The Environment of
Accounting
2
LEARNING OUTCOMES
By the end of this chapter, you should be able to:
y
list advantages and disadvantages of a free enterprise system within the South
African context
y
describe the role of accounting within a free enterprise system
y
discuss briefly the historical development of accounting
y
list and describe the different disciplines that form part of the accounting
profession
y
describe the differences between the disciplines in terms of their fundamental
objectives
y
discuss the role of technology in the field of accounting.
CHAPTER OUTLINE
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INTRODUCTION16
THE ECONOMIC SYSTEM
17
THE HISTORICAL DEVELOPMENT OF ACCOUNTING
17
THE ACCOUNTING PROFESSION
18
The chartered accountant
18
The professional accountant
19
The specialist disciplines within accounting
19
THE ROLE OF THE COMPUTER IN ACCOUNTING
21
SUMMARY22
INTRODUCTION
Financial accounting is an activity that usually takes place in some form of
business environment where records of financial transactions are required.
For us as South Africans, it also takes place within our economy, with its own
particular characteristics. To set the scene, this chapter briefly reviews the type
of economy in which business takes place in South Africa.
Thereafter, we briefly trace the history of accounting as an activity and
a profession. Modern developments in computer technology have had a
considerable impact on the way accounting activities are organised and the way
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Chapter 2 The Environment of Accounting
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17
in which transactions are recorded and reported. In this chapter, we also briefly
review the impact of technology on accounting.
THE ECONOMIC SYSTEM
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We speak of the South African economy as a free enterprise system. In a pure free
enterprise system, there is no government participation or intervention of any
sort and there exists personal freedom and freedom of enterprise. No country
exercises totally free enterprise, as governments are invariably involved in some
capacity with a view to ensuring an economy that functions smoothly.
At the other end of the scale is the socialist type of economy, which, in its
pure form, is characterised by an economy that is government planned and
controlled. In such a situation, ownership of fixed property is not permitted
and the individual is not free to start a business motivated by the expectation
of earning a profit. South Africa tends to be a country where free enterprise is
encouraged and small businesses flourish. It is, however, dominated by a few
very large companies and semi-state businesses.
An individual who has cash resources may use those resources freely within
the country to generate more money. This can be done by making low risk
investments in a bank or other financial institution in return for interest.
Another strategy would be to invest money in a new business in the hope that it
will prosper and result in profits. A further strategy is to invest the money into
an existing business that is expanding. There are, in fact, numerous alternatives
that can be selected.
Such an economic system makes it essential for the owners of capital to receive
feedback regarding the position of their investments. It also requires a means of
measuring the profit or loss that may have resulted from the investment. This
information is supplied by the accounting system.
THE HISTORICAL DEVELOPMENT OF ACCOUNTING
Accountancy originally stems from the need to keep records. In a primitive
sense, it has been used ever since humans first needed to add and subtract.
Many examples have been found of early attempts to record business
transactions. The Assyrians provided the earliest record as far back as 3500 BC,
while clay tablets were found in Babylon dating back to 2300 BC and in Egypt a
system of record-keeping for the building of the pyramids was unearthed. The
absence of recognised numerical and monetary systems in those early times was
a major drawback.
In early times, the venture system was used predominantly. For example, a
quantity of goods was bought, transported and sold. The venture was treated in
isolation and the profit was simply the result of income minus expenses.
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Fundamental Accounting
During the 6th and 5th centuries BC, a monetary system was developed, resulting
in improved financial records. The system whereby a servant was given charge
of resources entrusted to him, for which he was required to give an account,
formed the basis of the accounting system that developed over the centuries.
The function of giving an account of the entrusted resources was known as the
‘stewardship’ function.
The records were in a narrative form for many centuries. Only in the 11th
century AD did a number system begin to evolve, initiated by Arab traders. The
actual basic system of accounting, as it is still used today for record-keeping,
first received prominence in a publication by a Franciscan monk, Lucia Pacioli,
in 1494. The emphasis was on the stewardship function, focusing on recording
financial data.
As the venture system was still commonly used, accounting did not provide
information at periodic intervals, as it does today. The profit or loss was
calculated at the end of each venture, such as a voyage.
In the 19th century, the rapid development in trade, and particularly the
evolution of the company as the most important business organisation, led to
more developments in accounting. While the stewardship function remained
important for management to report to shareholders, greater emphasis was
placed on the use of accounting figures for decision-making.
