Encyclopedia of business and finance

Thus, there are articles aboutcareers in accounting, economics, finance, infor-mation systems, law, management, and market-ing, as well as a similar series of articles for ethics.There i

E N C Y C L O P E D I A O F BUSINE$$ FINANCE

San Jose State University (retired)

Mary Ellen Oliverio

Pace University

Allen Truell

Ball State University

Editorial Board

E N C Y C L O P E D I A O F BUSINE$$ FINANCE

BURTON S KALISKI, Editor-in-Chief

VOLUME 1

Encyclopedia of Business and Finance

Copyright © 2001 Macmillan Reference USA

All rights reserved No part of this book may be reproduced or transmitted in any form or by any means,

elec-tronic or mechanical, including photocopying, recording, or by any information storage and retrieval system,

without permission in writing from the Publisher.

Macmillan Reference USAMacmillan Reference USA

An imprint of the Gale Group An imprint of the Gale Group

Farmington Hills, MI 48331-3535 New York, NY 10019

Library of Congress Catalog Card No.: 00-107932

Printing number

1 2 3 4 5 6 7 8 9 10

ISBN 0-02-865065-4 (set) — ISBN 0-02-865066-2 (v 1) — ISBN 0-02-865067-0 (v 2)

Printed in the United States of America by the Gale Group

Gale Group and Design is a trademark used herein under license.

Preface vii

A cknowledgments ix

List of Articles xii

List of Contributors xvii

Encyclopedia of Business and Finance 1

Index 899

Contents

Mary Beth Trimper

ASSISTANT MANAGER, COMPOSITION

PURCHASING AND ELECTRONIC PREPRESS

Business is the backbone of American society and

is one of the keys to making our system work as

well as it has for more than two hundred years

Yet as a body of knowledge, business is much

younger There has been, to this point, no

organ-ized work that has attempted to present the

disci-pline of business in a single place The major

purpose of the Encyclopedia of Business and

Finance is to summarize the body of knowledge

that we know as business in a single place and in

language accessible to the layperson

This two-volume collection of more than

three hundred entries presents a wealth of

infor-mation about the major functional areas of

busi-ness: accounting, economics, finance, information

systems, law, management, and marketing The

articles vary in length and in depth, in

biblio-graphic support, and in writing style Thus, the

reader will encounter a variety of approaches and

discern a number of perspectives about business

Some articles are quantitative, since some aspects

of business are numerically based Other articles

tend more toward the qualitative, to

accommo-date the more descriptive aspects of business

Some of the articles present a historical

perspec-tive, incorporating long-proven knowledge, while

others focus more on current concepts and newer

data All entries have the same goal: to provide

useful knowledge about the business and financial

world

Because of their importance, we have given

special treatment to two topics: careers and

ethics In each case, a lead entry is followed by anarticle about that topic in each of the functionalareas of business Thus, there are articles aboutcareers in accounting, economics, finance, infor-mation systems, law, management, and market-ing, as well as a similar series of articles for ethics.There is also a strong emphasis on organiza-tions in the field of business and government.Wherever an organization is discussed, the articleprovides a Web site for further information.Relevant federal legislation is also featured in thiswork All acts that have had a major impact onbusiness are included in the Encyclopedia.The entries are arranged in the usual alpha-betical order, with extensive cross-referencing ofthree types First, there are “See” references, refer-ring the reader to an entry by another name Forexample, under Bait and Switch Advertising onefinds the line “See Advertising.” The second type

of cross-referencing is the “See Also” reference Atthe conclusion of the article on Insurance, forexample, one reads “See Also Personal FinancialPlanning.” The third type of cross-referencing isthe Related Articles listing At the conclusion ofmost articles, there is a list of other articles thatmay shed more light on the topic just discussed

Is the knowledge contained in this work thedefinitive and final word on each topic? Theanswer is “most certainly not.” In this day and age

of dynamic and rapidly growing knowledge, apositive answer would be quite inappropriate.However, this is not necessarily a negative The

Preface

information contained in this Encyclopedia is

valid and reliable and enables readers to do

fur-ther research by going easily accessible sources

Today’s technological environment thus offers a

unique opportunity that was not available to

pre-vious generations: to extend one’s knowledge on

every topic presented

This work was designed for different types of

users The middle school student may be looking

for a starting point for a paper on careers The

high school student may be seeking background

on a major research topic, such as the corporate

form of organization The businessperson may be

seeking a summary of antitrust laws The

busi-ness teacher may be preparing a lesson on the

his-tory of computers The interested layperson may

simply want to learn about something new, such

as government accounting standards or matrix

organization

The Encyclopedia of Business and Finance can

serve as a survey document for the many aspects

of business or as a guide to those aspects It can be

the beginning point of lengthy secondary

research, the background for primary research, or

the ending point for research on a specific item

covered within its pages It can be used to help ask

questions or to find answers It can be used as a

summary of existing knowledge or the basis foracquiring new knowledge

A number of individuals deserve to be tioned for their contributions to this project.First, I must thank the five associate editors onthis project: Roger Luft, Dorothy Maxwell, JimMaxwell, Mary Ellen Oliverio, and Allen Truell.Without their tireless efforts at securing contrib-utors of quality, we would have a very small work.Second, great appreciation goes to Elly Dickason,Publisher of Macmillan Reference USA, for herinspiration in conceiving of this project and get-ting it off the ground Third, I want to express myindebtedness to Allison Marion, Editor at theGale Group, for her professional work in keepingthis project running to its conclusion Fourth, Imust thank all the contributors for the bestefforts that each put forth Writing for an ency-clopedia is not a financially rewarding activity;however, it is a contribution to posterity, so whateach contributor has written is of great intangiblevalue to knowledge and to future scholars.Finally, I speak for all of the people involved inwhat has been a lengthy project when I thank ourfamilies for their encouragement and support

men-BURTONS KALISKI

The editors wish to thank the copyright holders

of the excerpted criticism included in this volume

and the permissions managers of many book and

magazine publishing companies for assisting us

in securing reproduction rights We are also

grateful to the staffs of the Detroit Public Library,

the Library of Congress, the University of Detroit

Mercy Library, Wayne State University Purdy/

Kresge Library Complex, and the University of

Michigan Libraries for making their resources

available to us Following is a list of the copyright

holders who have granted us permission to

reproduce material in this volume of the

Encyclopedia of Business and Finance Every

effort has been made to trace copyright, but if

omissions have been made, please let us know

PHOTOGRAPHS AND ILLUSTRATIONS

APPEARING IN THE ENCYCLOPEDIA OF

BUSINESS AND FINANCE WERE RECEIVED

FROM THE FOLLOWING SOURCES:

89th Annual Chicago Auto Show (workers

put the final touches on displays), photograph

Associated Press/AP Reproduced by

permis-sion.—Ace Hardware logo (displayed outside the

St Louis Convention Center) photograph

Associated Press/AP Reproduced by

permis-sion.—Al Lundberg (left), with Terry Brewer

(center) and Al Anderson (right)(talking about

the tents that will be used for temporary housing

for migrant farm workers), photograph

Associated Press/AP Reproduced by

permis-sion.—Allen, Tim, photograph AssociatedPress/AP Reproduced by permission.—AmericanElectric Power’s Muskingum River Plant, photo-graph Associated Press/AP Reproduced by per-mission.—Andreas, Michael (standing, arms atsides), Chicago, Illinois, 1998, photograph.AP/Wide World Photos Reproduced by permis-sion Associated Press/Ford Motor Company.—Berners-Lee, Tim, photograph AssociatedPress/AP Reproduced by permission.—Billboarddisplaying a Joe Camel advertisement(Vehiclespassing by), photograph Associated Press/AP.Reproduced by permission.—Billboards alongthe Palmetto expressway, photograph AssociatedPress/AP Reproduced by permission.—Bush,George (center) signing the Americans withDisabilities Act, Harold Wilke (rear left), EvanKemp (left), Sandra Parrino, and Justin Dart(right), Jefferson Memorial in the background,photograph Associated Press/AP Reproduced bypermission.—Bush, President George (standing,center), Mexican President Carlos Salinas Gortari(left), Canadian Prime Minister Brian Mulroney(right), Julie Puche (seated, left), Carla Hills (cen-ter), and Michael Wilson (right), photograph.Bettmann/Corbis Reproduce—Businesswomantele-commuting to her office (laptop on desk),photograph Michael Pole/Corbis Reproduced bypermission.—Camdessus, Michel, photograph.AFP/Corbis Reproduced by permission.—Carlson, Chester (standing with first Xeroxcopier), photograph Corbis-Bettmann Repro-

