Issues in Accounting Practices

Instructor:
Adnan Shoaib

Course Brief

Accounting History, Context of Accounting, and Accounting

Profession
Accounting of the corporation is studied in this course.
Working and issues Related to
Net Assets
retained earnings
dividends and earnings per share
long-term debt and debt vs. equity financing
cash flow and its analysis
traditional financial statement analysis
cost-volume-profit relationships through break-even analysis,
absorption vs. variable costing for control and product
pricing decisions
gross profit analysis, and demand elasticity effects on total
revenues and pricing.
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Textbooks and Reading

Donald E. Kieso, Jerry J. Weygandt, Terry D.
Warfield Intermediate Accounting (John Wiley &
Sons, Inc. 2012)
George J. Benston, et al.Worldwide
Financial Reporting: The Development of
Future of Accouting Standards (Oxford
University Press)
Elliott B and Elliott J Financial Accounting &
Reporting (Financial Times/Prentice Hall,
6th ed, 2001).
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Lesson 1: Accounting History

Accounting is the
fairest invention of the
human mind.
- Goethe
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Introduction

The activity of accounting has been around for

several thousand years
Much of what we know about the daily lives of
ancient peoples comes from accounting records,
such as inventories and sales records, found at
archeological sites
Generally the history of accounting throws light on
economic and business history

Introduction

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
The need for accounting has existed as long as there has
been activity involving money or resources

Ancient Accounting

Key ingredients of double entry bookeeping were

not found together
Problems of record keeping, control and
verification of financial transactions
In an illiterate society it is essential to keep
accounting records
Double entry bookeeping - key ingredients
1. Private Property
2. Capital
3. Commerce
4. Credit
5. Writing
6. Money
7. Arithmetic
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Accounting In Mesopotamia

Flourishing of Chaldaean-Babylonian & Sumerian

civilizations
Development of the valley
Most transactions were recorded & subscribed by the
parties during this period

Accounting In Ancient Egypt, China, Greece

and Rome
Governmental accounting similar to Mesopotamians
Records were kept & verified by internal verification
system
Egypt - Accounting never progressed beyond simple
list-making
China - Used accounting as a mean of evaluating
efficiency

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Accounting In Ancient Egypt, China, Greece

and Rome

Greece - Use of Public Accountants

Introduction of coined money about
600 B.C.
Rome - Elaborate system of checks &
balances
Use of annual budgets

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Medieval Accounting

According to Michael Chatfield,

Medieval Accounting laid the foundations for the
doctrines of stewardship and conservatism, and the
medieval era created the conditions for the rapid
advance in accounting technology that occurred
during the Renaissance.

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Italian Renaissance

Innovative Italians Fathers of modern accounting

Extensive business records were kept
Use of capital & credit on large scale developed
Evolutionary trend towards double entry bookkeeping
was underway

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Luca Pacioli and The Summa

A mathematician and merchant
Did not invent double-entry accounting but spread the
knowledge
Pacioli stated that a merchants responsibilities were:
To give glory to God in their enterprises
To be ethical in all business activities
To earn profit
Summa - First surviving accounting textbook written by
Pacioli in 1494

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Characteristics of Summa
Three things needed by one who wished to carry on
business diligently Cash, Good Accountant & Good
Order
Pacioli explained the opening inventory
Pacioli's account book system is three account booksthat is, a day book the journal and the ledger
All things pertaining to a transaction must be written in
the day book
Pacioli described debit and credit

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Double Entry Accounting

Invention of the Debit and Credit concepts from the

Italian terminology
Debit Comes from the Italian debito which comes from
the Latin debita which means:
Owed to the proprietor or an asset of the proprietor
Credit comes from the Italian credito which comes from
the Latin credo which means:
Trust or belief (in the proprietor) or owed by the
proprietor

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Double Entry Accounting

Each financial event is called a transaction

The effect of a transaction is recorded in the accounts
by an entry
Each entry will affect at least two parts of the
accounting record to balance the record
This does not mean that the financial event is
recorded twice rather it is balanced against either
costs, increased or reduced liability, changes in
inventory, etc.

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Pacioli's System: Memorandum, Journal & Ledger

Memorandum Paciolis equivalent of a

day book
Journal Merchant's private account book
Ledger Most like its modern equivalent

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19th Century
Due to industrial revolution - Mass production became
possible
Businesses expanded in:
Physical size,
Degree of mechanization, and
Number of employees
Government regulation and taxation also increased
Businesses began operating as corporations to bring
in funds from outsiders
Stocks
Bonds
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European Congresses of Accounting

World fair at St. Louis

Three major events
Invitation thither of third Olympic games
Change in social sciences from German
influences
Accountants Congress

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Accountants Congress

Promoted by Montgomery of New York and Wilkinson

of Illinois
Held in St. Louis, USA in 1904
Series of conferences were initiated after it in various
countries

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Spain
Conferences of today preceded by Spanish Fairs
Barcelona - 1929 a congress of the Brusselsbased AIC jointly with the Association of
Accountants in Catalonia
150 delegates from 14 countries and five
governments, and from 60 professional bodies
Agenda included
Final Account formats
Costing procedures
Public accounting
Regulated auditing
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Central Europe
Russian and other East European accountants learned
much from attendance at congresses
long series of annual conferences of German Business
Professors
World Accountants' Conference in Berlin in 1938
International Bureau of Accountancy

