ACCOUNTING

the systematic development and analysis of information about the economic affairs of an organization. This information may be used in a number of ways: by the organization's managers to help them plan and control the organization's operations; by owners and legislative or regulatory bodies to help them appraise the organization's performance and make decisions as to its future; by owners, lenders, suppliers, employees, and others to help them decide how much time or money to devote to the organization; by governmental bodies to determine how much tax the organization must pay; and occasionally by customers to determine the price to be paid when contracts call for cost-based payments. Accounting provides information for all these purposes through the maintenance of files of data, analysis and interpretation of these data, and the preparation of various kinds of reports. Most accounting information is historical-that is, the accountant observes the things that the organization does, records their effects, and prepares reports summarizing what has been recorded; the rest consists of forecasts and plans for current and future periods. Accounting information can be developed for any kind of organization, not just for privately owned, profit-seeking businesses. One branch of accounting deals with the economic operations of entire nations. The remainder of this article, however, will be devoted primarily to business accounting. the systematic development and analysis of information about the economic affairs of an organization. Every business and many organizations that are not businesses, up to and including nations, are continually engaged in transactions involving money or goods or both. Interested and responsible parties must have access to the information necessary for assessing the organization's economic status and performance. The actual recording and summarizing of financial transactions in accordance with well-established procedures is known as bookkeeping (q.v.). When the data thus produced are abstracted in reports (typically produced on a quarterly or an annual basis) published for the use of persons outside the organization-stockholders, creditors, brokers, government officials, and others-the process is called financial accounting. The process of producing reports (typically on a monthly basis) for the use of the management of the organization in planning and monitoring activities is called managerial accounting. Accounting systems also serve to produce the internal financial documents needed in the ordinary course of operations, to institute systems of internal controls for the protection of the organization's assets, and to provide data needed for tax returns and other legally required reporting. Three periodic reports are typically generated in financial accounting: (1) the balance sheet, which summarizes, as of a specified date, the assets or resources controlled by the firm, the liabilities of the firm to creditors, and the owners' equity, that is, the funds provided by the owners (usually in exchange for shares of capital stock) plus the sum of earnings retained by the organization, (2) the income statement, which reports the gross proceeds of the organization's operations for a specified period, the expenses incurred in those operations, and the net proceeds, and (3) the statement of cash flow, which analyzes the flow of cash into and out of the organization during the period. Many conventions and practical guidelines govern the difficult questions of measuring assets, distributing the costs of assets over time (a process known as amortization, or depreciation), measuring income, matching expenses to corresponding revenues, and adjusting costs for changes in the purchasing power of money. The reports prepared for an organization by its accountant ordinarily are reviewed by outside auditors for completeness, accuracy, and adherence to conventional practices; these auditors are independent accountants who in the United States bear the title of certified public accountant (CPA) and in Great Britain are known as chartered accountants. Managerial accounting aims to provide management with reliable and timely information on the various costs of operations and on standards with which those costs can be compared, to assist in the development of budgetary plans and in the measurement of performance against those plans, and to analyze the results of operations (in businesses, profits). The forecasts of cash requirements for given kinds and levels of operations that are provided by accountants to managers are essential to assure that the organization will remain liquid-able to meet its obligations as they fall due-while quantified profit plans form an integral part of any rational business strategy. Additional reading BIBLIOGRAPHY. Classic accounting works include R. Gene Brown and Kenneth S. Johnston, Paciolo on Accounting, trans. from Latin (1963, reprinted 1984), an annotated translation of the treatise, published in 1494, that is widely accepted as the foundation of modern accounting and bookkeeping systems, with biographical notes and a reproduction of the original manuscript; A.C. Littleton, Accounting Evolution to 1900, 2nd ed. (1966, reprinted 1988), a scholarly, well-written analysis of the development of accounting from the Renaissance to modern times; John B. Canning, Economics of Accountancy (1929, reprinted 1978), an early landmark in the development of 20th-century accounting thought and one of the first systematic attempts to build a structure of accounting on the basis of economic theory; Eugen Schmalenbach, Dynamic Accounting (1959, reprinted 1980), a translation of the 12th ed. of the most influential accounting book published in Germany in the first half of the 20th century, which had a measurable impact on the accounting systems used in most continental European countries and shaped many of the uniform accounting schemes that have been proposed or adopted in individual European countries; and Edgar O. Edwards and Philip W. Bell, The Theory and Measurement of Business Income (1961, reissued 1973), a critical review of conventional accounting measurements, with a detailed examination of possible alternative measurement systems. Current reference texts are Robert N. Anthony, Essentials of Accounting, 5th ed. (1993), an easy-to-follow, self-teaching guide to accounting fundamentals, using the programmed-learning approach; Gordon Shillinglaw and Kathleen T. Mcgahran, Accounting: A Management Approach, 9th ed. (1993), a concept-oriented introductory textbook covering both financial and managerial accounting; Eldon S. Hendriksen and Michael F. Van Breda, Accounting Theory, 5th ed. (1992), a textbook providing a historical survey and a critical examination of the measurement systems underlying business financial statements; Charles T. Horngren, George Foster, and Srikant Datar, Cost Accounting: A Managerial Emphasis, 8th ed. (1994), a popular textbook covering managerial accounting in depth; and Robert N. Anthony and David W. Young, Management Control in Nonprofit Organizations, 5th ed. (1994). The following books provide insight into important current issues facing accountants and the accounting profession. Steven A. Zeff and Bala G. Dharan (eds.), Readings and Notes on Financial Accounting: Issues and Controversies, 4th ed. (1994), examines current views on the measurement of various financial variables for use in external financial reporting. Barry J. Brinker (ed.), Handbook of Cost Management (1993); and John K. Shank and Vijay Govindarajan, Strategic Cost Management: The New Tool for Competitive Advantage (1993), examine current issues and practices in the rapidly changing field of cost accounting for management. C.J. McNair, The Profit Potential (1994), focuses on the measurement of nonvalue-adding activities and the elimination of waste. Ahmed Riahi-belkaoui, The Coming Crisis in Accounting (1989), explores problems facing the public accounting profession and concludes that government legislation may result. Among the works focusing on ethical issues is Philip G. Cottell, Jr., and Terry M. Perlin, Accounting Ethics (1990). Gordon Shillinglaw