Acknowledgments

duced by permission.—Chicago Cubs logo,

pho-tograph Sandy Felsenthal/Corbis Reproduced

by permission.—Clinton, William Jefferson

(announcing a new equal pay initiative for

women), photograph Associated Press/AP

Reproduced by permission.— Clinton, William

Jefferson (speaking at podium to America’s

cor-porate leaders), photograph Associated Press/AP

Reproduced by permission.—Construction of

the light rail line (connecting downtown

Portland with Portland International Airport),

photograph Associated Press/AP Reproduced by

permission.—Consumer labor activists

(protest-ing a meet(protest-ing of the American Petroleum

Institute), photograph Bettmann/Corbis

Repro-duced by permission.—Customers (entering a

Target store), photograph Associated Press/AP

Reproduced by permission.—Deming, Edward,

photograph Bettmann/Corbis Reproduced by

permission.—Demonstrators (carrying signs

expressing concern over genetically modified

foods), photograph Associated Press/AP

Reproduced.—Dickman, Donald, photograph

Associated Press/AP Reproduced by

permis-sion.—Dingell, Congressmen John, photograph

Associated Press/AP Reproduced by

per-mission.—Escalante, Roberto, photograph

Associated Press/AP Reproduced by

permis-sion.—Facade of the New York Stock Exchange,

photograph Corbis Corporation Reproduced by

permission.—Federal Reserve Building,

photo-graph Lee Snider/Corbis Reproduced by

permis-sion.—Four employees of McCellan’s IGA Family

Store (standing in an aisle of the supermarket),

photograph Philip Gould/Corbis Reproduced

by permission.—Francis, Robert, photograph

Associated Press/AP Reproduced by

permis-sion.—Friedman, Milton, photograph Archive

Photos, Inc./Camera Press, Ltd Reproduced by

permission.— Gates, Bill, photograph Associated

Press/AP Reproduced by permission.—Gates,

Craig, photograph Associated Press/AP

Repro-duced by permission.—Gilbreth, Lillian Evelyn

and Frank Gilbreth (standing together),

photo-graph Underwood & Underwood/Corbis

Repro-duced by permission.—Greenspan, Alan,

photograph Associated Press/AP Reproduced by

permission.—Group of inner city youths ing signs and protesting outside Nike Town store,New York), photograph Associated Press/AP.Reproduced by permission.—Group of peoplewatching girl with hula hoop Public Domain.—Hill, Anita (seated, testifying, wearing lightdress), Washington D.C., 1991, photograph.AP/Wide World Photos Reproduced by per-mission.—Hollerith, Herman, photograph.Bettmann/Corbis Reproduced by permission.—Hollerith tabulator and sorter, photograph.Hulton-Deutsch Collection/Corbis Reproduced

(hold-by permission.—IBM Personal Computer AT,photograph Bettmann/Corbis Reproduced bypermission.—Inslee, Jay, photograph AssociatedPress/AP Reproduced by permission.—Japanesebusinessman (pointing at an electronic stockboard on which most of the share prices areblinking “plus” signals), photograph AssociatedPress/AP Reproduced by permission.—Japaneseworker (taking inventory of Toyota trucks andminivans for export at the Yokohama port), pho-tograph Associated Press/AP Reproduced bypermission.—Johnson, Lyndon Baines, photo-graph Bettmann/Corbis Reproduced by permis-sion.—Johnson, Lyndon Baines (seated, turnedtoward the people behind him), photograph.Bettmann/Corbis Reproduced by permission.—Kennedy, Joseph P., photograph Bettmann/Corbis Reproduced by permission.—Keynes,John Maynard (seated), photograph UPI/Corbis-Bettmann Reproduced by permission.—Man(scooping rice out of a gigantic pan), photo-graph James Marshall/Corbis Reproduced bypermission.—Marx, Karl, photograph ArchivePhotos Reproduced by permission.—Maslow,Abraham (wearing crew neck sweater overchecked shirt), photograph UPI/Corbis Bett-mann Reproduced by permission.—McCloy,John J (1895-1989), photograph Bettmann/

McDonald’s employees, (serving customers at a

in Moscow), photograph Associated Press.Reproduced by permission.—McGregor,Douglas, photograph Bettmann/Corbis.Reproduced by permission.—McLuhan, Mar-shall, photograph Bettmann/Corbis Reproduced

by permission.—Men in line for jobs at E.F

Keating during the Depression, photograph The

Library of Congress.—Morgan, J P., photograph

Archive Photos Reproduced by permission.—

Mundell, Robert, photograph Reuters Newmedia

Inc./Corbis Reproduced by permission.—Nader,

Ralph, photograph Associated Press/AP

Reproduced by permission.—National Labor

Relations Board supervising steel workers’ vote

on union representation, 1937, photograph

UPI/Corbis-Bettmann Reproduced by

permis-sion.—New York City street (crowded with

Christmas shoppers and traffic, in front of Macy’s

department store), photograph Bettmann/

Corbis Reproduced by

permission.—Non-prescription medicine labels (shown with

warn-ings printed on them before and after the new

labeling system, 1999), photograph Associated

Press/AP Reproduced by permission.—Pacioli,

Fra Luca, photograph Achivo Iconografico,

S.A./C Reproduced by permission.—Pascal,

Blaise, painting The Library of Congress.—

Patent certificates, photograph Charles E

Rotkin/Corbis Reproduced by permission.—

People (seated in a circle, during the morning

trade in the Japanese markets), photograph

Associated Press/AP Reproduced by

permis-sion.—People stretching (during a corporate

management training session), photograph

Layne Kennedy/Corbis Reproduced by

permis-sion.—Pepsi television ad (showing a boy getting

sucked into a Pepsi bottle), photograph

Associated Press/AP Reproduced by

permis-sion.—President Roosevelt resurrecting the

Sherman Anti-Trust Law, political cartoon by

Bartholomew.—Proctor & Gamble Co

head-quarters, photograph Associated Press/AP

Reproduced by permission.—Prodi, Romano,

photograph Associated Press/AP Reproduced by

permission.—Raines, Franklin (standing at

podium), 1996, photograph AP/Wide World

Photos Reproduced by permission.—Safety

Recall posters, photograph Associated Press/

CPSC Reproduced by permission.—Sakic, Joe

(Colorado Avalanche center), photograph

Associated Press/AP Reproduced by

permis-sion.—Samaranch, Juan Antonio (back to

cam-era)(listening to Michael Knight during theSydney Organizing Committee for the OlympicGames by video conference, InternationalOlympic Committee headquarters), photograph.AFP/Corbis Reproduced by permission.—Schumpeter, Joseph (seated, wearing light-col-ored suit), photograph Corbis-Bettmann.Reproduced by permission.—Sculley, John, SteveJobs and Steve Wozniak, photograph UPI/Corbis-Bettmann Reproduced by permission.—Segregation sign (officer placing segregationsign), Jackson, Mississippi, 1956, photograph.AP/Wide World Photos Reproduced by per-mission —Socrates (marble bust), photograph.Gianni Dagli Orti/Corbis Reproduced by per-mission.—Taylor, Frederick W (1856-1915),photograph Bettmann/Corbis Reproduced bypermission.—The New York Stock Exchange(trading floor), photograph Associated Press/AP.Reproduced by permission.—Trains in CNRailyard, photograph Paul A Soulder/Corbis.Reproduced by permission.—Two men working

