What is accounting?

What is accounting and why should you invest in it? From first employment, tax will be deducted on your earnings and you may begin to contribute towards a company pension scheme (or you may choose to set up your own individual pension scheme). It pays to understand how these debit and credit transactions are affecting your cashflow and how you can control your income most effectively. You may invest in a mortgage for a home of your own, or a personal loan for a motor vehicle. Small to medium business owners will likely require a commercial loan or wider business financing. You can better equip yourself to deal with this by adding to your knowledge of accounting.

Below we present an essential introduction to accountancy.  Please note that this is a general guide which includes historical references, international standards as well as information concerning Guernsey and the UK. You may also want to view the FAQs page for more detail relating to the island and how Collenette Jones can support you locally. You can also view our services.  If you have any further questions, please contact our team - we are happy to help. 


Guernsey Accountants

Accounting
Accounting or accountancy is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language of business", measures the results of an organisation's economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants. The terms "accounting" and "financial reporting" are often used as synonyms.

Accounting can be divided into several fields including financial accounting, management accounting, external auditing, tax accounting and cost accounting. Accounting information systems are designed to support accounting functions and related activities.

Financial accounting focuses on the reporting of an organisation's financial information, including the preparation of financial statements, to the external users of the information, such as investors, regulators and suppliers; and management accounting focuses on the measurement, analysis and reporting of information for internal use by management. 

The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is the most common system.

Accounting has existed in various forms and levels of sophistication throughout many human societies, and the double-entry accounting system in use today was developed in medieval Europe, particularly in Venice, and is usually attributed to the Italian mathematician and Franciscan friar Luca Pacioli.  Today, accounting is facilitated by accounting organisations such as standard-setters, accounting firms and professional bodies.

Financial statements are usually audited by accounting firms, and are prepared in accordance with generally accepted accounting principles (GAAP). GAAP is set by various standard-setting organisations such as the Financial Accounting Standards Board (FASB) in the United States and the Financial Reporting Council in the United Kingdom. As of 2012, 'all major economies' have plans to converge towards or adopt the International Financial Reporting Standards (IFRS).


Brief History
Accounting is thousands of years old and can be traced to ancient civilisations.  The early development of accounting dates back to ancient Mesopotamia, and is closely related to developments in writing, counting and money;  there is also evidence of early forms of bookkeeping in ancient Iran, and early auditing systems by the ancient Egyptians and Babylonians. By the time of Emperor Augustus, the Roman government had access to detailed financial information.

Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval Middle East and was further refined in medieval Europe.  With the development of joint-stock companies, accounting split into financial accounting and management accounting.

The first published work on a double-entry bookkeeping system was the Summa de arithmetica, published in Italy in 1494 by Luca Pacioli (the "Father of Accounting"). Accounting began to transition into an organised profession in the nineteenth century, with local professional bodies in England merging to form the Institute of Chartered Accountants in England and Wales in 1880.


Etymology
Both the words accounting and accountancy were in use in Great Britain by the mid-1800s, and are derived from the words accompting and accountantship used in the 18th century. In Middle English (used roughly between the 12th and the late 15th century) the verb 'to account' had the form accounten, which was derived from the Old French word aconter, which is in turn related to the Vulgar Latin word computare, meaning 'to reckon'. The base of computare is putare, which "variously meant to prune, to purify, to correct an account, hence, to count or calculate, as well as to think".

The word 'accountant' is derived from the French word compter, which is also derived from the Italian and Latin word computare. The word was formerly written in English as 'accomptant', but in process of time the word, which was always pronounced by dropping the 'p', became gradually changed both in pronunciation and in orthography to its present form.


Terminology

Accounting -  has variously been defined as the keeping or preparation of the financial records of transactions of the firm, the analysis, verification and reporting of such records and "the principles and procedures of accounting"; it also refers to the job of being an accountant.

Accountancy - refers to the occupation or profession of an accountant, particularly in British English.

Certified Public Accountant (CPA) - refers to a qualification. To become a licensed Certified Public Accountant (CPA), you must first pass the Uniform CPA Examination®. The CPA Exam consists of four, four-hour sections: Auditing and Attestation (AUD), Business Environment and Concepts (BEC), Financial Accounting and Reporting (FAR) and Regulation (REG).

Certified Management Accountant (CMA) - refers to a certification. Certified Management Accountant is a professional certification credential in the management accounting and financial management fields. The certification signifies that the person possesses knowledge in the areas of financial planning, analysis, control, decision support, and professional ethics.

Certified General Accountant (CGA) - refers to a certification. Certified General Accountant is a professional designation granted to Canadian accountants. A person who meets the education, experience and examination requirements of the Certified General Accountants of Canada is entitled to use the professional designation and add the letters "CGA" to their title. It is mentioned here as it is often grouped with other accountancy acronyms. 


