Nature of

Accounting
Name: Kathleen Ysabelle C. Pabalate
Course/Year: BSA - 1
Subject: Financial Accounting and Reporting

Definition of Accounting
Accounting is the process of recording financial transactions pertaining to a
business. The accounting process includes summarizing, analyzing, and reporting
these transactions to oversight agencies, regulators, and tax collection entities.

History of Accounting
Accounting’s history can be traced back thousands of years to the cradle of
civilisation in Mesopotamia and is said to have developed alongside writing,
counting and money. The early Egyptians and Babylonians created auditing
systems, while the Romans collated detailed financial information.
Some of the first accountants were employed around 300 BC in Iran, where
tokens and bookkeeping scripts were discovered. Around the first millennium the
Phoenicians invented an alphabetic system for bookkeeping, while the ancient
Egyptians may have even assigned someone the role of comptroller.
Italian roots
But the father of modern accounting is Italian Luca Pacioli, who in 1494 first
described the system of double-entry bookkeeping used by Venetian merchants
in his Summa de Arithmetica, Geometria, Proportioni et Proportionalita. While he
was not the inventor of accounting, Pacioli was the first to describe the system of
debits and credits in journals and ledgers that is still the basis of today's
accounting systems.

With the onset of the industrial revolution in 1760, there was a proliferation of
companies and the need for more advanced accounting systems. The
development of corporations also created larger groups of investors, and more
complex structures of ownership, all requiring accounting systems to adapt.

Scotland modernises accounting

The modern profession also has its roots in Scotland in the mid-1800s when the
Institute of Accountants in Glasgow petitioned Queen Victoria for a Royal Charter,
so accountants could distinguish themselves from solicitors, as for a long time
accountants had belonged to associations of solicitors, which would offer
accounting in addition to a firm’s legal services. In 1854 the institute adopted
‘chartered accountant’ for its members, a term and demarcation that still carries
legal weight globally today.

The petition was signed by 49 Glaswegian accountants, and it argued that the
accounting profession had long existed in Scotland as a distinct profession of
great respectability and that the small number of practitioners had been rapidly
increasing. The petition further highlighted the varied skills required to be a
professional accountant – in addition to mathematical skills, an accountant
needed to be acquainted with general legal principles, as they were often
employed by the courts to give evidence on financial matters – as they still are
today.
Industrial revolution
By the mid-1800s, the industrial revolution in Britain was well underway and
London was the financial centre of the world. With the growth of the limited
liability company and large-scale manufacturing and logistics, demand surged for
more technically proficient accountants capable of handling the growingly
complex world of global transactions.

The increasing importance of accountants helped to transform accounting into a

profession, first in the UK and then in the US. In 1904 eight people formed the
London Association of Accountants to open the profession to a wider audience of
people than was available through the UK’s older associations. After several name
changes the London Association of Accountants adopted the name the
Association of Chartered Certified Accountants (ACCA) in 1996.

Importance of ethics
It’s not all been plain-sailing for the accountancy profession. The 21st century has
seen some dubious actions by accountants causing large-scale scandals. The
Enron scandals in 2001 shook the accounting industry, for example. Arthur
Andersen, one of the world’s largest accounting firms at the time, went out of
business. Subsequently, under the newly introduced Sarbanes-Oxley Act,
accountants now face harsher restrictions on their consulting engagements. Yet
ironically, since Enron and the financial crisis in 2008, accountants have been
greatly in demand, as corporate regulations have increased and more expertise is
required to fulfil reporting requirements.
The Contribution of Luca Pacioli in Accounting
Accounting has few heroes, but one that most acknowledge as worthy of that
accolade is Luca Pacioli, the man who published the first printed exposition of
double entry bookkeeping in 1494. This was the publication that led to the
development of the accounting systems we use today.

