Accounting

Last reviewed: February 2017

Abstract

Accounting is that part of a business that accounts for and reports on that company’s financial activities. Any financial activity is a matter of numbers, but numbers do not speak for themselves. They must be interpreted honestly and efficiently to help a business conduct its operations in real time. Because the financial activities of a company can be complex and because the nature of those financial activities varies greatly depending on the size of the business and the operations it controls, accounting is a wide-open field that is always listed among those careers most consistently in demand.

Overview

Accounting is one of those occupations subject to easy caricature in popular culture. In films and television shows, accountants are known popularly by two extremes: the bean-counting, bespectacled, numbers-crunching, socially awkward and cheerless math wonk dressed in a wrinkled white shirt and pressed polyester pants all too ready to spoil a company’s festive moments by bringing in numbers predictions and arithmetical realities; or the grinning, slightly shady accomplice to a shadowy business’s illegal operations, willing to “cook the books”—that is, adjust financial records to keep income from nefarious enterprises appearing legal and thus enabling criminals to skirt the long arm of law enforcement and the ever-present nemesis, the IRS. Though accounting does deal with numbers and accountants do read those numbers in order to create from them a narrative about company operations, neither caricature does justice to the skill sets of an accomplished and reliable accountant.

Brief History. Accounting as an occupation is as old as trading itself. Archeologists have found evidence of bookkeeping activities that date to the invention of papyrus nearly six thousand years ago. In Western civilizations, record keeping dates back to Egyptian civilizations. Traders then realized that the business of negotiating products and services required some sort of oversight. If farmers outside Alexandria produced grains and cottons, and merchants in the city purchased the produce and then devised transportation networks to sell those products for a profit, then a separate entity was created to keep track of these transactions. This would have to be an agency not directly involved in the production or provision of the goods or services, perceived to be honest, capable of understanding the implications of numbers, and sufficiently organized to record constant, simultaneous business activities. Although farmers and merchants rested, the business processes themselves really never stopped; for businesses to stay in business, those directing the operations required up-to-date and financially sound information as a way to direct company growth.

Ethics and Responsibilities. At the core of the field of accounting as it developed across millennia has been honesty. Although the profession did require a certain adept confidence with numbers and an ability to organize what can be the messy day to day procedures of any financial enterprise, accountants must first be committed to honestly recording that information: How much a company spends to create the service it provides, for example, or to manufacture the goods it sells; the dimensions of the sales, the revenues, the cash flow coming into that business; a business’s financial liabilities—that is, the debts it owes—and the company’s obligations to banks and investors who have put financial resources into the company with the expectations of having those investments returned with interest.

The responsibilities of the accountant depend, of course, on the size of the company. A relatively small restaurant operation—for instance, a family pizzeria—relies most often on the financial scrutiny of a single bookkeeper, usually part-time, who most often holds either a two-year professional certification in accounting or a traditional four-year degree in accounting and finance. If the operation, however, is a national chain of 4,500 pizza shops, that corporation creates an entire division of bookkeepers because the operations are far more involved and the company must answer to a variety of governmental oversight agencies, including but not restricted to the Internal Revenue Service (IRS).

These accountants have advanced certification, a special license in addition to education that requires passing a standardized board test and thus indicates advanced competency in the requirements, expectations, procedures, and laws regarding accountancy. These higher-level accountants, known as Certified Public Accountants, or CPAs, wield significant influence within an operation as the reports on business activities, known as financial statements, are used to assess the worth and to project the potential future for growth for businesses. The most successful accountants in Fortune 500 firms tend to also have a master’s degree in business administration (Bailey et al., 2013).

Accounting Principles. Whatever the level of employment or the level of expertise, accountants must maintain a high level of integrity; they must actually perceive themselves as answerable only to the numbers. This systematic financial oversight is conducted under what are termed Generally Accepted Accounting Principles (GAAP). These principles, articulated as guidelines, are set by national accounting foundations such as the Financial Accounting Standards Board (headquartered in Norwich, Connecticut) to standardized the expectations of all businesses’ financial reporting.

Accountants, for example, generally abide by three cardinal principles: (1) transparency—that is, the willingness to make public the financial records of the business, either internally or externally for open review (most often as part of an operations audit) and in turn to enable senior executive staff to make decisions about critical actions based on those numbers; (2) consistency—that is, the dedication to the constant review of finances for an operation and recording those simultaneous enterprises in a fashion that is established and logical and to make regular reports back to the company that analyzes the implications of those numbers; and (3) compliance—that is, the due diligence of making sure that the company’s financial operations, whatever the dimensions, are in strict accord with local, state, and federal laws regarding business activities and are current with those regulations.

