Accounting in evolution
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Accounting in Evolution. Class Announcements. Assignment #1 due January 13 th to 16th ; available on-line Assignment #2 due January 20 th ; available on-line January 16 th in LAB – CICA Hanbook. Class Objectives. Understanding accounting as a developing practice

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Accounting in evolution

Accounting in Evolution


Class announcements

Class Announcements

  • Assignment #1 due January 13th to 16th ; available on-line

  • Assignment #2 due January 20th; available on-line

  • January 16th in LAB – CICA Hanbook


Class objectives

Class Objectives

  • Understanding accounting as a developing practice

  • Investigating the responsiveness of accounting to changes in the needs of society

  • Understanding the infancy and sophistication of professional accounting system


Accounting theory

Accounting Theory

  • Environment of Accounting is both complex & very challenging

  • Product of accounting is information – a powerful and important commodity

    • Absence of perfect or true accounting concepts and standards

    • Individual will not be unanimous in their reaction to the same information


Accounting theory1

Accounting Theory

  • The goal of accounting theory is to provide a set of principles and relationships that provide an explanation for observed practice and predict unobserved practices

  • Development of accounting is important because of the role accounting plays in our economic society.

    • Role of accounting is to report how an organization utilizes scarce resources.

  • A single universally accepted basic accounting theory does not exist; a multiplicity of theories have been proposed.


Accounting value in information

Accounting: Value in Information

  • Jean Coutu Group (PJC) Inc. posted higher-than-expected net profit in the third quarter on lower revenues.

  • Longueuil, Que.-based Coutu reported on Thursday net profit of $62.5-million or 30 cents per share, up from$56.2-million or 26 cents in the year-earlier period.

  • See http://www.theglobeandmail.com/globe-investor/markets/stocks/chart/?q=pjc.a-T


Accounting theory users

Accounting: Theory & Users

  • Conditions for Accounting

    • 1) Existence of a need for information for decision making (decision usefulness) in face of information asymmetry

    • 2) Development of means, tools & techniques for satisfying decision making needs

  • As tasks of accounting became more difficult and focus shifted to users’ needs, a theory became necessary


Accounting preconditions

Accounting: Preconditions

  • 1) Literacy - ability to read & write

  • 2) Efficient Numbering systems - place value

  • 3) Writing Materials - convenient & inexpensive

  • 4) Money - unit of account/medium of exchange


Accounting evolution of society

Accounting: Evolution of Society

  • Accounting evolves as society evolves; reacting to society's need for information

  • Transition from a system to enable merchants to control his own system to a system to provide information to investors

  • The history of accounting follows major historical events:

    • Ancient Civilizations

    • Middle Ages – feudal system; ownership

    • Renaissance Period (1300-1500) - Ventures

    • Industrial Revolution (1700) – Large scale manufacturing, capital needs

    • Stock Market Crash (1929) – Audit and GAAP

    • Technology Bubble (2000) – Revenue Recognition

    • Internet Accessibility (2000) - XBRL

    • Enron (2002) – Corporate Governance, SPE’s

    • Market Collapse (2008) – Financial Instruments; banking regulation

    • Global Harmonization (2011) - IFRS


Accounting record keeping

Accounting: Record Keeping

  • Need existed to record incomplete transactions and the accumulation of wealth

  • Simple records did not summarize or classify data

  • Ledgers were not closed until something eventful happened like death of a partner

  • Accounts receivable was one of the earliest forms and requirements of accounting; other abstract concepts took longer to evolve


Accounting double entry bookkeeping

Accounting: Double Entry Bookkeeping

  • Double entry bookkeeping is the foundation for accounting today.

  • Duality concept requires that two sides to each transaction be recognized

  • No negative numbers to use

  • Brother Luca Pacioli’s treatise on mathematics contained a section on double entry bookkeeping (1494)

  • T accounts were developed to show increases on one side and decrease on the other “subtraction by opposition”

  • SEC sought to regulate the double entry system of account that had flourished.


Accounting business structure

Accounting: Business Structure

  • 1) Formal Business Organizations

  • 2) Public Accountants

  • 3) Audited Financial Statement Requirements

  • 4) GAAP


1 the business organization

1)The Business Organization

  • Early trading operated as ventures

  • Partnerships existed in the 13th & 14th centuries

  • Corporation established by royal charter up to the 1700’s (i.e.; HBC)

  • Joint stock on voyages were forerunners of corporations

  • Joint Stock Companies Act of 1844 & 1855 permitted the existence of corporations, limited liability and transferability of shares

  • Transferability of shares led to the Stock Market (1773 London; 1792 NYSE)