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Italy
Italian Unification in 1870
nine Italian accountants' congresses held between 1879
and 1895
Publicity and respect was achieved however for Italian
accountants

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France
Congress of French accountants to Paris in 1880
- Theme was the Unification of Accounting
Rivalry of accountants in 1895 - 250 essays on
accounting subjects were submitted
International congress of accountants in Paris in
1948
43 countries were represented
Congress sought to establish an elite Academie
de comptabilite and also an Institut international
de comptabilite
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The Low Countries

1926 - Second world congress of accountants in

Amsterdam
Belgian accountants played a unique role through the
remarkable leadership of Paul Otlet.
Development of Decimal Classification and Coding
1926 - AIC held its congress again in Brussels
Central School of International Accounting

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Advancement in Accounting
Requirement & standardization of reports
20th and early 21st centuries
Double-entry accounting spread throughout the
world
Accountants in each country adapted accounting
practices to suit their:
Cultures
Laws & regulations
Capital market structures
Environments

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Advancement in Accounting
National differences in accounting rules and practices
render financial statements of companies based in
different countries UNCOMPARABLE
Major advance in accounting:
Development of international accounting standards
Harmonization of accounting and reporting

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Current criticisms and concerns about

financial reporting

Off balance sheet items

Leasing transactions
Securitization transactions
Creation of unconsolidated entities
Pension obligations
Intangible Assets
Items not included in the profit and loss account
Under existing accounting standards in some
jurisdictions, a company that pays for goods and
services through the use of its own shares, options on
its shares, or instruments tied to the value of its shares
may not record any cost for those goods and services

Accounting Issue Preamble

What is important to ship navigators is the giant mass
that lies below the icebergs. If we make an analogy that
the financial statements contain only what appears
above the surface, over 99% of the accounting theory
disputes have centered on the top of the icebergs.

Harmonization
IAS believes that harmonization can best be pursued by
focusing on financial statements that are prepared for
the purpose of providing information that is useful in
making economic decisions.

Examples of Economic Decisions

decide when to buy, hold or sell an equity
investment;
assess the stewardship or accountability of
management;
assess the ability of the enterprise to pay and
provide other benefits to its employees;
assess the security for amounts lent to the
enterprise;
determine taxation policies;
determine distributable profits and dividends;
prepare and use national income statistics; or
regulate the activities of enterprises.

IAS Framework
Financial statements are most commonly
prepared in accordance with an accounting
model based on recoverable historical cost and
the nominal financial capital maintenance
concept.
Other models and concepts may be more
appropriate in order to meet the objective of
providing information that is useful for making
economic decisions although there is presently
no consensus for change.
This Framework has been developed so that it is
applicable to a range of accounting models and
concepts of capital and capital maintenance.

Concepts of Capital
A financial concept of capital is adopted by most
enterprises in preparing their financial statements.
Under a financial concept of capital, such as
invested money or invested purchasing power,
capital is synonymous with the net assets or equity
of the enterprise.
Under a physical concept of capital, such as
operating capability, capital is regarded as the
productive capacity of the enterprise based on, for
example, units of output per day.

Revenue IAS-18
Revenue is the gross inflow of economic benefits during
the period arising in the course of the ordinary activities
of an enterprise when those inflows result in increases in
equity, other than increases relating to contributions from
equity participants.

Measurement of revenue
Revenue should be measured at the fair value of the
consideration received or receivable.

IAS-18
Fair value is the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable,
willing parties in an arm's length transaction.

Investors

The providers of risk capital and their advisers are concerned with the
risk inherent in, and return provided by, their investments. They need
information to help them determine whether they should buy, hold or
sell. Shareholders are also interested in information which enables them
to assess the ability of the enterprise to pay dividends.

Employees

Employees and their representative groups are interested in

information about the stability and profitability of their employers.
They are also interested in information which enables them to
assess the ability of the enterprise to provide remuneration,
retirement benefits and employment opportunities.

objective of financial statements

The objective of financial statements is to provide

information about the financial position, performance
and changes in financial position of an enterprise that is
useful to a wide range of users in making economic
decisions.

Underlying Assumptions
Accrual Basis
the effects of transactions and other events are
recognised when they occur (and not as cash
or its equivalent is received or paid) and they
are recorded in the accounting records and
reported in the financial statements of the
periods to which they relate.

Going Concern
The financial statements are normally prepared
on the assumption that an enterprise is a going
concern and will continue in operation for the
foreseeable future.

Qualitative characteristics
Understandability
An essential quality of the information provided in financial
statements is that it is readily understandable by users. For
this purpose, users are assumed to have a reasonable
knowledge of business and economic activities and accounting
and a willingness to study the information with reasonable
diligence.

Qualitative characteristics
Relevance
Information has the quality of relevance when it influences the
economic decisions of users by helping them evaluate past,
present or future events or confirming, or correcting, their past
evaluations.

Conclusion
Today, accounting is generally regarded as being the
systematic development and analysis of information about the
economic affairs of an organization. In fact, one of the most
important purposes of accounting is to communicate relevant
information between and among producers and users of such
information

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