a UNIVAC computer, photograph Bettmann Reproduced by permission.—Vehiclesparked in front of a WalMart store (on Hawaii’sbig island), photograph James Marshall/Corbis.Reproduced by permission.—Walker, James(left) and Elena Kholodenko, photograph.Associated Press/AP Reproduced by permis-sion.—Warden, John (arriving at the federalcourt) Washington DC 1998, photograph byTyler Mallory AP/Wide World Photos Repro-duced by permission.—Weber, Max (wearingdark suit, greying beard, frowning), photograph.The Library of Congress.—West, Wade H., pho-tograph Corbis Reproduced by permission.—White, Harry Dexter, photograph Bettmann/Corbis Reproduced by permission.—Wilson,Woodrow, photograph The Library ofCongress.—Woman at desk (with dictaphoneand earphones), photograph Bettmann/Corbis.Reproduced by permission.—Women operatingmachinery (in a munitions factory, Europe, ca.1914-1918), photograph Corbis Reproduced bypermission.—Workers in cubicles making calls,photograph Associated Press/AP Reproduced bypermission

Mary Jean Lush

AMERICANS WITH DISABILITIES

ASSURANCE SERVICESDon PallaisAUDIT COMMITTEESLouis Braiotta, Jr

AUDITINGMohammad AbdolmohammadiBALANCE OF TRADE

Lisa HuddlestunBANKRUPTCYRosario GirasaBEHAVIORA L SCIENCE MOVEMENTMarcia Anderson

BENCHMARKINGMary L FischerBONDS

Allie F MillerBUDGETS AND BUDGETINGRoger Doost

BUREAU OF LABOR STATISTICSBernard H NewmanBUSINESS CYCLEDavid BowersBUSINESS PROFESSIONALS OF AMERICA

Jewel Hairston

CAPITAL INVESTMENTSDouglas R EmeryCAPITAL MARKETSSurendra KaushikCAREERS IN ACCOUNTINGBernard H NewmanCAREERS IN ECONOMICSWendy RinholenCAREERS IN FINANCEMark WilsonCAREERS IN INFORMATIONLinda J Austing, DeborahHughes

CAREERS IN LAW FOR BUSINESSCraig A Bestwick

CAREERS IN MANAGEMENTThaddeus McEwenCAREERS IN MARKETINGRandy L JoynerCAREERS OVERVIEWJudith Chiri-MulkeyCERTIFIED INTERNAL AUDITORS (CIA)

Charles H CalhounCERTIFIED MANAGEMENT ACCOUNTANT (CMA)Kathy WilliamsCERTIFIED PUBLIC ACCOUNTANT (CPA)

Anthony T Krzystofik

CONSUMER BILL OF RIGHTS

Mary Jean Lush

CONSUMER PRICE INDEX

Randy L JoynerCORPORATE EDUCATIONDiane ClevesyCORPORATIONG.W MaxwellCOST ALLOCATIONClifford BrownCOST-BENEFIT ANALYSISMary MichelCOST-VOLUME-PROFIT ANALYSIS

G Stevenson SmithCOSTS

Roman L WeilCOTTAGE INDUSTRIESJulie WatkinsCREDIT/DEBIT/TRAVEL CA RDSBurton S Kaliski

CRIME AND FRAUDAllen D TruellCURRENCY EXCHANGEDenise WoodburyCUSTOMER SERVICEBarry L ReeceDATABASESGary HansenDECA

Robert G BernsDECISION MAKINGMarcy SatterwhiteDEREGULATIONJames RinehartDERIVATIVESPatrick CasabonaDESKTOP PUBLISHINGWilliam H BakerDISCOUNT STORESWinifred Green, Earl MeyerDIVERSITY IN THE WORKPLACEPatrick Highland

DIVISION OF LABORDonna McAlister Kizzier

DOCUMENT PROCESSINGLinda J AustinECONOMIC ANALYSISRalph WrayECONOMIC CYCLESPaula LuftECONOMIC DEVELOPMENTEllen Szarleta

ECONOMIC SYSTEMSDenise WoodburyECONOMICS

Roger LuftECONOMICS: A HISTORICAL PERSPECTIVE

Roger LuftELECTRONIC COMMERCEMiklos A VasarhelyiE-MAIL

Marsha BaylessEMPLOYEE ASSISTANCE PROGRAMSPatrick Highland

EMPLOYEE BENEFITSMarcy SatterwhiteEMPLOYEE COMPENSATIONLee Wonsick LeeEMPLOYEE DISCIPLINEMarcia AndersonENTREPRENEURSHIPRobert Berns, Jewel HairstonENVIRONMENTAL PROTECTION AGENCY

Mary Jean LushEQUAL EMPLOYMENT OPPORTUNITY ACTNikole PogemanEQUAL PAY ACTNikole PogemanERGONOMICSPat GravesETHICS IN ACCOUNTINGMary B GreenawaltETHICS IN ECONOMICSRoger Luft

ETHICS IN FINANCEAnand Shetty

FORECASTING IN BUSINESSRoger Luft

FOREIGN CORRUPT PRACTICES ACT

OF 1977Charles H CalhounFRAUDULENT FINANCIAL REPORTING

Gerard A LangeFUTURE BUSINESS LEADERS OF AMERICA

Jill WhiteGENERALLY ACCEPTED ACCOUNTING PRINCIPLESEdmund L JenkinsGLOBAL ECONOMYNorman WrightGOODS AND SERVICESEarl MeyerGOVERNMENT ACCOUNTINGMary L Fischer

GOVERNMENT ACCOUNTING STANDARDS BOARDJesse HughesGOVERNMENT AUDITING STANDARDS

Bernard H NewmanGOVERNMENT FINANCIAL REPORTING

Armand SequinHEALTH ISSUES IN BUSINESSBrenda ReinsboroughHUMAN RELATIONSPatrick HighlandHUMAN RESOURCE MANAGEMENTChristine Jahn

INCOME TAX, HISTORY OFJean E Harris

INDEPENDENCE STANDARDS BOARD

C Richard BakerINFORMATION PROCESSINGMary Alice GriffinINFORMATION PROCESSING: HISTORICAL PERSPECTIVESJames Miles

INFORMATION SYSTEMSTheo B A AddoINFORMATION TECHNOLOGYLinda J Austin

INSTITUTE FOR INTERNAL AUDITORS

Steven E JamesonINSTITUTE OF MANAGEMENT ACCOUNTANTS

Kathy WilliamsINSURANCEEdward J Keller, Jr

INTEGRATED SOFTWAREJudith Chiri-MulkeyINTERACTIVE TECHNOLOGIESPhilip D Taylor

INTEREST RATE(S)Henry H DavisINTERNAL CONTROL SYSTEMSAudrey A GramlingINTERNATIONAL ACCOUNTING STANDARDS

