Accounting

• Author: Jeffrey Lehman, Shirelle Phelps

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A system of recording or settling accounts in financial transactions; the methods of determining

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income and expenses for tax and other financial purposes. Also, one of the remedies available for enforcing a right or redressing a wrong asserted in a lawsuit.

Various accounting methods may be employed. The accrual method shows expenses incurred and income earned for a given period of time whether or not such expenses and income have been actually paid or received by that time. The cash method records income and expenses only when monies have actually been received or paid out. The completed contract method reports gains or losses on certain long-term contracts. Gross income and expenses are recognized under this method in the tax year the contract is completed. The installment method of accounting is a way regulated utilities calculate depreciation for INCOME TAX purposes.

The cost method of accounting records the value of assets at their actual cost, and the fair value method uses the present market value for the recorded value of assets. Price level accounting is a modern method of valuing assets in a financial statement by showing their current value in comparison to the gross national product.

Where a court orders an accounting, the party against whom judgment is entered must file a complete statement with the court that accounts for his or her administration of the affairs at issue in the case. An accounting is proper for showing how an executor has managed the estate of a deceased person or for disclosing how a partner has been handling partnership business.

An accounting was one of the ancient remedies available in courts of EQUITY. The regular officers of the Chancery, who represented the king in hearing disputes that could not be taken to courts of law, were able to serve as auditors and work through complex accounts when necessary. The chancery had the power to discover hidden assets in the hands of the defendant. Later, courts of law began to recognize and enforce regular contract claims, as actions in ASSUMPSIT, and the courts of equity were justified in compelling an accounting only when the courts at law could not give relief. A plaintiff could ask for an accounting in equity when the complexity of the accounts in the case made it too difficult for a jury to resolve or when a trustee or other fiduciary was charged...