Accounting has few heroes, but one that most acknowledge as worthy of that
accolade is Luca Pacioli, the man who published the first printed exposition of
double entry bookkeeping in 1494. This was the publication that formed the basis
for manuals on bookkeeping for at least 100 (Hatfield, 1924, p. 245) or 150 years
(Littleton, 1933, p. 4), standardized the method, and led to the development of
the accounting systems we use today.1

Contrary to the view in the literature initiated by Fabio Besta that Pacioli could
not have authored his manual (1909, pp. 363–5), and in support of all the
subsequent literature that queries (e.g., Yamey, 1994, p. 23), hesitates (e.g.,
Hernández-Esteve, 1994a, pp. 72–3), or refutes Besta's claims (e.g., Penndorf,
1933, pp. 63–8; Stevelinck, 1994, pp. 5–6), the pedagogy within the bookkeeping
manual and its similarity with how he taught algebra makes it clear that Pacioli
wrote it (Sangster, 2018, pp. 306–11). He also left a sign that may indicate that he
did so without borrowing text from other writings, something he has been
accused of overdoing, particularly in the second volume of Summa Arithmetica
(1494) and in the geometry part of De Divina Proportione (1509). The capital
letter (‘L’) at the start of his bookkeeping treatise presents an image of a friar
pointing to a page in an open book, an image that resonates with his portrait in
Naples, in which he is doing exactly that (Figure 1). The sparse use throughout the
book of this image—it is only used five times in over 600 pages2—identifies it as a
manicula, a sign indicating something important. In this case, that would either
have been the content, or that he wrote it himself or, most likely in this instance
—because he would have viewed all the sections in his book as being important—
both.
Sangster (2018, p. 307) identified how Pacioli adopted the same approach when
teaching bookkeeping as he had done in his teaching of algebra; and removed the
mystery of double entry by explaining how it works mathematically in five
generalizable statements that form the foundation of double entry.
All transactions involve two elements: an item exchanged and a form of
settlement.
All forms of settlement can substitute for each other.
One element is debit and the other is credit.
The amount of the debit = the amount of the credit.
The entries in the money column are to be in one currency only.
It was an axiomatic3 teaching approach, but Pacioli does not indicate that he is
presenting a series of axioms of double entry. That terminology had not yet been
invented. He had identified the generalizability of these statements, and he keeps
telling his readers that he need say no more for anyone to be able to do double
entry. He declared how to do it, and he expected them to do what he prescribed.
If they did, they would correctly record a debit and a credit for every entry. As is
also evident in how he teaches algebra in Summa Arithmetica, Pacioli had realized
that learning does not require an explanation. It only requires a desire to learn
and a means to do so. Over 300 years later, in 1818, Joseph Jacotot reached the
same conclusion:4

It was for others to develop Pacioli's first theorization of algebra and double entry
into axiom-based theory. The algebraists of the 16th and 17th centuries did so
and developed his axiomatic approach to teaching algebra into axiom-based
theory (Heeffer, 2012, p. 39). The accounting masters did not, preferring to
continue with an exemplar-based approach that was augmented with rules in the
16th century, firstly by Manzoni (1540) and then by those that followed, up to the
present day.
Many have investigated Pacioli's life, his works, and his motivation, including
English biographies by Knight (1857), Taylor (1942), Jayawardene (1971, 1998),
and Rankin (1992); a Spanish biography by Hernández Esteve (1994b); and Italian
biographies by Baldi (1589), Boncompagni (1879), Vianello (1896), Ricci (1940),
Masotti Biggiogero (1960), Ulivi (1994, 2009) and, most recently, Ciocci (2003,
2009, 2011, 2017) but, scholars tend to limit their sources to those in their own
discipline, and none has succeeded in bringing everything together in one place.

This insularity is most evident in the accounting literature on Pacioli where,

despite publication of scores of papers, there is a marked lack of use of wider
sources combined with a narrow selection of secondary material that has resulted
in this body of literature being both confusing and contradictory. This manifests
itself in a variety of statements and conclusions that range from the relatively
unimportant year of his birth and his name, to where he was educated as a boy,
who taught him, where he obtained his degree, where he lived, what he taught,
where he taught, at what level, and whether or not he wrote the treatise that
gave rise to his recognition as the ‘father of accounting’. In brief, if you read very
much of this extensive literature, you will find that you are not sure what or who
Luca Pacioli was, or what he did or did not do.

This paper addresses this ambiguity and uncertainty by applying critical

hermeneutic analysis to the literature in order to present a more authentic
perception of the life and works of Luca Pacioli with an emphasis on what is most
important for an accounting audience. It identifies and brings together the
influences and activities that culminated in his publication of his bookkeeping
treatise. This analysis was informed by archival discoveries of the past 20 years,
Pacioli's own writings, and those of others who have sought to identify the man
and his ambition, along with contextual features of his time and place. In doing
so, it complements Sangster's (2018) hermeneutic analysis-based interpretation
of Pacioli's treatise that discounted previous interpretations and exposed, for the
first time, Pacioli's theoretical interpretation of double entry. This paper extends
and completes the background material on Pacioli's life and career contained in
that paper. It reveals that Pacioli was far more than the peripatetic journeyman
friar and teacher of mathematics our literature describes. In doing so, it fills a
much larger gap than most have realized exists in our knowledge of the man who
many consider to be the ‘father of accounting’.