In the end, fair practice accounting relies on the moral and ethical integrity of the accountant. Indeed, John L. Harvey, an iconic figure in public accounting in postwar American business, more than five decades ago cited the most important characteristic of an accountant as “courage.” Current accounting education theory, in fact, subscribes to introducing religion and spirituality along with accounting curriculum (Chang, Davis & Kauffman, 2015).

Applications

In its fundamental protocol, accounting tracks five different elements of a company’s financial transactions: assets, liabilities, shareholders’ equity, revenue, and operating expenses.

Whatever potentially benefits the company financially, excluding human resources, is considered an asset. Assets refer to tangible property owned by the company such as equipment (computers, for instance, or assembly line machinery), inventory (products ready to be sold), property and the actual physical buildings used by the company operations, and those sales that have already been completed—that is, money is owed or obligated to the company but is in transit (accounts payable). An asset most broadly is anything that could potentially help a business maintain its revenue stream. In a dentist office, for example, drills and the x-ray machines are obvious assets, but the office computers that maintain appointments and dental information are assets, as well as the desks and supplies the reception uses.

Liabilities are the obverse of assets. Unlike assets, liabilities represent elements that the company owes from past operations—basically debts incurred most often over the last month, although companies can track these liabilities on tighter schedules. These are the debts the company owes its resource providers.

Shareholders’ equity is the net value of a company. The company’s current liabilities is subtracted from its total worth on hand (assets), and that number is considered the shareholders’ equity, or the amount of money that would be returned to shareholders is the company were liquidated. This figure is the actual operating financial resources of a company, which can, in turn, be used to determine the value of any financial institution’s or investor’s stake in the company. Investors and banks, after all, often provide the financial resources for a company to open its doors and to continue its operations, and therefore these stakeholders have a right to up-to-date value assessments of their investment.

Revenues are the actual income a company can generate by providing its goods or services. Whether a company makes toothbrushes or provides customer support, the company product brings in money—at least, it needs to as that significantly defines a company’s financial integrity and its promise for growth. To present an accurate narrative of those revenue streams, an accountant must also track the company’s operating expenses. These are the costs of simply maintaining the business operations, including providing utilities; satisfying local, state, and federal business taxes; stocking necessary inventory to sustain day to day operations; salaries for staff; and payments made for the facilities themselves in the form of incremental rent or mortgage payments.

Creative Accounting. Depending on the success (or failure) of a company’s operations, an accountant can find rationales for distorting the numbers, providing deliberately misleading financial statements as a way to provide a struggling company with a cover and the time to address its problems. Or an accountant can find rationale for distorting the numbers of a successful company as a way to create the illusion of more modest success as way to sidestep tax payments or to influence stock prices or investment expectations. Really, the scenarios in which an accountant might be involved in false representations of a company’s financial operations are as numerous as there are companies that seek creative bookkeeping practices to further their own business endeavors.

Numbers can be inflated, numbers can be moved around, numbers can be hidden. These practices, if they come to light, can lead to a loss of employment, a loss of certification, and criminal charges. Nevertheless, business accounting has come to be seen as what Tormo-Carbó, Seguí-Mas, and Oltra term an “ethics unfriendly environment”—that is, when accountants participate in unethical or illegal activity, because they often serve as their own evaluator, such behavior may be not only difficult to detect but also actually encouraged (2016). In 2002 alone, for instance, more than fifty major American companies were under investigation by the IRS for accounting fraud (Lennox, Lisowsky & Pittman, 2013).

Viewpoints

As a field, accounting defies the cycle of boom and bust that impacts virtually all occupations. Between 2012 and 2014 alone, for instance, accounting enjoyed a 7 percent increase in openings. By 2020, industry estimates suggest American businesses alone will need in the neighborhood of 140,000 accountants, far in excess of qualified applicants. In 2016, Forbes listed accountancy as one of the four most in-demand jobs in the new digital age (Strauss). Thus, universities and professional certification programs have become a major component of the academic community, particularly in online operations, as a way to address this growing need. Accountants earn about 25 percent above the median salary for four-year college graduates. The average starting salary for accountants in firms that employ more than fifty people is just under $60,000.

On its face, an accountant’s job is fairly straightforward: record a company’s financial operations, categorize those numbers into one of five discrete classifications, and then summarize those numbers for any interested party. For an accountant to be successful and avoid any liabilities or prosecution, the occupation obviously requires not only integrity but also organization. Companies, after all, maintain dozens of financial transactions every minute of the workday and in many cases even during times when the business itself is not in operation. Companies involved in Internet services, for instance, can sustain a wide transaction field.