Mahendra R GujarathiINTERNATIONAL FEDERATION OF ACCOUNTANTS

Frederick D S ChoiINTERNATIONAL INVESTMENTMasaaki Kotabe

INTERNATIONAL MONETARY FUNDBernard H Newman

INTERNATIONAL TRADEAllen D TruellINTERNETLloyd BartholomeINTERSTATE COMMERCEPatricia Spirou

MASS MARKETINGEarl MeyerMEETING MANAGEMENTBrenda ReinsboroughMONETARY POLICYEdward HsiehMONEY SUPPLYHassan MohammadiMONOPOLY

Michael SpahrMOTIVATIONPat GravesMULTIMEDIA SYSTEMSGeorge MundrakeMUTUAL FUNDSAnand ShettyNATIONAL ASSOCIATION OF STATE BOARDS OF ACCOUNTANCYLouise Dratler HabermanNATIONAL BUSINESS EDUCATION ASSOCIATION

G.W MaxwellNATIONAL LABOR RELATIONS BOARD

Tod RejholecNATIONAL RETAIL FEDERATIONMary Jean Lush

NATIONAL TRANSPORTATION SAFETY BOARD

Mary Jean LushNEGOTIATIONDonna McAlister KizzierNETWORKING

Dennis LaBontyNORTH AMERICAN INDUSTRY CLASSIFICATION SYSTEMMary Michel

NOT-FOR-PROFIT ACCOUNTING

G Stevenson SmithOCCUPATIONAL SAFETY AND HEALTH ADMINISTRATIONMary Jean Lush

OFFICE TECHNOLOGYLinda J AustinOFFICE TECHNOLOGY: HISTORICAL PERSPECTIVES

B June SchmidtOLIGOPOLYRajeev K GoelOPERATIONS MANAGEMENTJanel KupferschmidOPPORTUNITY COSTDenise WoodburyORGANIZATIONAL BEHAVIOR AND DEVELOPMENT

Cheryl NollORGANIZATIONAL STRUCTUREChristine Jahn

OUTSOURCINGCarolyn AshePARTNERSHIPKeith BicePATENTSRandy L JoynerPERFORMANCE APPRAISALLee Wonsick LeePERFORMANCE AUDITSDouglas E ZiegenfussPERSONAL FINANCIAL PLANNINGJoel Lerner

POLICY DEVELOPMENTMarie FlatleyPRICE FIXINGPatricia SpirouPRICING

Allen D TruellPRIVACY AND SECURITYLisa E GueldenzophPRODUCT LABELINGMichael MilbierPRODUCT LINESMichael Milbier

SMALL BUSINESS ADMINISTRATION

Mary Jean Lush

SOCIAL RESPONSIBILITYThomas HaynesSOFTWARE

Wanda SamsonSOLE PROPRIETORSHIPG.W MaxwellSPEAKING SKILLS IN BUSINESSJan Hargrave

SPREADSHEETSBetty BrownSTAGGERS RAIL AND MOTOR CARRIER ACTS OF 1980Phyllis Bunn

STANDARDS-BASED WORK PERFORMANCEJames MilesSTANDARD COSTINGBernard H NewmanSTANDARD METROPOLITAN STATISTICAL AREASMary Jean LushSTATEMENTS ON MANAGEMENT ACCOUNTING

B Douglas ClintonSTATE SOCIETIES OF CPASKathleen A SimonsSTOCK EXCHANGESIan DomowitzSTOCK INDEXESJoel LernerSTOCKSJoel LernerSTRATEGIC MANAGEMENTNorman WrightSTRESS, WORK-RELATEDJim Rucker

SUPPLY AND DEMANDJohn ConantTARGET MARKETINGTatum TurnerTAXATIONJeffrey JacobsTELECOMMUNICATIONMary Alice Griffin, Susan EvanaJennings

TELECOMMUTINGCarol JonesTELEMARKETINGEarl MeyerTELEPHONE SKILLSDorothy MaxwellTEMPORARY EMPLOYMENTDorothy MaxwellTIME MANAGEMENTCarrie FoleyTIME VALUE OF MONEYRoman L WeilTRADEMARKSRandy L JoynerTRADE SHOWSEarl MeyerTRADING BLOCSMasaaki KotabeTRAINING AND DEVELOPMENTDavid Hyslop

TRANSFER PAYMENTSMichael NelsonUNIFORM CERTIFIED PUBLIC ACCOUNTANT EXAMINATIONAnthony T KrzystofikUNITED STATES GENERAL ACCOUNTING OFFICEJean E HarrisVIDEOCONFERENCINGJames MilesVOICE MESSAGINGChristine IrvineWHOLESALINGPatricia SpirouWORD PROCESSINGWilliam H BakerWORK GROUPSTena B CrewsWORK MEASUREMENTNashwa GeorgeWRITING SKILLS IN BUSINESSG.W Maxwell

DESKTOP PUBLISHING WORD PROCESSINGLloyd BartholomeUtah State University, LoganINTERNET

MANAGEMENT INFORMATION SYSTEMS

Marsha BaylessStephen A Austin StateUniversity

E-MAILJean C BedardNortheastern UniversityANALYTICAL PROCEDURESDennis R Beresford

University of GeorgiaFINANCIAL ACCOUNTING STANDARDS BOARDRobert G Berns

Bowling Green State UniversityDECA

ENTREPRENEURSHIPCraig A BestwickSan Francisco, CaliforniaCAREERS IN LAW FOR BUSINESS

Keith BiceIndianapolis, IndianaCONTRACTS PARTNERSHIP

Lauren BlockNew York, New YorkCONSUMER BEHAVIORWinnifred BolinskyAllentown, PennsylvaniaSCHOOL TO CAREER MOVEMENTRichard BortzSouthern Illinois University,Carbondale

JOB ANALYSIS AND DESIGNDavid Bowers

Case Western ReserveUniversity

BUSINESS CYCLELouis Braiotta, Jr

SUNY, BinghamtonAUDIT COMMITTEESClarice Brantley

Pensacola, FloridaSEXUAL HARASSMENTClifford Brown

Bentley CollegeACTIVITY-BASED MANAGEMENT COSTING COST ALLOCATIONMichael Brun

Illinois State UniversityFACTORS OF PRODUCTIONPhyllis Bunn

Delta State UniversityCONSUMER PRODUCT SAFETY ACT OF 1972

List of Contributors

Indiana State University

SUPPLY AND DEMAND

University of Miami, CoralGables

CAPITAL INVESTMENTSSamir B Fahmy

St John’s UniversitySECURITIES ACTS:

REQUIREMENTS FOR ACCOUNTINGMary L FischerUniversity of Texas, TylerBENCHMARKING GOVERNMENT ACCOUNTINGMarie Flatley

Del Mar, CaliforniaCOMMUNICATIONS CHANNELS POLICY DEVELOPMENTCarrie Foley

West Baldwin, MaineTIME MANAGEMENTNashwa George

Jersey City, New JerseyPUBLIC OVERSIGHT BOARD WORK MEASUREMENTRosario Girasa

Pace UniversityBANKRUPTCYRajeev K GoelIllinois State UniversityOLIGOPOLY

Keith Goree

St Petersburg, FloridaETHICS OVERVIEWAudrey A GramlingWake Forest UniversityINTERNAL CONTROL SYSTEMSPat Graves

Eastern Illinois UniversityERGONOMICS

MOTIVATIONMary B GreenawaltThe CitadelETHICS IN ACCOUNTING FINANCIAL STATEMENT ANALYSIS

Mary Alice GriffinValdosta State UniversityINFORMATION PROCESSING TELECOMMUNICATIONSLisa E GueldenzophBowling Green State UniversityPRIVACY AND SECURITYMahendra R GujarathiBentley CollegeINTERNATIONAL ACCOUNTING STANDARDS