The governing law of Accounting

Republic Act No 9298, otherwise known as the “Philippine Accountancy Act of

2004”, is the law that regulates the practice of the accounting profession in the
Philippines. Accordingly, the law recognizes the invaluable contributions of
accountants in nation building and development.

Branches of Accounting

1. Financial Accounting

Financial accounting involves recording and categorizing transactions for

businesses. This data is generally historical, meaning it’s from the past.
It also involves generating financial statements based on these transactions. All
financial statements, such as a balance sheet and an income statement, must be
prepared in a certain way. This tends to be according to the generally accepted
accounting principles. These are known as GAAP for short.
Public companies have to follow a set of rules set out by the government (this is
the Securities and Exchange Commission in the U.S.).
Financial accounting is performed to conform to external regulations. It is not for
internal employees to analyze and make financial decisions— managerial
accounting is used for this purpose.

2. Cost Accounting
Cost accounting is considered a type of managerial accounting.
Cost accounting is most commonly used in the manufacturing industry, an
industry that has a lot of resources and costs to manage. It is a type of accounting
used internally to assess a company’s operations.
Cost accounting concerns itself with recording and analyzing manufacturing costs.
It looks at a company’s fixed (unchanging and constant costs, like rent) and
variable costs (changing costs, like shipping charges). Then it looks at how they
affect a business, and how these costs can be better managed, according to
Accounting Tools.

3. Auditing

There are two types of auditing: external and internal auditing. In external
auditing, an independent third party reviews a company’s financial statements.
This is to make sure they are presented correctly and comply with GAAP.
Internal auditing involves evaluating how a business divides up accounting duties.
As well as who is authorized to do what accounting task and what procedures
and policies are in place.
Internal auditing helps a business zero in on fraud, mismanagement and waste. It
also identifies and controls any potential weaknesses in its policies or procedures.

4. Managerial Accounting

Also known as management accounting, this type of accounting provides data

about a company’s operations to managers.
The focus of managerial accounting is to provide data. This is what managers
need to make decisions about a business’s operations, not comply strictly with
GAAP.
Managerial accounting includes budgeting and forecasting and cost analysis. As
well as financial analysis, reviewing past business decisions and more.
Cost accounting is a type of managerial accounting.
FreshBooks has simple online accounting software for small businesses. This
makes it easy to produce these reports.

5. Accounting Information Systems

AIS concerns itself with everything to do with accounting systems and processes.
This involves their construction, installment, application, and observation. This
can include accounting software management. As well as the management of
bookkeeping and accounting employees.

6. Tax Accounting

Tax accounting involves planning for tax time and the preparation of tax returns.
This branch of accounting aids businesses to be compliant with regulations set up
by the IRS.
Tax accounting also helps businesses figure out their income tax and other taxes
and how to legally reduce their amount of tax owing. Tax accounting also analyzes
tax-related business decisions and any other issues related to taxes.

7. Forensic Accounting

This specialized accounting service is trending in accounting and is becoming

increasingly popular. Forensic accounting focuses on legal affairs. Such as inquiry
into fraud, legal cases and dispute and claims resolution.
Forensic accountants need to reconstruct financial data when the records aren’t
complete. This could be to decode fraudulent data or convert a cash accounting
system to accrual accounting. Forensic accountants are usually consultants who
work on a project basis.

8. Fiduciary Accounting

This branch of accounting centers around the management of property for

another person or business. The fiduciary accountant manages any account and
activities. This is specifically related to the administration and guardianship of
property.
Fiduciary accounting covers estate accounting, trust accounting, and
receivership. This is the appointing of a custodian of a business’s assets during
events such as bankruptcy.

9. Government Accounting

Government accounting, also known as public accounting, handles any state and
federal fund allocation and disbursement. This can range anywhere from social
accounting and the measure of cost to humans, to climate change or the use of
welfare funds.
Government accounting tracks the movement of money through a number of
different agencies and makes sure that budgets are kept to or met.

A government accountant may work in state or federal programs such as

housing, education or healthcare.

