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Accounting Cycle

How do environmental changes impact the accounting college and should expect to maintain competence in
profession? Numerous changes in the environment make them throughout his or her professional career. These
the practice of accounting and auditing much different in skills greatly enhance and facilitate all phases and aspects
the new century than it was in the 1970s. For example, of what accounting and accountants attempt to do. What
professional accounting firms now actively compete for can be done is limited only by technology and by the
clients by advertising extensively in various media, a prac- sophistication of the system, its operators, and users.
tice that at one time was forbidden by their code of pro- SEE ALSO Accounting Cycle; Accounting: Historical Per-
fessional conduct. Mergers of clients have led CPA firms
spectives; Careers in Accounting; Ethics in Accounting
into mergers as well, such that the Big Eight is now the
Big Five and the second-tier group has been reduced from
twelve firms to about five. Another result of competition BIBLIOGRAPHY
and other changes has been that some of the largest Hansen, Don R., and Mowen, Maryanne M. (2000). Manage-
employers of CPAs now include income tax and account- ment Accounting (5th ed.). Cincinnati, OH: Southwestern
ing services firms such as H&R Block and an American College Publishing.
Kimmel, Paul D., Weygandt, Jerry J., and Kieso, Donald E.
Express subsidiary.
(2000). Financial Accounting (2nd ed.). New York: Wiley.
Competition among CPAs also has led the SEC to
expand its regulatory and enforcement activities to ensure
that financial reports are relevant and reliable. From its Harvey S. Hendrickson
inception, the SEC has had legal authority to prescribe the
accounting principles and standards used in the financial
reports of enterprises whose securities are publicly traded,
but it has delegated this responsibility to the accounting ACCOUNTING CYCLE
profession. Since 1973, that organization has been the The primary objectives of the accounting function in an
FASB, with which the SEC works closely. But because the organization are to process financial information and to
FASB is limited to performing what is essentially a legisla- prepare financial statements at the end of the accounting
tive function, the SEC has substantially increased its period. Companies must systematically process financial
enforcement activities to ensure that the FASB’s standards information and must have staff who prepare financial
are appropriately applied in financial reports and that
statements on a monthly, quarterly, and/or annual basis.
accountants/auditors act in the public interest in perform- To meet these primary objectives, a series of steps is
ing their independent audits—for which the Securities required. Collectively these steps are known as the
Acts have given the CPA profession a monopoly. accounting cycle.

How does a student prepare for the accounting profes-
THE STEPS OF THE CYCLE
sion? Persons considering entering the accounting profes-
sion should begin by doing some self-analysis to 1. Collect and analyze data from transactions and events:
determine whether they enjoy mathematical, problem- or As transactions and events related to financial
puzzle-solving, or other analytical activities; by taking resources occur, they are analyzed with respect to
some aptitude tests; or by talking with accounting teach- their effect on the financial position of the company.
ers or practitioners about their work. As an example, the sales for a day in a retail estab-
Anyone interested in becoming an accounting profes- lishment are collected on a cash register tape. These
sional should expect to enter a rigorous five-year educa- sales become inputs into the accounting system.
tion program and to earn a master’s degree in order to Every organization establishes a chart of accounts
qualify to enter the profession and to sit for the CPA that identifies the categories for recording transac-
examination. To build a base for rising to the top of the tions and events. The chart of accounts for the retail
profession, students should select courses that help them establishment includes Cash and Sales.
learn how to think and to define and solve problems. The 2. Journalize transactions: After collecting and analyzing
courses should help them to develop analytical (logical, the information obtained in the first step, the infor-
mathematical, statistical), communication (oral, reading, mation is entered in the general journal, which is
writing), computer, and interpersonal skills. The early called the book of original entry. Journalizing trans-
part of the program should emphasize arts and sciences actions may be done continually, but this step can
courses in these skill-development areas. be done in a batch at the end of the day if data from
The person should begin to develop word-processing, similar transactions are being sorted and collected,
data-processing, and Internet skills long before entering on a cash register tape, for example. At the end of

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 5