objective of accounting

8/9/2019 Objective of Accounting

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1.The History of Accounting

14thCentury

The history of accounting dates back to ancient civilisations, however the birth of

double-entry bookkeeping in the 14th century is seen as being the beginning of the

modern accounting period.

The Renaissance period in Italy 14th to 1!th century" saw many ma#or developments

in accounting practice. $t this time, $rabic numerals were first used to keep records

of business transactions in place of Roman numerals, and record keeping developed

on a large scale. In 14%4 &uca 'acioli, a (ranciscan friar, published the )umma de

$rtihmetica, *eometria, 'roportioni et 'roportionalita. In it were +! chapters on

bookkeeping in which 'acioli described double-entry bookkeeping and other

commerce-related concepts. ouble entry bookkeeping is a system in which a debit

and credit entry is entered for each transaction /very debit has its credit 0 every

amount that is charged to on account must be placed to the credit of another.

$lthough 'acioli did not invent double-entry bookkeeping, he is credited with being

the first person to widely disseminate this knowledge, and the principles published in

his )umma remain largely unchanged to this day. evelopments that came later

included the splitting of records into different books suited to the nature of the

business carried on, each 2book3 containing such transactions as eclusively apply to

its title, for eample cash books for recording money received and payed, and

invoice books for recording goods purchased and sold. 5ariations in bookkeeping also

developed between different industries 6 professions e.g. )hipping, newspapers and

printing".


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17thCentury

7olonial epansion in the 18th century and demand for foreign goods saw the rise of

9chartered companies:, the first corporations. The scale of these endeavors re;uired

large investment, the reward for investors being that assets were divided between

stock holders at the end of each voyage. 8, the company ruled that stock was to be valued, and four years later the

governor of the company stated that future distributions would consist of the profits

earned dividends" and not divisions as in the past.

This was a big progression towards the modern conditions under which corporations

operate and was the first large-scale eample of stock echange, investment and

corporate finance. These accounting practices continued to develop through the net

centuries. ?any guides for investors and accountants were written during this

development period. /amples include Stock Exchange Accounts; with an appendix

of forms which details stock echange bookkeeping,Haight and Freese Cos Guide to

Investors which lists the stock prices for various companies between 1@%A-1%AA and

A Corporate enture which states that unless the stockholder in a corporation knows

the ropes they may be pulled to his disadvantage.

The 'honopore 7ompany &imited certificate is an eample of a shares certificate

from 1@%+ indicating that Billiam Robert 'ullman /s;uire was the holder of 1CA

shares in the 'honopore 7ompany, valued at D1 each.


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18thCentury

uring the Industrial Revolution, methods were re;uired which could be used to track

costs related to large scale production in factory-manufacturing operations. Eosiah

Bedgwood, the founder of famous pottery manufacturer Bedgwood is considered by

many to be a pioneer in cost accountancy. $fter eamining business accounts, Eosiah

Bedgwood discovered that his head clerk had been embeFFling from the company

and so after hiring a new clerk he implemented weekly account reviews to keep track

of his finances. These reviews allowed him to calculate detailed costs for materials

and labour, leading to the discovery of overhead costs and economies of scale.

19thCentury

The early evolution of accounting was dominated by advances in bookkeeping

practice. There are numerous books chronicling this progression. The century

following the industrial revolution saw great progress from the method of

systematically recording 2financial3 echanges into a means of giving business

management an effective control over its affairs.

1816 - Eohn 7roaker, a bank clerk from /ngland, was caught and charged with

embeFFling from the bank and was sent to the colony of Gew )outh Bales. Hpon

arrival he was granted an immediate ticket of leave and began working as a clerk in

the #usticiary and set himself up as a commodities dealer. $t this time, the first =ank

of Gew )outh Bales opened, and Eohn 7roaker helped to establish their bookkeeping

practices, instigating double-entry bookkeeping for the first time in $ustralia.

1854 - n the !th of Euly 1@>4, a petition was signed by forty-nine accountants in

*lasgow asking Jueen 5ictoria for the grant of a Royal 7harter. Thus the formal

accounting profession emerged in )cotland with the formation of /dinburgh )ociety

and *lasgow Institute of $ccountants. The title 97hartered $ccountant: was decided


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upon and adopted for members of the )ociety, and was soon adopted by the *lasgow

Institute and the later formed $berdeen )ociety. 1.

1880 - In 1@@A, the Institute of 7hartered $ccountants in /ngland and Bales was

formed, bringing together members from a number of individual accounting

organisations. The newly formed institute developed standards of conduct and

eaminations for admission.

=ooks such as!ook"keeping exercise for accountant students, #he students $usiness

methods and commercia% correspondence and Austra%ian e%ementar& $ookkeeping

represent eamples of the shift towards professional education and accreditation in the

accountancy profession.'ou$%e Entr& !ookkeeping for technica% c%asses and schoo%s

gives eamples of civil service eamination papers for accountants from this period.

1887 - uring the rapid growth of $merican industry in the 1@AAs, many )cottish and

=ritish accountants travelled to the Hnited )tates to audit and keep track of =ritish

investments in the country. $ number of these professionals remained in the H) and

are thought to have begun the practice of accountancy in $merica. In 1@@8 the

$merican $ssociation of 'ublic $ccountants was formed.

