CHAPTER TWO: LITERATURE REVIEW
2.1. General introduction
2.1.1. Historical background of accounting
Accounting is as old as the exchange processes that gradually
developed with civilization. It is neither a discovery of science nor the
inspiration of a happy moment, but the outcome of the continued efforts to meet
the changing necessities of trade.
The origin of keeping accounting has been traced as far back
as 8500 B.C, the date archeologists have established for certain clay
tokens-cones, disks spheres, and pellets-found in Mesopotamia(modern Iraq).
These tokens represented such commodities as sheep, jugs of oil, bread, or
clothing and were used in the Middle East to keep records. Later, symbols
impressed on wet clay tablets replaced tokens. Some experts consider this stage
of record keeping as the beginning of the art of writing, which spread rapidly
along the trade routes and took hold throughout the known civilized world.
Development of more formal accounts keeping methods is
attributed to the merchants and bankers of Florence, Venice and Genoa (ITALY)
during 13th -15th centuries. The earliest of these
methods consisted of accounts kept by a Florence banker in 1211 A.D.
The first known treatment of the subject was written in 1494
by an Italian monk and mathematician, Fr. Luca Paciolo, described an approach
earlier developed by merchants to account for their activities as owner
managers of business venture.
Paciolo laid the foundation of the basic accounting model that
is used today. As economic activities progressed from the feudal system to the
industrial revolution, accounting continued to adapt to the needs of society.
As business units became complex and broader in scope, accounting evolved in
response to the increased planning control responsibilities of management.
As governments grew in size and became more centralized,
accounting was developed to meet accountabilities in the 17th and
18th centuries.1
1 Jill Hussey and roger hussey, business accounting,
seventh edition, 1996
2.1.2. Definition of accounting
Accounting is the process of whereby the effects of the
economic activities of an enterprise are accumulated, analyzed, quantified in
money terms, classified in related groups, recorded in books pf accounts,
summarized in financial statements and reported as information which can be
used in making better decisions for the enterprise.
Accounting is the process by which financial information about
a business is recorded classified, summarized, interpreted, and communicated to
owners, managers, and other interested parties. The effects of economic changes
or activities or events are known as transactions. These are in form of
exchange of goods or services using money as the medium of exchange.
Both the above definitions identify the various aspects that make
up the accounting processes involving the following key procedures that are
repeated in the same sequence every year:
Accumulating, analyzing, and recording day by day money worth
of every transaction in the books of accounts which are traditionally referred
to as books of original entries or journals or day books. This operation is
termed as journalizing.
Classifying the journal entries by sorting them into related
categories (accounts) in the ledger book. This exercise is technically known as
posting.
Testing the accuracy of the records of the financial data by the
preparation of a trial balance. Summarizing data from the trial balance in
financial report or statements wh5ch are traditionally:
The income statement or trading, profit and loss account,
which is the statement in which income (revenue) earned by the business venture
is matched with the costs (expenses) associated with that revenue to ascertain
the net increase (profit) or decrease (loss) in the owner's wealth during a
particular accounting period.
The balance sheet which shows a photo image of the financial
position of the business as at a given point in time listing the property of
the business known as assets, and the claims of the creditors (debts) known as
liabilities and the business owner's claim to thatproperty known as capital or
equity of the owner.
The statement of sources and application of funds.
Interpreting of financial statements to various interested
parties through an exercise Commonly referred to as financial statement
analysis.
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