Louise Dratler HabermanNew York, New YorkNATIONAL ASSOCIATION OF STATE BOARDS OF

ACCOUNTANCYJewel HairstonBowling Green State UniversityBUSINESS PROFESSIONALS OF AMERICA

ENTREPRENEURSHIPWalter A HamiltonSouth Hadley, MassachusettsCOMPUTER GRAPHICSGary Hansen

Brigham Young University,Provo

DATABASESJames HansenBrigham Young University,Provo

ARTIFICIAL INTELLIGENCEJan Hargrave

Houston, TexasLISTENING SKILLS IN BUSINESS SPEAKING SKILLS IN BUSINESSJean E Harris

Pennsylvania State University,Harrisburg

CHIEF FINANCIAL OFFICERS ACT

INCOME TAX, HISTORY OF UNITED STATES GENERAL ACCOUNTING OFFICEBeth Haynes

Brigham Young University,Hawaii

CONSUMER PRICE INDEXThomas Haynes

Illinois State University

Bowling Green State University

TRAINING AND DEVELOPMENT

Edmund L JenkinsNorwalk, ConnecticutGENERALLY ACCEPTED ACCOUNTING PRINCIPLESJennifer Jennes

Hooksett, New HampshireFADS

PUBLICITYCarol JonesCalifornia State PolytechnicUniversity

TELECOMMUTINGRandy L JoynerGreenville, North CarolinaCAREERS IN MARKETING COPYRIGHTS

PATENTS RESEARCH IN BUSINESS TRADEMARKS

Burton S KaliskiNew Hampshire CollegeCREDIT/DEBIT/TRAVEL CA RDSSurendra Kaushik

Pace UniveristyCAPITAL MARKETS FINANCIAL INSTITUTIONSEdward J Keller, Jr

Franklin Square, New YorkINSURANCE

Donna McAlister KizzierUniversity of Nebraska, LincolnDIVISION OF LABOR

NEGOTIATIONMasaaki KotabeBlue Bell, PennsylvaniaINTERNATIONAL INVESTMENT TRADING BLOCS

Alan G KrabbenhoftRoosevelt UniversitySERVICE INDUSTRIESAnthony T KrzystofikHadley, MassachusettsCERTIFIED PUBLIC ACCOUNTANT (CPA) UNIFORM CERTIFIED PUBLIC ACCOUNTANT EXAMINATION

Janel KupferschmidBloomington, IllinoisANTITRUST LEGISLATION OPERATIONS MANAGEMENTGerard A Lange

St John’s UniversityFRAUDULENT FINANCIAL REPORTING

Audrey LangillDerry, New HampshireSHOPPING

Christine LatinoAtkinson, ConnecticutMARKET RESEARCHLee Wonsick LeeNewington, ConnecticutEMPLOYEE COMPENSATION LEADERSHIP

PERFORMANCE APPRAISALMark Lefebvre

Bow, New HampshireINVENTORY CONTROLJoel Lerner

Sullivan County CommunityCollege

PERSONAL FINANCIAL PLANNING

STOCK INDEXES STOCKSPaula LuftDahinda, IllinoisCOLLECTIVE BARGAINING ECONOMIC CYCLES LABOR UNIONSRoger Luft

Dahinda, IllinoisCIRCULAR FLOW ECONOMICS ECONOMICS: A HISTORICAL PERSPECTIVE

ETHICS IN ECONOMICS FORECASTING IN BUSINESS MANAGEMENT

MANAGEMENT: HISTORICAL PERSPECTIVES

QUALITY MANAGEMENTMary Jean Lush

Delta State UniversityAMERICAN MARKETING ASSOCIATION

CONSUMER BILL OF RIGHTS DEMOGRAPHICS

St Louis, MissouriPRODUCT LABELING PRODUCT LINES PRODUCT MIXJames MilesPittsford, New YorkINFORMATION PROCESSING:

HISTORICAL PERSPECTIVES STANDARDS-BASED WORK PERFORMANCE

VIDEOCONFERENCINGAllie F Miller

Drexel UniversityACCOUNTING CYCLE BONDS

Theodore J MockUniversity of SouthernCalifornia

ACCOUNTING INFORMATION SYSTEMS

Hassan MohammadiIllinois State UniversityMONEY SUPPLYMelvin MorgensteinPlainview, New YorkFEDERAL RESERVE SYSTEMGeorge Mundrake

Ball State UniversityMULTIMEDIA SYSTEMSRobert J Muretta, Jr

Westbook, MaineGOVERNMENT FINANCIAL REPORTING

Michael NelsonIllinois State UniversityTRANSFER PAYMENTSBernard H NewmanPace UniversityBUREAU OF LABOR STATISTICS CAREERS IN ACCOUNTING FINANCIAL FORECASTS AND PROJECTIONS

GOVERNMENT AUDITING STANDARDS

INTERNATIONAL MONETARY FUND

STANDARD COSTINGCheryl Noll

Eastern Illinois UniversityCHANGE PROCESS MANAGEMENT: AUTHORITY AND RESPONSIBILITY ORGANIZATIONAL BEHAVIOR AND DEVELOPMENTMary Ellen OliverioPace UniversityFINANCE: HISTORICAL PERSPECTIVESSharon Lund O’NeilHouston, TexasCOMMUNICATION IN BUSINESS

Don PallaisRichmond, VirginiaASSURANCE SERVICESLou E Pelton

University of North TexasCHANNELS OF DISTRIBUTIONNikole Pogeman

Bartonvill, IllinoisAMERICAN MANAGEMENT ASSOCIATION

AMERICANS WITH DISABILITIES ACT CIVIL RIGHTS ACTS EQUAL EMPLOYMENT OPPORTUNITY ACT EQUAL PAY ACTKaren PuglisiHooksett, New HampshireCLASSICS

Zane QuibleOklahoma State UniversityOFFICE LAYOUT

Barry L ReecePittsboro, North CarolinaCUSTOMER SERVICEBrenda ReinsboroughYarmouth, MaineHEALTH ISSUES IN BUSINESS MEETING MANAGEMENTTod Rejholec

Bridgeport, IllinoisNATIONAL LABOR RELATIONS BOARD

Virginia Polytechnic Institute

and State University

Manchester, New Hampshire

CONSUMER ADVOCACY AND PROTECTION

FRANCHISES INTERSTATE COMMERCE PRICE FIXING

RETAILERS WHOLESALINGJames E StoddardAppalachian State UniversityMARKETING: HISTORICAL PERSPECTIVES

John SwopeEast Carolina UniversityADVERTISING AGENCIES ETHICS IN MARKETINGEllen Szarleta

Indiana University, NorthwestECONOMIC DEVELOPMENTPhilip D Taylor

Wesleyan CollegeINTERACTIVE TECHNOLOGIESAllen D Truell

University of Missouri,Columbia

ADVERTISING CRIME AND FRAUD GOVERNMENT ROLE IN BUSINESS

INTERNATIONAL TRADE MARKETING

MARKETING MIX PRICING

PROMOTIONTatum TurnerManchester, New HampshireTARGET MARKETINGGregory ValentineUniversity of Southern IndianaGROSS DOMESTIC PRODUCT INCOME

Carson VarnerIllinois State UniversityETHICS IN LAW FOR BUSINESS LAW IN BUSINESS

Miklos A VasarhelyiRutgers University, NewarkELECTRONIC COMMERCEAnnette Vincent

University of SouthwesternLouisiana

ETHICS IN INFORMATION PROCESSING

Michelle VotoLondonberry, New HampshireLIFESTYLES

Julie WatkinsBrownfield, MaineCOTTAGE INDUSTRIESRoman L Weil

University of ChicagoTIME VALUE OF MONEYJill White

Pensacola, FloridaFUTURE BUSINESS LEADERS OF AMERICA

Kathy WilliamsMontvale, New JerseyCERTIFIED MANAGEMENT ACCOUNTANT (CMA) INSTITUTE OF MANAGEMENT ACCOUNTANTS

