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We have put together some helpful information for people who wish to
find out more about accounting.
History of Accounting
The origins of accounts can be traced to the earliest of civilisations.
Record Keeping was practiced as early as 3 600 B.C. The Greeks and
Romans were familiar with the notion of depreciation (walls were written
down over 80 years). However modern accounting as we know it grew from
the double entry book-keeping systems developed in Italy in the fourteenth
century.
Here the concept of a self-contained project was created, recording times
in money terms and separating capital and revenue aspects.
The first formal treatise on accounting was ‘ Summa de Arithmetica
Geometria Proportioni et Proportionalita’ by Luca Pacioli, a Franciscan
prior in Venice. This dramatic step in the development of accounting was
only made possible by virtue of contemporary progress in writing, arithmetic,
use of money, business associations such as partnerships, private property,
credit and the accumulation of private capital.
The one-off nature of accounting for specific ventures subsequently developed
into an on-going process in the 17th and 18th centuries once the idea of the
accounting period emerged and year end reconciliations were adopted.
Throughout subsequent history accounting progress tended to follow centres of
commercial activity. Hence developments were observed progressively in Spain,
Portugal, and Northern Europe. In 1673 France was the first country to adopt
an official code of accounting with bi-annual balance sheets. A certain amount
of standardisation was introduced at this stage with debits on the left and
credits on the right. A surge of development in accounting accompanied the
large-scale investments in mass production and infrastructure.
Business associations adapted to suit these conditions as publicly quoted
share companies. The most recent changes to the accounting system have
resulted from the increasing complexity of modern multi-national corporations
and the growth of mergers and acquisitions.
The system as we know it today has not developed uniformly in the various
national economies. The great emphasis now is on regulation and standardisation.
So far the countries of the European Community have made little progress
although two directives have been issued: The Fourth Directive requires an
annual audit of Companies of a certain size; and the Eighth Directive
concerns the qualification of statutory auditors, reciprocity (allowing
auditors to practice in each other’s countries) and the independence of auditors.
References
International Accounting and Multinational Enterprises, Second Edition, Jeffrey S.
Aspen and Lee H. Radebaug, John Wiley and Sons, 1981.
The Origins and Growth of a Business
Most businesses start with an individual setting up as a sole trader.
This can be done by anyone who can raise the necessary money to buy
stock, equipment, premises, etc, and who has an idea that might make
a profit on the money invested.
Once set up, the business becomes a separate entity, dealing with
customers and suppliers in a separate identifiable existence. The
sole trader is however, still responsible for debts that cannot be
met by the business.
In time, and given favourable circumstances, the business might grow,
both in size and in complexity, to the point at which the sole trader
must employ staff, because he is no longer able to do everything
himself and keep up with an expanding order book.
As the business expands, the sole trader will, no doubt, wish to
renounce his personal liability for the business's debts. He can do
this by forming a private limited company. A limited company
(incorporated under the Companies Act) is not only a separate entity
- as is the case with all businesses - but is also given, in law, a
separate personality (eg. It can be sued under its company name).
This means that the business, and the business alone, is responsible
for all its debts, except those incurred in the name of the sole
trader before incorporation.
The business might become so promising that healthy expansion can only
take place if a very large sum of money is invested. This money could
be raised by selling part (or all) of the business in the form of
shares. If a million rands is needed, one million rands shares could
be put 'on the market' and provided that buyers can be found for the
shares, one million rands will be available to the company as soon as
they are sold.
The business will then have become a public limited company (because
the shares were bought by members of the public) and will be owned by
the shareholders. Therefore, if the founder (original sole trader) wishes
to maintain control of the business, he must buy over 50% of the shares,
but having done so, he will still only be a part-owner.
Obviously, a business cannot be run by dozens of owners (shareholders)
so they will appoint directors (who are not necessarily shareholders) on
a year-to-year basis to run the company.
Even if one person holds over 50% of the shares (a controlling interest),
other shareholders can influence company policy and the appointment of
directors by holding a large number of shares. Those shareholders who
possess only a small proportion of the company's shares (less than, say,
25%) may not have much influence, but will nonetheless be able to share
in the company's profits by receiving dividends issued by the company to
all its shareholders.
However large or small a business is, it is a entity, and as such, it must
ACCOUNT for its financial transactions.
All businesses must make a profit to survive. This is true even of so-called
'non-profit-making organisations' where the profits are disclosed of in a
charitable way.
In order to ensure a continually healthy trading position, a close watch must
be kept on the financial transactions of the business. This is done by means
of management reports.
When a business is large enough to need several members of staff, its
functions will probably be divided amongst those staff members, each having
responsibility for his/her own part of the operation (although, in many small
businesses, the lines of demarcation are necessarily somewhat nebulous).
Perhaps the staff will be large enough to require managers to oversee the
various parts of the operation (departments), and these managers might be
responsible to the overall (general) manager, who will, in turn, report to
the member of the board of directors who has been elected to manage the
day-to-day activities of the business (managing director).
All the managers are accountable to their immediate superiors as to the success
(or otherwise) of their efforts. Such management reporting requires management
accounting because the information contained in management accounts will allow
the managers to check on results, and to adjust their efforts as necessary.
Production of management accounts is the responsibility of the firm's accountant,
who will also be called upon to produce a full financial year, for presentation
to the inland revenue. A very small business may be able to do without management
reports, but it will have to prepare financial accounts for the inland revenue,
and possibly for the bank.
The foregoing are the foundations of business accounting. The points raised have
been projected and expanded in a selection of accounting HOWTOs in our startup section. Some details
will be repeated for clarity and for reinforcement.
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