The emphasis of accounting is presently focused on reporting financial
information to the various classes of users (discussed in Chapter 1) and the use
of the financial information on the past performance of a business to predict its
future performance.
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THE ACCOUNTING PROFESSION
Accounting has developed as a profession over the past century, attaining a
status equivalent to that of law and medicine. In South Africa, there are two
accounting career paths to be considered, that is:
1. The chartered accountant: via the South African Institute of Chartered
Accountants (SAICA).
2. The professional accountant: via the South African Institute of Professional
Accountants (SAIPA).
The chartered accountant
The Companies Act 71 of 2008 requires that all listed companies must prepare
their annual financial statements in conformity with International Financial
Reporting Standards (IFRS). SAICA has therefore devoted considerable resources
to developing the profession, from researching and developing standards that are
in line with acceptable, international accounting standards to the education of
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Chapter 2 The Environment of Accounting
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19
accountants in training. Their focus extends to accountants in practice in terms
of their continuous professional development requirements for their members.
Only those accountants who have passed the SAICA qualifying exams, have
met certain experience requirements and have joined one of the provincial
societies of chartered accountants, may use the designation CA(SA).
The professional accountant
Unlisted companies as defined by the Companies Act – small and medium
enterprises (SMEs) with a turnover of less than R100 million per annum – are
also required to manage their business activities within an acceptable accounting
framework, namely IFRS for SMEs. These companies would use the services of a
professional accountant to manage the financial information of the business or
offer advice that will ensure the sustainability of the business.
The regulatory body that professional accountants in South Africa
would typically belong to is SAIPA. The requirements to use the designation
‘Professional Accountant (SA)’ include specific academic qualifications,
practical training or experience and the professional evaluation exam facilitated
by SAIPA.
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The specialist disciplines within accounting
Bookkeeping involves the recording of transactions. The activities of the
bookkeeper tend to be repetitive. A few months of study may be sufficient to
become a good bookkeeper.
Accounting, on the other hand, ‘includes not only the maintenance of
accounting records, but also the design of efficient accounting systems, the
performance of audits, the development of forecasts, income tax work, and the
interpretation of accounting information’. It takes several years of study and
experience to become a professional accountant.
Accountants qualified as chartered accountants, or CA(SA) form a relatively
small proportion of the total number of people involved in accounting activities.
In many businesses, banks and government institutions, it is possible to become
the chief accountant for that business or division without a CA(SA) qualification.
Here are the specialist areas where a thorough knowledge of accounting is
essential:
Auditing
This is the primary service offered by most public accounting businesses. These
businesses act as external examiners of the accounting system and sign the
financial statements. Large businesses use people with a thorough knowledge
of accounting to ensure that established procedures and policies are being
followed.
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Fundamental Accounting
The internal auditor, who is an employee of the business, is thus not independent
but can assist in reducing the time that the external audit would take. The
internal auditor will not be required to give the audit opinion and need not be
a chartered accountant, but should have a thorough knowledge of accounting
and auditing principles.
Over the last few years, the auditing profession, especially external auditors,
has come under pressure after providing assurance when assurances should
not have been provided. This is because so much reliance is placed on not only
the opinions of external auditors, but also on various stakeholders, including
government, investors and the general public.
Tax services
Tax services are offered by accounting businesses and also by outside consultants
and lawyers. Although a thorough knowledge of accounting is important here,
knowledge of tax laws and tax case histories is vital.
Accountants specialising in taxation endeavour to reduce their clients’ tax
liabilities within the parameters of tax legislation. This is known as tax avoidance
and is perfectly legal. Tax evasion, on the other hand, whether through deliberate
non-disclosure or false disclosure of the true facts, is a serious offence.
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Management advisory services
Public accounting businesses are becoming increasingly involved in advising
clients on deficiencies in their accounting and other systems.
Again, this task is often performed by persons other than chartered
accountants, who have skills in the area requiring attention. However, a
thorough knowledge of accounting is usually a fundamental prerequisite for
being able to offer this service effectively.
Financial accounting
This function requires that systems be established to meet four basic
requirements:
1. The recording of all transactions of the business (bookkeeping).
2. The classification and summary of all this information.
3. Reporting the results to management and other stakeholders on a regular
basis, usually annually, monthly or weekly.
4. The analysis of the information to detect areas of financial weakness that
require attention.
Every small organisation that deals with money has at least one person
involved in this function. Many large organisations have literally hundreds of
people whose daily job is some aspect of the financial accounting system of the
organisation.