Mark WilsonColumbus, OhioCAREERS IN FINANCEDenise WoodburyBrigham Young University,Hawaii

CURRENCY EXCHANGE ECONOMIC SYSTEMS MONEY

OPPORTUNITY COSTCharles W WoottonEastern Illinois UniversityACCOUNTING: HISTORICAL PERSPECTIVES

Ralph WrayBloomington, IndianaECONOMIC ANALYSISNorman Wright

Brigham Young University,Hawaii

GLOBAL ECONOMY STRATEGIC MANAGEMENTDouglas E Ziegenfuss

Virginia Beach, VirginiaPERFORMANCE AUDITS

Accounting is a field of specialization critical to

the functioning of all types of organizations

Ac-counting often is referred to as ‘‘the language of

business’’ because of its role in maintaining and

processing all relevant financial information that

an entity requires for its managing and reporting

purposes

Accountants often have a specific

sub-specialization and function at one of several

lev-els Preparation for the field is provided by

secon-dary schools, postseconsecon-dary business schools,

community colleges, and four-year colleges and

universities

WHAT IS ACCOUNTING?

Accounting is a body of principles and

conven-tions as well as an established general process for

capturing financial information related to an

tity’s resources and their use in meeting the

en-tity’s goals Accounting is a service function that

provides information of value to all operatingunits and to other service functions, such as theheadquarters offices of a large corporation

Origin of Accounting Modern accounting istraced to the work of an Italian monk, LucaPacioli, whose publication inA.D 1494 describedthe double-entry system, which continues to bethe fundamental structure for contemporary ac-counting systems in all types of entities Whendouble-entry accounting is used, the balancesheet identifies both the resources controlled bythe entity and those parties who have claims tothose assets

Early histories of business identify the keeper as a valuable staff member As businessesbecame more complex, the need for more astutereview and interpretation of financial informa-tion was met with the development of a newprofession—public accounting In the UnitedStates, public accounting began in the latter part

book-of the nineteenth century The first organizationwas established in 1887; the first professional ex-amination was administered in December 1896

In the early days of the twentieth century,numerous states established licensing require-ments and began to administer examinations.During the first century of public accounting inthe United States, the American Institute of Cer-tified Public Accountants (and its predecessororganizations) provided strong leadership tomeet the changing needs of business, not-for-profit, and governmental entities

A

Fra Luca Pacioli’s 1494 publication described the double-entry system.

Generally Accepted Accounting Principles

(GAAP)No single source provides principles for

handling all transactions and events Over time,

conventional rules have developed that continue

to be relevant Additionally, groups have been

authorized to establish accounting standards

The Financial Accounting Standards Board

(FASB) assumed responsibility for accounting

standards and principles in 1973 It is authorized

to amend existing rules and establish new ones

In 1992, the Auditing Standards Board lished the GAAP hierarchy At the highest level ofthe hierarchy are FASB statements and interpre-tations; APB opinions were issued from 1959 to

estab-1973 by the Accounting Principles Board (APB),and Accounting Research Bulletins, issued until

ACCOUNTING

1959 by the Committee on Accounting

Proce-dure (CAP); both the APB and CAP were

com-mittees of the American Institute of Certified

Public Accountants (AICPA)

What type of unit is served by accounting?

Probably no concept or idea is more basic to

accounting than the accounting unit or entity, a

term used to identify the organization for which

the accounting service is to be provided and

whose accounting or other information is to be

analyzed, accumulated, and reported The entity

can be any area, activity, responsibility, or

func-tion for which informafunc-tion would be useful

Thus, an entity is established to provide the

needed focus of attention The information

about one entity can be consolidated with that of

a part or all of another, and this combination

process can be continued until the combined

entity reaches the unit that is useful for the

de-sired purpose

Accounting activities may occur within or

outside the organization Although accounting is

usually identified with privately owned,

profit-seeking entities, its services also are provided to

not-for-profit organizations such as universities

or hospitals, to governmental organizations, and

to other types of units The organizations may be

small, owner-operated enterprises offering a

sin-gle product or service, or huge multi-enterprise,

international conglomerates with thousands of

different products and services The

not-for-profit, governmental, or other units may be local,

national, or international; they may be small or

very large; they may even be entire nations, as in

national income accounting Since not-for-profit

and governmental accounting are covered

else-where in this encyclopedia, the balance of this

article will focus on accounting for privately

owned, profit-seeking entities

What is the work of accountants?Accountants

help entities be successful, ethical, responsible

participants in society Their major activities

in-clude observation, measurement, and

communi-cation These activities are analytical in nature

and draw on several other disciplines (e.g.,

eco-nomics, mathematics, statistics, behavioral

sci-ence, law, history, and tion)

language/communica-Accountants identify, analyze, record, andaccumulate facts, estimates, forecasts, and otherdata about the unit’s activities; then they translatethese data into information that can be useful for

a specific purpose

The data accumulation and recording phasetraditionally has been largely clerical; typicallyand appropriately, this has been called bookkeep-ing, which is still a common and largely manualactivity, especially in smaller firms that have notadopted state-of-the-art technology But with ad-vances in information technology and user-friendly software, the clerical aspect has becomelargely electronically performed, with internalchecks and controls to assure that the input andoutput are factual and valid

Accountants design and maintain accountingsystems, an entity’s central information system,

to help control and provide a record of the tity’s activities, resources, and obligations Suchsystems also facilitate reporting on all or part ofthe entity’s accomplishments for a period of timeand on its status at a given point in time

en-An organization’s accounting system vides information that (1) helps managers makedecisions about assembling resources, control-ling, and organizing financing and operating ac-tivities; and (2) aids other users (employees, in-vestors, creditors, and others—usually calledstakeholders) in making investment, credit, andother decisions

pro-The accounting system must also provideinternal controls to ensure that (1) laws and en-terprise policies are properly implemented; (2)accounting records are accurate; (3) enterpriseassets are used effectively (e.g., that idle cashbalances are being invested to earn returns); and(4) steps be taken to reduce chances of losingassets or incurring liabilities from fraudulent orsimilar activities, such as the carelessness or dis-honesty of employees, customers, or suppliers.Many of these controls are simple (e.g., theprenumbering of documents and accounting forall numbers); others require division of dutiesamong employees to separate record keeping and

ACCOUNTING

custodial tasks in order to reduce opportunities

for falsification of records and thefts or

misap-propriation of assets

An enterprise’s system of internal controls

usually includes an internal auditing function

and personnel to ensure that prescribed data

handling and asset/liability protection

proce-dures are being followed The internal auditor

uses a variety of approaches, including

observa-tion of current activities, examinaobserva-tion of past

transactions, and simulation—often using

sam-ple or fictitious transactions—to test the

accu-racy and reliability of the system

Accountants may also be responsible for

pre-paring several types of documents Many of these

(e.g., employees’ salary and wage records) also

serve as inputs for the accounting system, but

many are needed to satisfy other reporting

re-quirements (e.g., employee salary records may be

needed to support employee claims for

pen-sions) Accountants also provide data for

com-pleting income tax returns

What is the accountant’s role in decision

mak-ing?Accountants have a major role in providing

information for making economic and financial

decisions Rational decisions are usually based on

analyses and comparisons of estimates, which in

turn, are based on accounting and other data that

project future results from alternative courses of

action

External or financial accounting, reporting,

and auditing are directly involved in providing

information for the decisions of investors and

creditors that help the capital markets to

effi-ciently and effectively allocate resources to

enter-prises; internal, managerial, or management

ac-cou nting is r esponsible for providing

information and input to help managers make

decisions on the efficient and effective use of

enterprise resources

The accounting information used in making

decisions within an enterprise is not subject to

governmental or other external regulation, so any

rules and constraints are largely self-imposed As

a result, in developing the data and information

that are relevant for decisions within the

enter-prise, managerial accountants are constrained

largely by cost-benefit considerations and theirown ingenuity and ability to predict future con-ditions and events

