People use accounting information in day-to-day affairs to manage their bank accounts, to make investments, and to decide whether to rent or to bur a house.
Managers of businesses use accounting information to set goals for their organizations, to evaluate their progress toward those goals, and to take corrective action if necessary. Decisions based on accounting information may include which building and equipment to purchase, how much merchandise inventory to keep on hand, and how much cash to borrow.
Investors and creditors provide the money that businesses need to begin operations. To decide whether to help start anew venture, potential investors evaluate what income they can reasonably expect on their investment. This means analyzing the financial statements of the new business. Those people who do invest monitor the progress of the business by analyzing the company’s financial statements and by keeping up with its developments in the business press.
AUDITING
Not so many years the presence of an auditor suggested that a company was having difficulties or that irregularities had been discovered in the records. Currently, however, outside audits are a normal and regular part of business practice. Independent auditors are employed by a company’ board of directors to supply the stockholders with the result of checking the financial statements, in order to prove that annual reports are fair representations of the financial position of the company. Performing his work the auditor should follow several principles and assumptions: the company’s accounts must represent a true financial position; generally accepted accounting principles have been use at all accounting steps and accounts can be compared with those of similar companies; the proper amount of information is disclosed in the financial statements. As a result, the auditor’s opinion should be based only on facts and it must be objective. Auditors are expected to maintain a relationship of strict independence and professionalism with the companies for whom they work, so they mustn’t hold shares in these companies. On the other hand, the auditor should respect the client’s confidence, so having the access to some private information; the auditor mustn’t spread it outside. On the other hand, he should think of public interests, that is why he must publish his opinion in a standard form and the information is to be clear to the stockholders. But he must always carry out his duties under the law and inform authorities about fraud.
Thus the auditors review financial records and report to the management on the current state of the company’s fiscal affairs in the form of auditor’s Report or Auditor’s Opinion.
THE DEVELOPMENT OF ACCOUNTING THOUGHT
Accounting has a long history. Some scholars claim that writing arose in order to record accounting information. Account records date back to the ancient civilizations of China, Babylonia, Greece, and Egypt. The rulers of these civilizations used accounting to keep track of the cost of labour and materials used in building structures like the great pyramids.
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Accounting developed further as a result of the information needs of merchants in the city-states of Italy during the 1400s. Historians consider 14th century Italian merchants to have developed the practice of double-entry book keeping, which is used by modern accounting. Although the earliest double-entry books appeared in 1340 in Genoa, the first published book on bookkeeping was written in 1494 by a Franciscan monk Luca Pciolo. This work summarized the main accounting principles that have remained unchanged up to date. Additional accounting works were published during the 16th century in Italian, German, Dutch, French and English, these works including early formulations of the concepts of assets, liabilities and income.
In the mid-19th century with the establishment of large public corporations owned by stockholders and administered by professional managers, the public demand for accurate financial reports and for government regulations greatly increased. The rise of the multinational corporations also resulted in increased accounting responsibilities, for it required to keep reports under different legal conditions, to make payments within various systems of taxes, tariffs and other government controls.
Since the mid—20th century bookkeeping as an essential part of all accounting systems has been carried out by machines. The introduction of computers broadened the scope of bookkeeping and the term “data processing” now often associates with bookkeeping.