If honesty and organization and computer expertise are obvious assets for success in accounting, what is perhaps not so apparent is the need for an accountant to be imaginative. Indeed, classic caricatures of accountants tends to suggest just the opposite, but experienced financial executives cite creativity as a most valuable characteristic. Creativity in this context is the intuitive understanding of the dimensions of any number being tracked, to read data by maintaining both a clear grasp of the company’s operational past as well as its investment in its operating future. That way an accountant can ultimately present a balanced and fair reading of what is otherwise columns of figures on a spreadsheet.

More conservative readings of accounting, however, dispute creativity as a job skill and, in fact, see it as the gateway to unreliability and the lack of strict accountability in the field. Analysis of numbers—that is, the systematic development of numbers into projections and patterns—is not the same as interpretation of numbers. An interpretive accounting approach may lose its integrity and become part of a company’s propaganda mission. Once numbers become narratives, critics argue, financial statements themselves become a sort of fiction that can be interpreted to say anything the accountants (or their employers) want them to say. It is enough for the accountant to record financial activities, monitor those activities, and present hard numbers in an efficient and regular fashion.

In any event, accounting is an integral part of any business’s day to day operations. Only through the accurate record keeping of the accountant or by the accounting department does a business reliably understand its own financial integrity as a way to decide on its critical moves to grow the company.

Terms & Concepts

Account Payable: Any financial obligation owed by a company to another institution or individual.

Account Receivable: Any financial obligation owed to a company by individuals or companies.

Asset: Anything belonging to a company that can reliably produce or help produce income.

Credit: The recording, done by an accountant or bookkeeper, of monies received.

Debit: The recording, done by an accountant or bookkeeper, of monies owed.

Financial Statement: The regular summary, prepared by a licensed accountant, of the financial operations of a company for both internal use and external review.

Liability: That which costs a company debt or incurs any level of financial responsibility.

Shareholder: Any individual or institution that holds financial interest in a company either through a loan or through stock investment.

Bibliography

Bailey, R. (2013). Success in industry-based accounting careers. CPA Journal, 83(1), 63–65. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=87368397&site=ehost-live

Chang, O. H., Davis, S. W., & Kauffman, K. D. (2015). Accounting ethics education: A comparison with Buddhist ethics education framework. Journal of Religion & Business Ethics, 3(2), 1–22. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=117564899&site=ehost-live

Christopher, J. et al. (2015). An exploratory study of Color Accounting: A new way to teach and learn accounting. Journal of Education Theory & Practice, 15(7), 77–85.

Kleinsmith, W., Hewitt, M., Previti, L., & Kachur, R. (2016). Accounting ethics: Post-conventional moral development and non-mandatory virtues; making the case for ethics training in the undergraduate program. Journal of Theoretical Accounting Research, 11(2), 63–77. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=113641304&site=ehost-live

Lennox, C., Lisowsky, P., & Pittman, J. (2013). Tax aggressiveness and accounting fraud. Journal of Accounting Research, 51(4), 739–778. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=101423853&site=ehost-live

Onyebuchi, V. (2011). Ethics in accounting. International Journal of Business and Social Science, 2(10), 275–276.

Strauss, K. (2016). The most in-demand jobs (and what they pay). Forbes.Com, 7. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=112823240&site=ehost-live

Tormo-Carbó, G., Seguí-Mas, E., & Oltra, V. (2016). Accounting ethics in unfriendly environments: The educational challenge. Journal of Business Ethics, 135(1), 161–175. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=115131557&site=ehost-live

Suggested Reading

Arfaoui, F., Damak-Ayadi, S., Ghram, R., & Bouchekoua, A. (2016). Ethics education and accounting students' level of moral development: Experimental design in Tunisian audit context. Journal of Business Ethics, 138(1), 161–173. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118005405&site=ehost-live

Drăgan, O. (2016). Ethics and professional judgment in accounting - analysis based on conceptual maps. Management Intercultural, 18(2), 177–187. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118366181&site=ehost-live

Ittelson, T. (2009). Financial statement: A step-by-step guide to understanding and creating financial reports. Wayne, NJ: Career Press.

Mintz, S. (2016). From analysis to action. CPA Journal, 86(8), 6–9. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118272825&site=ehost-live

Mullis, D., & Orloff, J. (2008). The accounting game: Basic accounting from the lemonade stand. Chicago, IL: Sourcebook Publications.