Page 26 - Encyclopedia of Business and Finance

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Accounting

governmental accounting are covered elsewhere in this An enterprise’s system of internal controls usually
encyclopedia, the balance of this article will focus on includes an internal auditing function and personnel to
accounting for privately owned, profit-seeking entities. ensure that prescribed data handling and asset/liability
protection procedures are being followed. The internal
What is the work of accountants? Accountants help enti- auditor uses a variety of approaches, including observation
ties be successful, ethical, responsible participants in soci- of current activities, examination of past transactions, and
ety. Their major activities include observation, simulation—often using sample or fictitious transac-
measurement, and communication. These activities are tions—to test the accuracy and reliability of the system.
analytical in nature and draw on several other disciplines Accountants may also be responsible for preparing
(e.g., economics, mathematics, statistics, behavioral sci- several types of documents. Many of these (e.g., employ-
ence, law, history, and language/communication). ees’ salary and wage records) also serve as inputs for the
accounting system, but many are needed to satisfy other
Accountants identify, analyze, record, and accumu-
reporting requirements (e.g., employee salary records may
late facts, estimates, forecasts, and other data about the
be needed to support employee claims for pensions).
unit’s activities; then they translate these data into infor-
Accountants also provide data for completing income tax
mation that can be useful for a specific purpose.
returns.
The data accumulation and recording phase tradi-
tionally has been largely clerical; typically and appropri-
ately, this has been called bookkeeping, which is still a What is the accountant’s role in decision making?
common and largely manual activity, especially in smaller Accountants have a major role in providing information
for making economic and financial decisions. Rational
firms that have not adopted state-of-the-art technology. decisions are usually based on analyses and comparisons of
But with advances in information technology and user-
estimates, which in turn, are based on accounting and
friendly software, the clerical aspect has become largely
other data that project future results from alternative
electronically performed, with internal checks and con-
courses of action.
trols to assure that the input and output are factual and
External or financial accounting, reporting, and
valid.
auditing are directly involved in providing information for
Accountants design and maintain accounting sys-
the decisions of investors and creditors that help the cap-
tems, an entity’s central information system, to help con-
ital markets to efficiently and effectively allocate resources
trol and provide a record of the entity’s activities, to enterprises; internal, managerial, or management
resources, and obligations. Such systems also facilitate accounting is responsible for providing information and
reporting on all or part of the entity’s accomplishments for input to help managers make decisions on the efficient
a period of time and on its status at a given point in time.
and effective use of enterprise resources.
An organization’s accounting system provides infor- The accounting information used in making deci-
mation that (1) helps managers make decisions about sions within an enterprise is not subject to governmental
assembling resources, controlling, and organizing financ-
or other external regulation, so any rules and constraints
ing and operating activities; and (2) aids other users are largely self-imposed. As a result, in developing the data
(employees, investors, creditors, and others—usually and information that are relevant for decisions within the
called stakeholders) in making investment, credit, and enterprise, managerial accountants are constrained largely
other decisions. by cost-benefit considerations and their own ingenuity
The accounting system must also provide internal and ability to predict future conditions and events.
controls to ensure that (1) laws and enterprise policies are But accounting to external users (financial account-
properly implemented; (2) accounting records are accu- ing, reporting, and auditing) has many regulatory con-
rate; (3) enterprise assets are used effectively (e.g., that idle straints—especially if the enterprise is a “public”
cash balances are being invested to earn returns); and (4) corporation whose securities are registered (under the
steps be taken to reduce chances of losing assets or incur- United States Securities Acts of 1933 and 1934) with the
ring liabilities from fraudulent or similar activities, such as Securities and Exchange Commission (SEC) and traded
the carelessness or dishonesty of employees, customers, or publicly over-the-counter or on a stock exchange. Public
suppliers. Many of these controls are simple (e.g., the companies are subject to regulations and reporting
prenumbering of documents and accounting for all num- requirements imposed and enforced by the SEC; to rules
bers); others require division of duties among employees and standards established for its financial reports by the
to separate record keeping and custodial tasks in order to FASB and enforced by the SEC; to regulations of the
reduce opportunities for falsification of records and thefts organization where its securities are traded; and to the reg-
or misappropriation of assets. ulations of the AICPA, which establishes requirements

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 3