Financial Accounting
Financial accounting focuses on the reporting of an organisation's financial information to external users of the information, such as investors, potential investors and creditors. It calculates and records business transactions and prepares financial statements for the external users in accordance with generally accepted accounting principles (GAAP).  GAAP, in turn, arises from the wide agreement between accounting theory and practice, and change over time to meet the needs of decision-makers.

Financial accounting produces past-oriented reports - for example financial statements are often published six to ten months after the end of the accounting period - on an annual or quarterly basis, generally about the organisation as a whole.

 

Management Accounting
Management accounting focuses on the measurement, analysis and reporting of information that can help managers in making decisions to fulfil the goals of an organisation.  In management accounting, internal measures and reports are based on cost-benefit analysis, and are not required to follow the generally accepted accounting principle (GAAP).  In 2014 CIMA created the Global Management Accounting Principles (GMAPs).  The result of research from across 20 countries in five continents, the principles aim to guide best practice in the discipline.

Management accounting produces past-oriented reports with time spans that vary widely, but it also encompasses future-oriented reports such as budgets. Management accounting reports often include financial and non financial information, and may, for example, focus on specific products and departments.

 

Audit / Auditing
Auditing is the verification of assertions made by others regarding a payoff, and in the context of accounting it is the "unbiased examination and evaluation of the financial statements of an organisation".  Audit is a professional service that is systematic and conventional. 

An audit of financial statements aims to express or disclaim an independent opinion on the financial statements. The auditor expresses an independent opinion on the fairness with which the financial statements presents the financial position, results of operations, and cash flows of an entity, in accordance with the generally acceptable accounting principle (GAAP) and "in all material respects". An auditor is also required to identify circumstances in which the generally acceptable accounting principles (GAAP) has not been consistently observed.

 

Information Systems
An accounting information system is a part of an organisation's information system used for processing accounting data. Many corporations use artificial intelligence-based information systems. The banking and finance industry uses AI in fraud detection.  The retail industry uses AI for customer services. AI is also used in the cybersecurity industry.  It involves computer hardware and software systems using statistics and modelling.

Many accounting practices have been simplified with the help of accounting computer-based software.  An enterprise resource planning (ERP) system is commonly used for a large organisation and it provides a comprehensive, centralised, integrated source of information that companies can use to manage all major business processes, from purchasing to manufacturing to human resources.  These systems can be cloud based and available on demand via application or browser, or available as software installed on specific computers or local servers, often referred to as on-premise.

 

Taxation Compliance
Tax accounting concentrates on the preparation, analysis and presentation of tax payments and tax returns. A professional accountant will provide unmatched expertise in making certain your company and personal taxation compliance needs are competently taken care of and all return filing requirements will be dealt with on a timely basis.

Your Guernsey accountant can also plan for you in line with local island legislation and financial rules to minimise the amount of tax you pay in a way that suits the requirements of your company and personal needs. 

 

Forensic Accounting
Forensic accounting is a specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation. 'Forensic' means 'suitable for use in a court of law', and it is to that standard and potential outcome that forensic accountants generally have to work.

 

Professional Accounting Bodies
Professional accounting bodies include the American Institute of Certified Public Accountants (AICPA) and the other 179 members of the International Federation of Accountants (IFAC), including Institute of Chartered Accountants of Scotland (ICAS), Institute of Chartered Accountants of Pakistan (ICAP), CPA Australia, Institute of Chartered Accountants of India, Association of Chartered Certified Accountants (ACCA) and Institute of Chartered Accountants in England and Wales (ICAEW).

Professional bodies for subfields of the accounting professions also exist, for example the Chartered Institute of Management Accountants (CIMA) in the UK and Institute of management accountants in the United States.  Many of these professional bodies offer education and training including qualification and administration for various accounting designations, such as certified public accountant (AICPA) and chartered accountant.

 

Firms
Depending on its size, a company may be legally required to have their financial statements audited by a qualified auditor, and audits are usually carried out by accounting firms.

Accounting firms grew in the United States and Europe in the late nineteenth and early twentieth century, and through several mergers large international accounting firms were established by the mid-twentieth century. Further large mergers in the late twentieth century led to the dominance of the auditing market by the 'Big Five' accounting firms: Arthur Andersen, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers. The demise of Arthur Andersen reduced the Big Five to the Big Four.

