Accounting Requirements

AuthorJeffrey Wilson
Pages127-134

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Background

The field of accounting embodies a set of concepts and techniques that are used to measure and report financial information about a particular economic entity (or smaller unit of an entity). An economic entity may be an individual, a for-profit or non-profit business or organization, or a unit of government.

Accounting information is useful not only to owners of entities or their creditors, but also to business planners and forecasters, government administrators, financial analysts, and even individual employees of a company. Investors are hoping to learn as much as possible about a business enterprise before purchasing an interest; creditors are interested in the enterprise's ability to repay obligations. Business enterprise managers need financial information to make sound business decisions. Governmental units need accurate financial profiles in order to tax and regulate. Analysts use this information to form opinions and forecast local or national economic profiles. Individual employees often have bonuses or options tied to enterprise performance.

Financial vs Managerial Accounting

Accounting practices can be divided into two broad areas of function: financial accounting and managerial accounting. Both areas are dependent upon a strong information system that can reliably capture and summarize personal and business transactional data. At the heart of all accounting practices and procedures is a basic understanding of assets and liabilities (debts). However, with the advent of computers and sophisticated software capability, tedious bookkeeping tasks largely have been relegated to the annals of history, and replaced with software programs with dynamic, proactive decision-making capability in the field of financial and managerial accounting.

Financial accounting concerns itself with external reporting of information to parties outside of the subject business or entity. To ensure consistency and structure in reporting, financial accounting is managed by many rules or standards, such as those developed by the private sector group called the Financial Accounting Standards Board (FASB) (see below). Fi-

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nancial reports prepared under these standards have a general-purpose orientation with which all intended user groups are familiar, thus rendering the reports ostensibly neutral and free from bias. Most earnings reports are based on these established measurement and reporting rules, known as generally accepted accounting principles (GAAP)(see below).

In contrast, managerial accounting benefits internal management of an entity by providing information that will assist in planning, controlling, and decision-making. In contrast to financial accounting, internal management accounting dictates its own information needs and specifies the way that data is accumulated and presented. It need not follow any particular rules or guidelines, as its intended purpose is for internal decision-making.

The Accounting Profession

Like law or medicine, the field of accounting involves specialized study and experience in a variety of disciplines. The simplest of accounting tasks is no more than detailed bookkeeping; on the other end of the spectrum is analysis of complex data and economic predictions at the global level.

Auditing services involve the examination of transactions and systems that constitute an organization's financial reports. The objective of an audit is to provide an independent review and report on the appropriateness and correctness of financial statements.

Tax services relate to providing help in the preparation and filing of tax returns to governmental entities, and the rendering of advice on the tax consequences of alternative filing or income-classifying actions.

Consulting services include such diverse activities as evaluating production methods or developing information systems capable of multi- data-processing tasks.

Accountants may work in areas of product costing and pricing, budgeting, or diversifying investments. They may focus on internal auditing of controls and procedures used by their employers, to safeguard company resources and develop reliable and accurate accounting information and systems. They may specialize as tax accountants, auditors, or financial managers. Their expertise is widely used in governmental agencies such as the Internal Revenue Service, General Accounting Office, or Securities and Exchange Commission.

Accountants, PAs, and CPAs

Referring to oneself as an accountant implies, but does not require, a college education or license. It does require, at a minimum, a mastery of specialized expertise in the understanding and presentation of complex financial data. Many smaller business entities retain accountants/bookkeepers internally as employees, to handle the internal financial matters of the business.

Engaging in the practice of "public accounting" involves auditing, taxing, and consulting services to the general public. The term "PA" has become somewhat obsolete (or at least subsumed within the broader category of CPA) in that most, but not all, public accountants are licensed as Certified Public Accountants (CPAs) and hold themselves out as certified to engage in the practice of public accounting. CPAs have received a public accountant registration or license from an accountancy board within the jurisdiction in which they practice, after having met all requirements for such license.

Qualification and Licensure

The federal government plays no role in establishing minimum criteria for the profession, and instead defers to states. Qualification to practice accounting in each state is controlled by that state's board of accountancy (see below).

Generally speaking, modern references to the term "accountant" imply a profession dictated by the fulfillment of minimum education requirements and experience. Certainly this is true for the CPA subcategory. Most colleges offer bachelors' degrees in accounting, which is almost universally a minimum requirement for employment in the field. While experience was often substituted for education in earlier job vacancies, the technical nature of liability exposure for accounting errors now dictates a more comprehensive minimum educational requirement that ensures uniformity in the learning of various accounting practices and procedures.

CPA Requirements

The objective of most prospective accounting professionals is the attainment of a CPA license. All CPA candidates in all 50 state jurisdictions (and DC) must meet minimum educational criteria, successfully pass the Uniform Certified Public Accountant (CPA) Examination, and undergo background investigation to qualify for the CPA license/certificate permitting them to practice.

All states now require (New York is the last to implement, in 2009) a minimum 150-hour education re-

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quirements. This essentially equates to the completion of a standard 120-semester-hour bachelor's (baccalaureate) degree plus 30 hours of specialized course study in accounting, as found in typical master's degree programs. All states have a minimum number of core semester hours in accounting that must be completed as part of the educational requirement.

The Uniform CPA Examination was adopted by all 50 states and the DC as a way to protect the public interest in helping to ensure that only qualified individuals become licensed as CPAs. A revised examination was implemented in 2004, and new simulations on the exam were upgraded in 2006. Subjects covered in the examination include auditing and...

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