10. International Accounting

The need for international accounting expands alongside growth within
international markets. This branch of accounting then serves to learn about the
laws and regulations in other countries. So that there is a fair and honest cross of
information.
International accountants follow GAAP. But they are also well versed in
International Financial Reporting Standards (IFRS).

11. Fund Accounting

A fund accountant will work with non-profit organizations. They will make sure
that any funds that are taken in are handled correctly and accurately. They will
work according to company policy, or in accordance with the laws that govern
NPOs.
Fund accounting tends to be used by:
Charities
Churches
Educational institutions
Hospitals
Government agencies
Clubs

12. Political Campaign Accounting

The political campaign branch of accounting oversees the development and

implementation of the finance systems. This is within a political campaign.
This could include transaction accounting or monitoring donations. With the aim
of ensuring compliance with state and federal laws. It is practiced in local, state,
or nationwide political races.
What Are the 2 Accounting Methods?
There are 2 accounting methods: Cash and accrual. Most small businesses can use
either method. Businesses that are corporations or have gross revenue over $5
million per year are required to use the accrual method, according to the IRS.

Cash Method
The cash accounting method is the simplest method. When money comes in,
revenue is recorded. When money goes out, an expense is recorded, according to
the Houston Chronicle.

Accrual Method
In accrual accounting, revenue is recorded when it’s earned, not when money
actually comes in. A company can perform a service and bill the client. Even if the
client hasn’t paid yet, revenue is still recorded in the books.

Expenses are matched to revenue in accrual accounting, meaning they’re

recorded at the same time as revenue. So if a house painter has to buy paint for a
job, the total income for the job and the cost of the paint are recorded in the
books at the same time. It doesn’t matter exactly when the paint was purchased.

REFERENCES:
https://www.investopedia.com/terms/a/accounting.asp#:~:text=Accounting%20is
%20the%20process%20of,regulators%2C%20and%20tax%20collection
%20entities.
https://yourfuture.accaglobal.com/global/en/blog/how-humans-invented-
accounting.html#:~:text=Accounting's%20history%20can%20be
%20traced,Romans%20collated%20detailed%20financial%20information.
https://www.freshbooks.com/hub/accounting/8-branches-of-
accounting#:~:text=Though%20there%20are%2012%20branches,is%20required
%20by%20the%20IRS.
https://picpa.com.ph/philippine-accountancy-act/#:~:text=Republic%20Act
%20No%209298%2C%20otherwise,in%20nation%20building%20and
%20development.
https://onlinelibrary.wiley.com/doi/full/10.1111/
abac.12218#:~:text=Abstract,accounting%20systems%20we%20use%20today.

Accounting in Mesopotamia and the Roman Empire

A means of keeping track of income and spending is essential to running a
business, or even maintaining personal finances. A system of recording
transactions is the basis of accounting. Accounting has been around since as far
back as 3300 B.C., with archaeologists having discovered accounting on clay
tablets from Egypt and Mesopotamia.

The techniques demonstrated in such ancient writing indicates accounting was

used to keep track of herd and crop growth—what now are called commodities—
to project surpluses or shortages, as the price of commodities ultimately are
determined by supply and demand.

Accounting evolved and traveled with traders along trade routes like the ancient
Silk Road. By the time of the Roman Empire, 27 B.C., Emperor Caesar Augustus
began recording his own financial transactions and other "good deeds'' as Res
Gestae Divi Augusti or "The Deeds of the Divine Augustus." The tome listed
distributions to people, land grants, construction projects, military pensions,
religious offerings, and entertainment spending. Roman historians also kept track
of public revenues, treasury holdings, taxes, slaves, and freedmen.
Medieval Accounting
Barter was the main system of trade during the Middle Ages. But Europe returned
to a monetary economy in the 13th century, according to historians. At that time,
merchants began needing bookkeeping to keep track of multiple transactions.
That's also when "double-entry" bookkeeping began, in which a debit and credit
value is entered for each transaction by an accountant. Merchants used
accounting as a system for ordering transactions, providing them with constant,
"real-time" information about their businesses.

1494: Luca Pacioli

In 1494, Luca Pacioli published Summa Arithmetica, Geometria, Proportioni et
Proportionalita, describing the system of double-entry bookkeeping used by
Venetian merchants. In his tome, Pacioli included a 27 treatise purely on the
subject of bookkeeping, called Particularis de Computis et Scripturis, or "Details of
Calculation and Recording." The treatise described record keeping and double-
entry accounting. His book actually became the teaching tool and reference text
on bookkeeping and accounting for the next several hundred years. Historians
also note his book was the first to publish symbols for plus and minus (addition
and subtraction). As such, besides being the first known published work on the
topic of double-entry bookkeeping, Summa Arithmetica also was the first known
book printed in Italy to contain algebra.