 

Standard-setters
Generally accepted accounting principles (GAAP) are accounting standards issued by national regulatory bodies.  In addition, the International Accounting Standards Board (IASB) issues the International Financial Reporting Standards (IFRS) implemented by 147 countries. While standards for international audit and assurance, ethics, education, and public sector accounting are all set by independent standard settings boards supported by IFAC. The International Auditing and Assurance Standards Board sets international standards for auditing, assurance, and quality control;  the International Ethics Standards Board for Accountants (IESBA)  sets the internationally appropriate principles- based Code of Ethics for Professional Accounts the International Accounting Education Standards Board (IAESB) sets professional accounting education standards;  International Public Sector Accounting Standards Board (IPSASB) sets accrual-based international public sector accounting standards.

Organisations in individual countries may issue accounting standards unique to the countries. For example, in the United Kingdom the Financial Reporting Council (FRC) sets accounting standards. In the United States the Financial Accounting Standards Board (FASB) issues the Statements of Financial Accounting Standards, which form the basis of US GAAP.  However, as of 2012 'all major economies' have plans to converge towards or adopt the IFRS.

 

Education, Training and Qualifications

Degrees
At least a bachelor's degree in accounting or a related field is required for most accountant and auditor job positions, and some employers prefer applicants with a master's degree. A degree in accounting may also be required for, or may be used to fulfil the requirements for, membership to professional accounting bodies.  For example, the education during an accounting degree can be used to fulfil the American Institute of CPA's (AICPA) 150 semester hour requirement, and associate membership with the Certified Public Accountants Association of the UK is available after gaining a degree in finance or accounting.

A doctorate is required in order to pursue a career in accounting academia, for example to work as a university professor in accounting. The Doctor of Philosophy (PhD) and the Doctor of Business Administration (DBA) are the most popular degrees. The PhD is the most common degree for those wishing to pursue a career in academia, while DBA programs generally focus on equipping business executives for business or public careers requiring research skills and qualifications.

Professional Qualifications
Professional accounting qualifications include the Chartered Accountant designations and other qualifications including certificates and diplomas.  In Scotland, chartered accountants of ICAS undergo Continuous Professional Development and abide by the ICAS code of ethics.  In England and Wales, chartered accountants of the ICAEW undergo annual training, and are bound by the ICAEW's code of ethics and subject to its disciplinary procedures.

The ACCA is the largest global accountancy body with over 320,000 members and the organisation provides an ‘IFRS stream’ and a ‘UK stream’. Students must pass a total of 14 exams, which are arranged across three papers.  In the United States, the requirements for joining the AICPA as a Certified Public Accountant are set by the Board of Accountancy of each state, and members agree to abide by the AICPA's Code of Professional Conduct and Bylaws.

 

Collenette Jones Services Information

Accountancy
Accurate, timely and reliable financial information is key to the success of a business, whether well established or in the start up phase. We are able to help provide this, but our expertise and experience allow us to offer our clients one step further by acting as business advisors and assisting with strategic planning. This key step helps enable our client's businesses to grow at a steady, sustainable pace that will ensure continued success.

Bookkeeping
Bookkeeping is the cornerstone of any set of financial statements. It is the recording of financial transactions, and is part of the process of accounting for any business.

Tax
Tax is one of the most crucial elements in the day to day lives of businesses and individuals alike and, year after year, both will often pay more than they need to because they lack the knowledge to take advantage of the exemptions and planning opportunities that are available.

Audit
Whilst most Guernsey companies now have the option of being audit exempt, shareholders and stakeholders alike still often require the comfort of having a set of financial statements audited.

Bespoke Pensions
Our Directors and Trust team specialise in the set up and ongoing administration of Retirement Annuity Trust Schemes ("RATS"). This is a service we have been providing for over 20 years. We currently look after approximately 285 bespoke schemes and have a multi-member scheme, Granite RATS.

Multi-Member Pensions
If high costs and too many choices have been putting you off starting a pension, Granite Retirement Annuity Trust Scheme (“Granite RATS”) could be the solution for you.

Company Formations
Forming a Guernsey company is an activity that is regulated by the Guernsey Financial Services Commission. In order to form Guernsey companies one must use a regulated Corporate Service Provider or Trust company.

Corporate and Trust Services
Collenette Jones can offer various corporate and trust services to Bailiwick of Guernsey residents through our fully licensed subsidiary company, Crossways Trustees Limited

Business Advisory
Whatever the size of your business there are always times when you will be in need of good, solid and impartial advice delivered in a constructive manner and which will enable your business to move on to the next level. We encourage clients to call us throughout the year for advice.

 

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Collenette Jones

We are a Guernsey based firm of Chartered and Certified Accountants providing a high level of service to Bailiwick of Guernsey clients. We provide a total suite of accounting, assurance, tax, company formation and administration, and pension / trust services under one roof.

Please contact us for a no obligation discussion of your accounting needs. Discover more about our services and talented local staff team.

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