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Chapter 1 AccountingPresent and Past

CHAPTER 1

LEARNING OBJECTIVES
To understand:
1. The definition of accounting.
2. Who the users of accounting information are and why they find accounting
information useful.
3. The variety of professional services that accountants provide.
4. The development of accounting from a broad historical perspective.
5. How financial reporting standards evolve.
6. The key elements of ethical behavior for a professional accountant.
7. The objectives of financial reporting for business enterprises.

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What is Accounting?

LO1

Accounting is the process of:

Identifying
Measuring
Communicating

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Economic
information
about an entity

For decisions
and informed
judgments

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LO2

Users and Uses of Accounting

Information

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LO3

Financial Accounting
Financial accounting
generally refers to the
process that results in the
preparation and reporting
of financial statements for
an entity.
Financial accounting is
primarily externally
oriented and concerned
with the historical results
of an entitys performance.

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LO3

Managerial Accounting/Cost
Accounting
Managerial accounting is
concerned with the use of
economic and financial
information to plan and
control many of the activities
of the entity and to support
the management decisionmaking process.
Cost accounting relates to the
determination and
accumulation of product,
process, or service costs.

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LO3

AuditingPublic Accounting
Public accounting firms
and individual Chartered
Accountants (CAs) provide
auditing services and issue
an independent auditors
report.

An independent auditors report usually contains four brief

paragraphs and states whether the financial statements are
prepared in conformity with International Financial
Reporting Standards. An auditors report can be unqualified
(a clean opinion), qualified, emphasis over matter or
disclaimer.
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LO3

Internal Auditing

Internal auditors are

professional accountants
who perform functions
much like those of an
external auditor. However,
internal auditors are
employed in industry rather
than public accounting.

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LO3

Governmental and Not-for-Profit

Accounting
Governmental units (e.g.,
district, state, and federal
agencies) and not-for-profit
entities (e.g., universities,
hospitals, and religious
organizations) require the
same accounting functions
to be performed as do
other accounting entities.

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LO3

Income Tax Accounting

Tax practitioners often
develop specialties in the
taxation of individuals,
partnerships, corporations,
trusts and estates, or
international tax law
issues.

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LO4

How Has Accounting

Developed?

Mesopotamians
record tax receipts
on clay tablets.

3000 B.C.

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How Has Accounting

Developed?

LO4

Luca Pacioli published the first textbook

describing a comprehensive doubleentry bookkeeping system.

3000 B.C. 1494

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How Has Accounting

Developed?

LO4

The industrial revolution of the 19th century generated the

need for large amounts of capital to finance the
enterprises that supplanted individual craftsmen.

3000 B.C.1494

1800s

This need resulted in the corporate form of organization

and the need to provide investors with reports showing the
financial position and the results of operations.

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How Has Accounting

Developed?

LO4

3000 B.C.1494

1800s

1900s

Accounting professionals in this country organized

themselves in the early 1900s and worked hard to
establish certification laws, standardized audit
procedures, and other attributes of a profession.
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LO4

How Has Accounting

Developed?

Between 1932 and 1934, the American Institute of

Accountants and the New York Stock Exchange agreed on
five broad principles of accounting.

3000 B.C.1494

1800s

1900s 1932 1933

to
&
1934 1934

The Securities Act of 1933 and the Securities Exchange Act of

1934 gave the Securities and Exchange Commission (SEC)
the authority to establish accounting principles for companies
whose securities had to be registered with the SEC.
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LO4

How Has Accounting

Developed?

Although the SEC has the authority to establish accounting

principles, the standard-setting process has been delegated to
other organizations over the years.

3000 B.C.1494

1900s 1932 1933 1939

to
to
&
1934 1934 1959
The Committee on Accounting Procedure of the American
Institute of Accountants issued 51 Accounting Research
Bulletins that dealt with accounting principles.

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LO5

How Has Accounting

Developed?

The Financial Accounting Foundation (FAF) was created and

established the Financial Accounting Standards Board (FASB)
as the authoritative standard-setting body within the
accounting profession.
3000 B.C.1494

1800s

1900s 1932 1933 1939

to
to
&
1934 1934 1959

1973

The FASB has issued 164 Statements of Financial Accounting

Standards that have established standards of accounting and
reporting for particular issues.
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LO6

3000 B.C.1494

How Has Accounting

Developed?

1900s 1932 1933 1939 1973 2002

to
to
&
1934 1934 1959
The Sarbanes-Oxley Act of 2002 created the five-member
Public Company Accounting Oversight Board (PCAOB), which
has the authority to set and enforce auditing, attestation,
quality control, and ethics standards for public companies.

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LO6

Standards for Other Types of

Accounting

Managerial/Cost
Accounting

Cost Accounting
Standards Board (CASB)
for government contracts

Auditing/Public
Accounting

Auditing Standards
Board (part of AICPA)

State and Local

Governments

Governmental
Accounting Standards
Board (GASB)

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LO6

International Accounting
Standards
The International
Accounting Standards
Board (IASB) seeks
methods of providing
comparability between
financial statements
prepared according to
the differing accounting
standards of its member
nations.

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Ethics and the

Accounting Profession

LO7

Integrity
Objectivity
Independence
Competence
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End of Chapter 1

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