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AN OVERVIEW OF ACCOUNTING
Unlike economics, the concepts and principles underlying accounting cannot generally be proved as a matter of natural law or empirical evidence. Instead, accounting has evolved from a mixture of ideas, judgments, policies, practices, and methods over centuries. Accounting, though established largely by the accounting profession, derives its authority primarily from its general acceptability in the marketplace.
What is Accounting?
The Committee on terminology of the American Institute of Accountants (now the American Institute of Certified Public Accountants or AICPA) proposed in 1941 that "accounting" be defined as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof." Accounting’s traditional primary goal has been the facilitation of the administration, control and reporting of economic activity. Interestingly enough, the AICPA saw accounting as an art. That said, accounting has been traditionally broken down into three major classifications: (1) public accounting, (2) governmental accounting, and (3) managerial accounting. While managerial and governmental accounting are immensely important, Western society traditionally emphasizes public or financial accounting. The same need not be the case for other, less developed nations, where governmental accounting, should take on a more significant role.
When Did Accounting Practices Begin?
Although some evidence of accounting practices can be traced back to Babylonian times, the prevalent method of accounting known as "double entry accounting" has been attributed to, and is believed to have begun, during the Crusades. It became necessary when the various kingdoms of Europe garnered their resources from every corner to mount their offensives to “free” Jerusalem from what they viewed as Islaamic occupation. Massive contributions of wealth, resources, arms, equipment and men were accounted for by preparing separate contribution accounts for each kingdom, nobleman, etc. Thereafter, the accounting format was refined during the years of European mercantilism in the late 1400s (CE). The journal format and the double entry system of debits and credits was formalized in the 30 year work by the Franciscan monk Luca Pacioli, of Venice, Italy, entitled Summa de Arithmetica Geometria, Proportioni et Proportionalita or Review of Arithmetic Geometry and Proportions.
Interestingly enough, the concept of proportional mathematics (the underlying formulation for double-entry accounting), is in essence algebra. It is generally accepted today that algebra was first developed and used by non-European, North African Muslims. Moreover, research has been presented that refutes Western claims of being the genesis of modern accounting. See Omar Abdullah Zaid, The Appointment Qualifications of Muslim Accountants in the Middle Ages, Accounting Education 9 (4), 330 (2000). Zaid’s research, though clearly noting that the terms “accountant” and “accounting” were not used in the early and middle stages of the Islaamic history, also shows that early Islaamic society utilized comparable terms for accountant and accounting records. This research also shows that accounting was “practiced and organized as a profession” in the early stages of Islaam in Madinah, Arabia. Terms such as Al-Amel, Mubasher, and Al-Kateb were used. Moreover, the Muslim Holy Book, the Quran, contains the following: Oh you who believe, when you contract a debt for a fixed period, write it down. Let a scribe (kaatibu) write it down in justice between you…” Zaid’s research further indicates that the term Kateb or Kaatib became the dominant title used in Islaamic society for “any person who is assigned the responsibility of writing and recording information whether of a financial or non-financial nature.”
The most significant advances in modern accounting were undoubtedly made in the United States. Although the Institute of Chartered Accountants was established in the UK a few years (1883) before the American Association of Public Accountants (1887), the profession of accounting found fertile ground in the new territories of the US. American accounting practices were transplanted from European accounting practices, which is said to have first taken root in Scotland in the mid-1800s, and further developed as large-scale exploitation of natural resources in various regions of the world occurred. In America’s early years the primary source of capital investment came from England and Scotland. Hence, British and Scottish accountants and accounting practices where transplanted to America.
What is GAAP?
The term GAAP (Generally Accepted Accounting Principles) is used throughout accounting literature; yet it is not a monolithic set of rules. The formation of GAAP was influenced by pronouncements from existing and predecessor standard setting authorities, industry practices, accounting literature, textbooks and regulatory standards promulgated by security commissions. There is American GAAP; British GAAP; and Japanese GAAP; just to name a few. There is even an emerging Islamic GAAP developed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Practices and standard setting is not uniform as between the various venues. Japanese GAAP, for example, is promulgated by the BADC or Business Accounting Deliberation Council, which is an advisory body to the Minster of Finance. Hence, in Japan, GAAP is in effect promulgated by its government. In the US, on the other hand, GAAP is promulgated by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC), i.e. both a private and a governmental standard setter.
Recently, there is movement towards an international GAAP through the International Accounting Standards Board (IASB). As a result, more than 10 countries accept the IASB’s GAAP as supplements to their own national standards, among them Kuwait, Malaysia, Oman, and Pakistan. More than 14 other countries use them directly as national standards, including Albania, Bangladesh, Jordan and Sudan. Moreover, in order to facilitate the process of evaluating cross-border security offerings and to attempt to standardize the reporting requirements, the SEC, along with counterpart organizations around the world (including Malaysia’s Securities Commission and Bahrain’s Stock Exchange) have formed the International Organization of Securities Commissions (“IOSCO”), which is presently based in Madrid, Spain
Why is Accounting Important?
High quality accounting standards, whether specific to a region or more encompassing, are essential for sound and efficient capital market systems and they further facilitate the day-to-day and periodic economic/financial transactions between people and businesses. Accounting standards reduce uncertainty, increase overall efficiency and investor confidence and provide decision useful business information that is relevant, reliable, comparable and transparent. The present day trend towards globalization of capital markets has resulted in a proliferation of cross-border transactions. For example, globally, the Islamic bond market has topped the $200 billion mark. Malaysia comprises more than 25% of that amount. In a June 2002 placement, the Malaysian government booked a $1.1 billion bond placement. In terms of geography, that deal drew from all over the world with the Middle East accounting for about 50% of the paper placed, followed by Asia at 30%, 16% in Europe and 4% in the United States. Islamic “banks” played a major intermediation role in that transaction, booking about 75% of the paper, while asset managers took the remaining 25%. Notwithstanding the fact that the bonds issued by Malaysia were “Islamic bonds,” it is illustrative to note that the accounting standards in most of the world are different in some way, shape or form from those used in the US.
In closing, good accounting is essential to any properly run business and some level of government oversight is needed to impose rules relating to comparability and penalties for failure to do so. It follows then, that the best accounting is done by those accountants that are properly trained and certified by the relevant licensing authority. In California, that authority is the Board of Accountancy (BOA) and accountants licensed by the BOA are referred to as certified public accountants or CPAs.
For more info on US based accounting standards go to: www.fasb.com, www.sec.gov, or www. aicpa.org. For more info on international accounting standards go to: www.iasb.com. For more info on the Islamic GAAP, go to www.aaoifi.com. For more info on the Malaysian securities market, go to: www.sc.com.my and key Islamic Capital Market Review into the search browser on the home page for info on Malaysia’s growing Islamic Capital Market.
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