped by the industrial revolution, which created a demand for technically sound professionals capable of handling modern accountancy problems.
Branches of Accountancy
Most people think of accountancy as simple bookkeeping and debits and credits. While it is a part of accountancy, there are several branches of accountancy that are different from each other. The branches are as follows:
1) Financial Accounting
Financial accounting is the most popular and widely implemented branch of accountancy., The financial accounting branch is related to the reporting of the financial status of a business through the financial statements and any process that helps with the preparation of these financial statements.
For example, any process involved from entering source documents into the accounting systems of the business up to the preparation of the key financial statements falls under the financial accounting branch.
2) Management Accounting
While financial accounting has to do with the preparation of the information that is reported externally, management accounting is related to the preparation of information for internal use.
Daily or monthly operating reports, budgets, variance analysis, etc., all fall under management accounting.
The management of the business uses the information produced through management accounting to make decisions for the future of the business. These can be used for short-term or long-term strategy making.
3) Cost Accounting
Cost accounting is similar to management accounting and often considered a type of management accounting.
Cost accounting is the branch of accountancy that is commonly used in the manufacturing industry. Cost accounting is used to derive the cost of a product for decision-making purposes.
This cost can be calculated using different costing techniques such as absorption costing, marginal cost, activity-based costing, target costing, etc. Once costs are determined, cost accounting is also concerned with monitoring those costs.
While auditing does not involve preparing any accounting information, it is related to reviewing the information produced through other branches of accounting.
Auditing can either be internal or external. The management of the business performs internal auditing to review accounting information produced for internal use.
External accounting is related to reviewing the information produced for external use, which mainly includes reviewing the financial statements of a business. Auditing can also be used to determine the level of internal control of an organization.
5) Forensic Accounting
Forensic accounting is closely related to auditing. Forensic accounting is related to the use of accountancy techniques, skills, and knowledge in circumstances that might have legal implications.
Forensic accounting is the process of carrying out forensic investigations to present in a legal proceeding. Forensic accounting is mainly used for fraud investigations within the business, professional negligence cases, or insurance claims.
6) Accounting Information System
Accounting Information System (AIS) is related to the collection, development, deployment, implementation, and monitoring of the accounting procedures and systems that are used in the accounting process. With the computerization of the accounting process, AIS has become a computerized methodology for conducting accounting processes with information technology resources.
7) Tax Accounting
Tax accounting is the branch of accountancy that deals with the application of tax planning to benefit the business and the preparation of tax returns.
It also involves calculating the income tax and other taxes of the business. Tax accounting is used to legally decrease the taxes of the business. Tax accounting should not be used for tax evasion.
The rules of tax accounting are defined and dictated by the local tax body of the country the tax is being paid in.
8) Fiduciary Accounting
Fiduciary accounting is the branch of accountancy that is related to the management of funds in trusts. This branch is mainly concerned with the trustee communicating any financial information about the trust to the beneficiaries.
Fiduciary accounting is regulated by the law and court, and, therefore, the information produced through this branch must be accurate and precise.
9) Nonprofit Accounting
Nonprofit accounting mainly applies to nonprofit organizations. In this branch of accountancy, incomes and expenses are recorded according to nonprofit accounting standards.
This is the alternative to financial accounting for nonprofit organizations. In this branch of accounting, expenses are recorded in the statement of functional expenses.
Furthermore, both the income and expenses are recorded in the statement of activities.
10) Social Accounting
Social accounting is the branch of accountancy that is related to reporting the effect of business activities on society and the environment.
For companies, social accounting is used in the context of Corporate Social Responsibility (CSR), and companies may be required by law to do so.
However, other types of organizations such as nonprofits, charities, or government agencies may also choose to adopt social accounting voluntarily.
Accountancy or accounting is the process of identifying, measuring, processing, classifying, recording, and reporting financial information of a business.
Accounting was developed thousands of years ago, and the concept of double-entry bookkeeping and debits and credits was introduced in 1494 by Luca Pacioli. Professionals of accountancy are known as accountants.
Accountancy has many branches such as financial accounting, management account, cost accounting, auditing, tax accounting, etc.