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Chapter 2 The Environment of Accounting
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21
Management accounting
This includes cost accounting, which deals with the collection, allocation and
control of the cost of producing specific goods or services. It also includes
preparation of plans or budgets of future operation costs and income, as well as
decision-making.
Once again, both these areas require a thorough knowledge of how an
accounting system functions and the ability to interpret the information that
it provides.
Financial management
The financial manager of a business has two major functions: investigating
investment opportunities into projects such as opening new stores or factories; or
purchasing additional machinery to increase production. If these projects seem
likely to be profitable, then funds must be raised to put them into operation.
These funds are obtained from resources within the business, if they are
available, by obtaining additional capital from owners and investors, or by
borrowing. Inevitably the financial manager will need to read and understand
the output of accounting systems.
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THE ROLE OF THE COMPUTER IN ACCOUNTING
Computer technology that is of interest to the accounting function is often
referred to as business data processing or information technology. There is no
doubt that the advent of computer technology has had a dramatic effect on the
accounting function.
Its main impact has been the removal of much of the drudgery attached to
the manual recording of transaction data of a business. It has, therefore, speeded
up the activities of recording and processing data.
Accounting packages do have major benefits:
y
Transactions are processed more quickly. (Postings to the general ledger
and trial balance is done by the computer, as is the balancing of individual
accounts. In a manual system these are time-consuming tasks.)
y
Transactions are processed more accurately. (Double entries are done by
the computer; the only error that can occur is when the computer operator
punches in the incorrect information.)
y
More information can be captured on individual transactions than any
manual system can accommodate.
From the above, it should be evident that the use of computers has changed
the role of the accountant. The emphasis in an accountant’s job has shifted
from recording and processing transactions to interpretation of results and
communication of corrective actions to be taken.
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Fundamental Accounting
The computer also plays a role in these tasks of the accountant because various
reports are available when needed, such as:
y
age analysis
y
trial balance
y
financial statements
y
budgets.
Having said this, it should also be noted that it is quite possible to access reports
and obtain information directly from the business database. Therefore, it can
be expected that the output of the accounting process, the traditional financial
statements, may eventually disappear.
The rate of development and change in computer technology is phenomenal.
This makes it difficult for the layperson to keep pace with the available hardware
(the computer) and the available software (the packages).
There is no doubt that it is possible to study accounting in front of a computer.
Currently, there are courses available that make this possible. However, it is still
necessary to understand the processes and relationships for an understanding
of accounting.
The fact that accounting is studied using paper and a pen should not detract
in any way from the fact that most accounting, in practice, is performed on
a computer. Once you are placed in front of a terminal, with a knowledge of
accounting, you will be in a position to use the computer package intelligently.
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SUMMARY
This chapter has defined the environment in which accounting systems operate.
It is possible in South Africa for anyone to start their own business with a view
to making a profit. Alternatively, people may invest their money into an existing
business and share in the profits if the business is successful.
To select the investment opportunity wisely, accounting information will be
of assistance. Accounting systems have developed over centuries from a purely
recording device to a situation that requires managers to give account of their
proficiency as stewards of the investments of others. Accounting information
about past performance is also used by investors to predict the expected future
performance of the business.
The accounting profession plays a role in regulating the standards of
accounting and reporting. Although CAs hold the highest accounting qualification, there are many highly skilled and senior positions in a number of areas
available to those who are competent in accounting skills.
Accounting students should also take cognisance of the role of the computer
in the accounting field.
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Chapter 2 The Environment of Accounting
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23
QUESTIONS
Question 2.1
List three characteristics of a free enterprise system.
Question 2.2
In your own words, list the benefits of a free enterprise system in South Africa.
Spend some time reading about the various disciplines within accounting
prior to answering questions 2.3 and 2.4.
Question 2.3
Briefly define each of the following disciplines in terms of the most fundamental
objective:
y
financial accounting
y
management accounting
y
cost accounting
y
taxation
y
auditing.
Question 2.4
Accounting has a few specialist disciplines of which two have been under the
microscope over the last few years, by both investors and the general public.
Name one of them and explain what their role is in society.
Spend some time refreshing your understanding of the Role of the
Computer in Accounting before attempting questions 2.5 and 2.6.
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Question 2.5
List two benefits that accounting packages are providing today.
Question 2.6
Computers have become more advanced, which has resulted in the accounting
process becoming more simplified. List two items or areas where a computer can
assist us with accounting information.
Muriro, E.. Fundamental Accounting, Juta & Company, Limited, 2022. ProQuest Ebook Central,
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