But accounting to external users (financialaccounting, reporting, and auditing) has manyregulatory constraints—especially if the enter-prise is a ‘‘public’’ corporation whose securitiesare registered (under the United States SecuritiesActs of 1933 and 1934) with the Securities andExchange Commission (SEC) and traded pub-licly over-the-counter or on a stock exchange.Public companies are subject to regulations andreporting requirements imposed and enforced bythe SEC; to rules and standards established for itsfinancial reports by the FASB and enforced by theSEC; to regulations of the organization where itssecurities are traded; and to the regulations of theAICPA, which establishes requirements and stan-dards for its members (who may be either inter-nal or external accountants or auditors)

If the entity is a state or local governmentalunit, it is subject to the reporting standards andrequirements of the Government AccountingStandards Board If the entity is private and not aprofit-seeking unit, it is subject to various report-ing and other regulations, including those of theInternal Revenue Service, which approves its taxstatus and with which it must file reports.Largely as a result of the governmental regu-lation of private profit-seeking businesses thatbegan in 1933, an increasingly clear distinctionhas been made between managerial or internalaccounting and financial accounting that islargely for external users One important excep-tion to this trend, however, was the changeadopted in the 1970s in the objectives of financialreporting such that both managerial and finan-cial accounting now have the same objective: toprovide information that is useful for makingeconomic decisions

But it must be recognized that although thefinancial accounting information reported tostakeholders comes from the organization’s ac-counting system, its usefulness for decision mak-ing is limited This is because it is largely histori-cal—it reflects events and activities that occurred

in the past, not what is expected in the future

ACCOUNTING

Even estimated data such as budgets and

stan-dard costs must be examined regularly to

deter-mine whether these past estimates continue to be

indicative of current conditions and expectations

and thus are useful for making decisions Thus

historical accounting information must be

exam-ined carefully, modified, and supplemented to

make certain that what is used is relevant to

expectations about the future

But it also must be recognized that

account-ing can and does provide information that is

current and useful in making estimates about

future events For example, accounting provides

current-value information about selected items,

such as readily marketable investments in debt

and equity securities and inventories, and it

pro-vides reports on what the organization plans to

accomplish and its expectations about the future

in budgets and earnings forecasts

Who uses accounting information for decision

making? The information developed by the

ac-countant’s information system can be useful to:

● Managers in planning, controlling, and

evalu-ating their organization’s activities

● Owners, directors, and others in evaluating

the performance of the organization and

de-termining operating, compensation, and other

policies

● Union, governmental, regulatory, taxing,

envi-ronmental, and other entities in evaluating

whether the organization is conforming with

applicable contracts, rules, laws, and public

policies and/or whether changes are needed;

● Existing and potential owners, lenders,

em-ployees, customers, and suppliers in evaluating

their current and future commitments to the

organization

● Accounting researchers, security analysts,

secu-rity brokers and dealers, mutual-fund

manag-ers, and others in their analyses and

evalua-tions of enterprises, capital markets, and/or

investors

The services that accounting and the

ac-countant can provide have been enhanced in

many ways since the 1970s by advances in

com-puters and other information technology The

impact of these changes is revolutionizing counting and the accounting profession But thechanges have yet to reach their ultimate poten-tial For example, accounting in the 1990s began

ac-to provide current-value information and mates about the future that an investor or otheruser would find useful for decision making Theavailability of computer software and the Inter-net greatly enhanced the potential for data andinformation services Such changes create oppor-tunities for accounting and accountants and alsowill require substantial modifications in the tra-ditional financial accounting and reportingmodel

esti-What is the profession of accounting? At thecore of the profession of accounting is the certi-fied public accountant (CPA) who has passed thenational CPA examination, been licensed in atleast one state or territory, and engages in thepractice of public accounting/auditing in a publicaccounting or CPA firm The CPA firm providessome combination of two or more of four types

of services: accounting, auditing, income taxplanning and reporting, and management advis-ing/consulting Analysis of trends indicates thatthe demand for auditing services has peaked andthat most of the growth experienced by publicaccounting firms is in the consulting area.Accounting career paths, specializations, orsubprofessions for CPAs who join profit-seekingenterprises include being controllers, chief finan-cial officers, or internal auditors Other careerpaths include being controllers or chief financialofficers in not-for-profit or government organi-zations and teaching in colleges and universities.Students should note that non-CPAs also couldenter these subprofessions and that certificates,but not licenses, could be earned by passing ex-aminations in several areas, including internalauditing, management accounting, and bankauditing

How do environmentalchanges impact the counting profession? Numerous changes in theenvironment make the practice of accountingand auditing much different in the new centurythan it was in the 1970s For example, profes-

ac-ACCOUNTING

sional accounting firms now actively compete for

clients by advertising extensively in various

me-dia, a practice that at one time was forbidden by

their code of professional conduct Mergers of

clients have led CPA firms into mergers as well,

such that the Big Eight is now the Big Five and

the second-tier group has been reduced from

twelve firms to about five Another result of

com-petition and other changes has been that some of

the largest employers of CPAs now include

in-come tax and accounting services firms such as

H&R Block and an American Express subsidiary

Competition among CPAs also has led the

SEC to expand its regulatory and enforcement

activities to ensure that financial reports are

rele-vant and reliable From its inception, the SEC has

had legal authority to prescribe the accounting

principles and standards used in the financial

reports of enterprises whose securities are

pub-licly traded, but it has delegated this

responsibil-ity to the accounting profession Since 1973, that

organization has been the FASB, with which the

SEC works closely But since the FASB is limited

to performing what is essentially a legislative

function, the SEC has substantially increased its

enforcement activities to ensure that the FASB’s

standards are appropriately applied in financial

reports and that accountants/auditors act in the

public interest in performing their independent

audits—for which the Securities Acts have given

the CPA profession a monopoly

How does a student prepare for the accounting

profession? Persons considering entering the

ac-counting profession should begin by doing some

self-analysis to determine whether they enjoy

mathematical, problem- or puzzle-solving, or

other analytical activities; by taking some

apti-tude tests; or by talking with accounting teachers

or practitioners about their work

Anyone interested in becoming an

account-ing professional should expect to enter a rigorous

five-year education program and to earn a

mas-ter’s degree in order to qualify to enter the

pro-fession and to sit for the CPA examination To

build a base for rising to the top of the profession,

students should select courses that help them

learn how to think and to define and solve

prob-lems The courses should help them to developanalytical (logical, mathematical, statistical),communication (oral, reading, writing), com-puter, and interpersonal skills The early part ofthe program should emphasize arts and sciencescourses in these skill-development areas.The person should begin to develop word-processing, data-processing, and Internet skillslong before entering college and should expect tomaintain competence in them throughout his orher professional career These skills greatly en-hance and facilitate all phases and aspects of whataccounting and accountants attempt to do Whatcan be done is limited only by technology and bythe sophistication of the system, its operators,and users

(SEE ALSO: Accounting cycle; Careers in accounting; Financial Accounting Standards Board; Certified Management Accountant; Generally Accepted Ac- counting Principles; Government accounting; Institute for Internal Auditors; Institute of Management Ac- countants; International Accounting Standards; International Federation of Accountants; National As- sociation of Boards of Accountancy; Public Oversight Board; Uniform Certified Public Accountant exami- nation; United States General Accounting Office; Securities Acts: Requirements for accounting)

BIBLIOGRAPHY Hansen, Don R., and Mowen, Maryanne M (2000).