20thCentury

n the 1%th of Eune 1%C@, a Royal 7harter was granted by *eorge the (ifth,

establishing The Institute of 7hartered $ccountants in $ustralia upon recognition that

the profession of 'ublic $ccountants in the said 7ommonwealth 2$ustralia3 is

practiced by a considerable number of persons and the duties and functions of such

public accountants are of great and growing importance in respect of their

employment in the capacities of &i;uidators acting in the winding up of 7ompanies

and of Receivers under ecrees and Trustees in =ankruptcy or Insolvency,


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iv" To portray the li;uidity position

(inancial reporting should provide information about how an enterprise obtains and

spends cash, about its borrowing and repayment of borrowing, about its capital

transactions, cash dividends and other distributions of resources by the enterprise to

owners and about other factors that may affect an enterprise:s li;uidity and solvency.

v" To protect business properties

$ccounting provides up to date information about the various assets that the firm

possesses and the liabilities the firm owes, so that nobody can claim a payment which

is not due to him.

vi" To facilitate rational decision 0making

$ccounting records and financial statements provide financial information which help

the business in making rational decisions about the steps to be taken in respect of

various aspects of business.

vii" To satisfy the re;uirements of law

/ntities such as companies, societies, public trusts are compulsorily re;uired to

maintain accounts as per the law governing their operations such as the 7ompanies

$ct, )ocieties $ct, and 'ublic Trust $ct etc. ?aintenance of accounts is also

compulsory under the )ales Ta $ct and Income Ta $ct


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Accounting entries

&ncre!se in 'roision for b!# #ebts

/ample

$ firm decided to make a provision for bad debts at 1AK of the debtors: accountswhich totalled L>A,AAA on +1 ecember 1%%4.

n +1 ecember 1%%>, the debtors accounts totalled L!A,AAA. The firm maintained

the provision at 1AK of its total debtors.

&ncre!se in 'roision

r 'rofit and &oss

7r 'rovision for =ad ebts

Bith the increase in the amount of provision

for bad debts

%ecre!se in 'roision

r 'rovision for =ad ebts

7r 'rofit and &oss

Bith the decrease in the amount of provision

for bad debts


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%ecre!se in "roision for b!# #ebts

/ample

The debtors: accounts on +1 ecember 1%%! totalled L4A,AAA. The firm decided tomaintain the provision at 1AK of the total debtors.

>4,AAA

+1 =alance cMfL4A,AAAN1AK" 4,AAA


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(or eample, a company records L1A,AAA,AAA of sales to several hundred customers,and pro#ects based on historical eperience" that it will incur 1K of this amount as

bad debts, though it does not know eactly which customers will default. It records

the 1K of pro#ected bad debts as a L1AA,AAA debit to the =ad ebt /pense accountand a L1AA,AAA credit to the $llowance for oubtful $ccounts. The =ad ebt/pense is charged to epense right away, and the $llowance for oubtful $ccounts

becomes a reserve account that offsets the account receivable of L1A,AAA,AAA for anet receivable outstanding of L%,%AA,AAA". The entry is

ebit 7redit

=ad ebt /pense 1AA,AAA

$llowance for oubtful $ccounts 1AA,AAA

&ater, several customers default on payments totaling L4A,AAA. $ccordingly, thecompany credits the accounts receivable account by L4A,AAA to reduce the amount ofoutstanding accounts receivable, and debits the $llowance for oubtful $ccounts byL4A,AAA. This entry reduces the balance in the allowance account to L!A,AAA. Theentry does not impact earnings in the current period. The entry is

ebit 7redit

$llowance for oubtful $ccounts 4A,AAA

$ccounts Receivable 4A,AAA

$ few months later, a collection agency succeeds in collecting L1>,AAA of the funds

+!,AAA


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that the company had already written off. The company can now reverse part of theprevious entry, thereby increasing the balances of both accounts receivable and theallowance for doubtful accounts. The entry is

ebit 7redit

$ccounts Receivable 1>,AAA $llowance for oubtful $ccounts 1>,AAA


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4. Financial Statements

Financial statements are a collection of reports about an

organization's nancial results, condition, and cash ows. They are

useful for the following reasons

To determine the ability of a business to generate cash, and the sources and

uses of that cash.

To determine whether a business has the capability to pay back its debts.

To track financial results on a trend line to spot any looming profitability

issues.

To derive financial ratios from the statements that can indicate the condition of

the business.

To investigate the details of certain business transactions, as outlined in the

disclosures that accompany the statements.

The standard contents of a set of financial statements are

=alance sheet )hows the entityOs assets, liabilities, and stockholdersO e;uity as

of the report date.

Income statement hows the results of the entityOs operations and financial

activities for the reporting period.


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)tatement of cash flow )hows changes in the entityOs cash flows during the

reporting period. Bhich classified into three categories operating cash flows,

investing cash flow, financing cash flow

)tatement of )tockholdersO /;uity This statement displays how e;uity

changes from the beginning of an accounting period to the end.

objective of accounting

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