Accounting During the Industrial Revolution

With the advent of industrial corporations, investors, and debtors, though not
part of a company's management, nonetheless had a vested interest in the
company's results. This interest spurred a need for more advanced cost
accounting, and it helped turn accounting into a profession.

The professionalization of accountants began in the 1800s, first in the United

Kingdom and, later, the United States.
In the U.S., 31 accountants in 1887 created the American Association of Public
Accountants. A decade later, the first standardized test for accountants was given,
and the first Certified Public Accountants were licensed by the AAPA in 1896.

Accounting in the 20th Century

While the U.S. government tried to pass laws to create a national standard for
accounting among publicly held companies before the stock market crash of
1929, no commission existed to monitor or enforce the standards.

On June 6, 1934, President Franklin D. Roosevelt created the Securities and

Exchange Commission, which required all publicly traded companies to file
periodic reports that had been certified as accurate by professional accountants.
Joseph P. Kennedy, father of the future president, was the first Chairman of the
SEC.

The AAPA was succeeded, in 1916, by the Institute of Public Accountants. In 1917,
the professional group that certifies CPAs changed its name again, to the
American Institute of Accountants, and changed its name once more to the
American Institute of Certified Public Accountants (AICPA) in 1957. The different
versions and growing membership of the AICPA, which had set and monitored the
standards of accounting in the U.S., handed that responsibility to a private,
independent, not-for-profit standards board in 1973. That's when the Financial
Accounting Standards Board was established.

The establishment of the FASB was based on recognition of a need to further

standardize accounting practices and reporting by companies. The FASB's main
task from its founding was to establish and keep updating Generally Accepted
Accounting Principles (GAAP) standards for U.S. firms.

Use of the principles isn't required for all businesses, but the SEC does require
publicly traded and regulated companies to follow them in their financial
reporting. This means companies that issue stock are held to the standardized
rules by the Securities and Exchange Act, which also requires yearly external
audits by independent accountants. However, companies that don't have external
investors aren't required to follow GAAP.

Meanwhile, government entities have a slightly different set of standards to

follow. Those standards are managed by the Government Accounting Standards
Board (GASB).

Other countries have GAAP-like rules, established by their own version of the
FASB.

Large accounting firms expanded services beyond auditing to different types of

consulting in the late 20th century. But they also became involved in corporate
scandals as their responsibilities beyond auditing other companies' accounts
grew.

Accounting Today
Since the establishment of the SEC, the pressure to hire good accountants has
intensified. The financial cost to companies for falsifying records or having
inadequate accounting is high, and continues to grow. Companies that try to
manipulate or omit financial information to appear financially stable, like Enron in
2001, eventually face legal consequences and risk insolvency.

It was discovered in 2001 that Enron had been using accounting "tricks" to hide
bad debt to the tune of billions of dollars, while also artificially inflating the
company's reported earnings.

An SEC investigation concluded Jeffrey Skilling, the company's Chief Executive

Officer, and former CEO Kenneth Lay, had managed to keep billions of dollars of
debt off the company's reported balance sheet. And the pair were accused of
pressuring the company's outside auditors, Arthur Andersen, to ignore it and
certify the reports.

Besides Skilling and Lay being convicted, Enron went bankrupt and Arthur
Andersen, the once-prestigious auditing firm, was dissolved.

In 2008, the once-prestigious global financial services firm Lehman Brothers—one

of the largest investment banks in the U.S.—was discovered to have hidden more
than $50 billion in loans as sales. The SEC determined the firm had sold toxic
assets to banks in the Cayman Islands, with the understanding Lehman Brothers
would buy back the assets in a short time. From an accounting standpoint, it
appeared the bank had $50 billion more in cash and $50 billion less in "toxic
assets."

Lehman Brothers collapsed as a firm, and some cite its collapse as precipitating
the Great Recession.

With modern and consistently updated auditing regulations, accounting

standards, and ethical standards for accountants to follow, accountants play a
significant role in the U.S. as well as global economy these days. Every individual,
government, corporation, company, or business uses at least basic accounting
principles during their life—some even during daily activities.

In short, the knowledge and application of accounting principles has spanned over
a thousand years to its most enlightened state—what is currently in use today.