Chapter 18 The Accounting Profession

Chapter 18 The Accounting Profession

1. The history of accounting

• Accounting records were used by ancient traders, farmers to control their assets, monitor their costs, collect payments and calculate earnings.
• In 1494, Luca Pacioli (Italian Monk), codified existing bookkeeping practice.
• Accounting increased in importance as the predominant form of business entity.
• Due to separation of ownership and management, accountants were required to produce and interpret financial information to enable shareholders to make decisions.
• Accounting standard were developed to make the comparison between different companies become easier.
• The growth in computerisation saw a reduction in traditional bookkeeping work, and globalisation required advice on many areas in addition to accounting.
• Today the accounting profession is a multimillion dollar industry, and gives clients advice on wide range of business issues.

2. The role of accounting within the business

Function- Business development
Financial information required- Past setup costs, expenses, revenues, in order to estimate for new project. Mix of fixed/ variable costs, in order to determine breakeven point.

Function- Sales
Financial information required- Credit history of, and types of, customers to establish whether a new customer is creditworthy. Price charged in the past and impact on quantity sold

Function- Production
Financial information required- Cost of labour, materials and overheads. COst of buying rather than making components.

Function- Marketing
Financial information required- Prices charged in past and by competitiors. Available budget. Costs of production,

Funtion- Human resources
Financial information required- Salaries, pay rises, training budget

Funtion- Strategy
Financial information required- Cash flow forecasts, budget, past information, profitability by product, trends in sales and profits.

3. The purpose of the accounting function

sales invoices

• external and internal users
• accounting department- recording in ledger
• customers- recording in customers' ledger, paying for goods.

Ledgers

• internal users
• accounting department- preparing financial statements at the year end.

Financial statements

• external users
• shareholders- deciding whether to buy/ sell/ hold shares
• lenders- deciding whether to lend
• employees- assessing likelihood of redundancy, considering whether pay rise is reasonable.

Cost information

• internal users
• accounting department- calculating production costs, making decisons as to whether to make or buy components, determining prices.