  • Need for information about shares investors are trading

  • Need for auditing and government regulation


2 public accountants

2) Public Accountants

  • Babylonian scribes were used to make records of contracts and receipts

  • Columbus was accompanied by an auditor appointed by the Spanish court to “figure the cost of gold and spices he would accumulate”

  • Bankruptcies and liquidations were chief forms of work

  • Edinburgh Society of Accountants (1854)

  • Institute of Accountants and Adjusters of Canada (1879)

  • Institute of Chartered Accountants of Ontario (1883)


3 audited financial statements

3) Audited Financial Statements

  • In medieval times evaluation of reasonableness was done by Babylonian scribes

  • 1844 Joint Stock Companies Act required audits but subsequently dropped requirement

  • Auditing done on a voluntary basis

  • Securities Act of 1934 focused on protection of investors and required audited financial statements

  • SEC established 1934 following stock market crash

    • Hampered by lack of accounting principles

  • 2010 International GAAS introduced


3a auditors report 1915

3a)Auditors’ Report 1915

  • We have audited the books and accounts of the year ended December 31, 1915, and we certify that, in our opinion, the above balance sheet correctly sets forth its position as at the termination of the year and that the accompanying profit and loss account is correct.


3b auditors report 1933

3b) Auditors’ Report 1933

  • We have made an examination of the balance sheet of the ABC Corporation as at December 31, 1933 and of the statement of income and surplus for the year 1933. In connection therewith, we examined or tested accounting records of the company and other supporting evidence and obtained information and explanations from officers and employees of the company; we also made a review of the accounting methods and of the operating and income account for the year, but we did not make a detailed audit of the transaction. In our opinion, based on such examination, the accompanying balance sheet and related statement of income and surplus fairly present, in accordance with accepted principles of accounting consistently maintained by the company during the year under review, its position at December 31, 1933 and the results of its operations for the year.


4 gaap

4) GAAP

  • Following stock market crash Securities Act (1934) was established giving SEC power to make standards

  • Standard creation delegated to professionals by SEC in US

  • No theoretical basis of choosing among the various alternatives and no authoritative voice

  • 1968 CICA Handbook became authority

  • 1975 CBCA required adherence to it

  • 2011 CICA adopts IFRS (International Financial Reporting Standards)

  • 2011 CICA adopts ASPE

  • 2011 Public Accountability GAAP


4a gaap early 20 th century standards

4a) GAAP: Early 20th Century Standards

  • Balance sheet is the most important financial report

  • Balance sheet is basically a statement of asset values and liabilities

  • Cost is satisfactory basis of valuation of assets (i.e.. with depreciation)

    • Contributing to the Great Depression was appraisal of assets

  • Patton and Littleton’s (1940) lithograph made a case for historical cost base

  • Income tax and historical cost base of accounting shifted focus to the income statement


4b gaap standards evolve early 1900s

4b) GAAP: Standards Evolve Early 1900s

  • Various principles applied inconsistently

  • Accounting profession and accountants lacked authority

  • Management favored freedom in reporting

  • No well defined theory or standards on which to base opinions


4c gaap standards evolve post 1929

4c) GAAP: Standards Evolve Post 1929

  • No consensus on a conceptual framework

  • Establishment of accounting standard committees

  • Lack of support for standards, internally and externally

  • Belief that standards could not be imposed

  • SEC (1938) permits profession to lead way in formulation of accounting principles

  • Lack of accounting principles

    • Reduce inconsistencies

    • New reporting principles deduced from principles


4d gaap standards evolve 1970 s

4d) GAAP: Standards Evolve 1970’s

  • Profession required disclosure of departure from its standards

  • SEC regarded accounting practices as authoritative

  • Accounting standard bodies issue significant amount of standards and principles

  • Reference to CICA Handbook in CBCA made essentially status of law

  • EIC (1984) formed to deal with issues on a timely basis

  • Technology bubble (2000) revised revenue recognition

  • Enron (2002) reinforced consolidation of SPE’s

  • Market failure on asset-backed securities (2008) focused attention on current (market) value


4e gaap international standards

4e) GAAP: International Standards

  • Emergence of global marketplace

  • US standard setting process is predominant in Canada, UK and Australia (albeit worldwide)

  • US standards are more restrictive

  • International Accounting Standards Committee (IASC) – harmonization

  • International standards adopted for 2011 in Canada


4f gaap century of change

4f) GAAP: Century of Change

  • 1. Intense regulation quite distinct from the previous centuries

  • 2. Domination of the field by public accountants as opposed to managerial accountants

  • 3. Increasing pressure to move to a uniform accounting system

  • 4. Accounting Standards (IFRS,ASPE)

  • 5. Increased Regulation (e.g. SOX, NP 201)

  • 6. Auditor Litigation (e.g. Enron, Livent)

  • 7. Technology – XBRL; internet


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