Management Accounting, 5th ed Cincinnati, OH:

South-western College Publishing.

Kimmel, Paul D., Weygandt, Jerry J., and Kieso, Donald E.

(2000) Financial Accounting, 2d ed New York: Wiley.

HARVEYS HENDRICKSON

ACCOUNTING CYCLE

The primary objectives of the accounting tion in an organization are to process financialinformation and to prepare financial statements

func-at the end of the accounting period Companiesmust systematically process financial informationand must have staff who prepare financial state-ments on a monthly, quarterly, and/or annualbasis To meet these primary objectives, a series

ACCOUNTING CYCLE

of steps is required Collectively these steps are

known as the accounting cycle The steps,

applica-ble to a manual accounting system, are described

below Later, there will be a brief discussion of a

computerized processing system

THE STEPS OF THE CYCLE

1 Collect and analyze data from transactions

and events: As transactions and events

re-lated to financial resources occur, they

are analyzed with respect to their effect

on the financial position of the company

As an example, consider the sales for a

day in a retail establishment that are

col-lected on a cash register tape These sales

become inputs into the accounting

sys-tem Every organization establishes a

chart of accounts that identifies the

cate-gories for recording transactions and

events The chart of accounts for the

re-tail establishment mentioned earlier in

this paragraph will include Cash and

Sales.

2 Journalize transactions: After collecting

and analyzing the information obtained

in the first step, the information is

en-tered in the general journal, which is

called the book of original entry

Jour-nalizing transactions may be done

contin-ually, but this step can de done in a

batch at the end of the day if data from

similar transactions are being sorted and

collected, on a cash register tape, for

ex-ample At the end of the day, the sales of

$4,000 for cash would be recorded in the

general journal in this form:

Cash 4000

Sales 4000

3 Post to general ledger: The general journal

entries are posted to the general ledger,

which is organized by account All

trans-actions for the same account are collected

and summarized; for example, the

ac-count entitled ‘‘Sales’’ will accumulate the

total value of the sales for the period If

posting were done daily, the ‘‘Sales’’

ac-count in the ledger would show the totalsales for each day as well as the cumula-tive sales for the period to date Posting

to ledger accounts may be less frequent,perhaps at the end of each day, at theend of the week, or possibly even at theend of the month

4 Prepare an unadjusted trial balance: At the

end of the period, double-entry ing requires that debits and credits re-corded in the general ledger be equal

account-Debit and credit merely signify position—

left and right, respectively Some accountsnormally have debit balances (e.g., assetsand expenses) and other accounts havecredit balances (e.g., liabilities, owners’equity and revenues) As transactions arerecorded in the general journal and sub-sequently posted to the ledger, allamounts recorded on the debit side ofaccounts (i.e., recorded on the left side)must equal all amounts recorded on thecredit side of accounts (i.e., recorded onthe right side) Preparing an unadjustedtrial balance tests the equality of debitsand credits as recorded in the generalledger If unequal amounts of debits andcredits are found in this step, the reasonfor the inequality is investigated and cor-rected before proceeding to the next step.Additionally, this unadjusted trial balanceprovides the balances of all the accountsthat may require adjustment in the nextstep

5 Prepare adjustments: Period-end

adjust-ments are required to bring accounts totheir proper balances after consideringtransactions and/or events not yet re-corded Under accrual accounting, reve-nue is recorded when earned and ex-penses when incurred Thus, an entrymay be required at the end of the period

to record revenue that has been earnedbut not yet recorded on the books Simi-larly, an adjustment may be required torecord an expense that may have been in-curred but not yet recorded

ACCOUNTING CYCLE

6 Prepare an adjusted trial balance: As with

an unadjusted trial balance, this step tests

the equality of debits and credits

How-ever, assets, liabilities, owners’ equity,

rev-enues, and expenses will now reflect the

adjustments that have been made in the

previous step If there should be unequal

amounts of debits and credits or if an

ac-count appears to be incorrect, the

dis-crepancy or error is investigated and

cor-rected

7 Prepare financial statements: Financial

statements are prepared using the

cor-rected balances from the adjusted trial

balance These are one of the primary

outputs of the financial accounting

sys-tem

8 Close the accounts: Revenues and expenses

are accumulated and reported by period,

either a monthly, quarterly, or yearly To

prevent their not being added to or

com-ingled with revenues and expenses of

an-other period, they need to be closed

out—that is, given zero balances—at the

end of each period Their net balances,

which represent the income or loss for

the period, are transferred into owners’

equity Once revenue and expense

ac-counts are closed, the only acac-counts that

have balances are the asset, liability, and

owners’ equity accounts Their balances

are carried forward to the next period

9 Prepare a post-closing trial balance: The

purpose of this final step is two-fold: to

determine that all revenue and expense

accounts have been closed properly and

to test the equality of debit and credit

balances of all the balance sheet accounts,

that is, assets, liabilities and owners’

eq-uity

COMPUTERIZED ACCOUNTING SYSTEM

A computerized accounting system saves a great

deal of time and effort, considerably reduces (if

not eliminates) mathematical errors, and allows

for much more timely information than does a

manual system In a real-time environment, counts are accessed and updated immediately toreflect activity, thus combining steps 2 and 3 asdiscussed in the preceding section The need totest for equality of debits and credits through trialbalances is usually not required in a computer-ized system accounting since most systems testfor equality of debit and credit amounts as theyare entered If someone were to attempt to inputdata containing an inequality, the system wouldnot accept the input Since the computer is pro-grammed to post amounts to the various ac-counts and calculate the new balances as newentries are made, the possibility of mathematicalerror is markedly reduced

ac-Computers may also be programmed to ord some adjustments automatically at the end ofthe period Most software programs are also able

rec-to prepare the financial statement once it hasbeen determined the account balances are cor-rect The closing process at the end of the periodcan also be done automatically by the computer.Human judgment is still required to analyzethe data for entry into the computer system cor-rectly Additionally, the accountant’s knowledgeand judgment are frequently required to deter-mine the adjustments that are needed at the end

of the reporting period The mechanics of thesystem, however, can easily be handled by thecomputer

(SEE ALSO: Accounting; Accounting information tems)

sys-BIBLIOGRAPHY Dansby, Robert, Kaliski, Burton, and Lawrence, Michael

(1999) College Accounting St Paul, MN: EMC

Para-digm.

Ingram, Robert W., and Baldwin, Bruce A (1998) Financial

Accounting: A Bridge to Decision Making Cincinnati, OH:

South-Western College Publishing.

Larson, Kermit D (1997) Essentials of Financial Accounting.

Boston: Irwin/McGraw-Hill.

Meigs, Robert F., Meigs, Mary A., Bettner, Mark, and

Whit-tington, Ray (1998) Financial Accounting Boston:

Irwin/McGraw Hill.

Needles, Belverd E., and Powers, Marian (1998) Financial

Accounting Boston: Houghton Mifflin.

ACCOUNTING CYCLE

Porter, Gary A., and Norton, Curtis L (1998) Financial

Accounting Fort Worth, TX: Dryden Press.

With the establishment of the first English

colo-nies in America, accounting or bookkeeping, as

the discipline was referred to then, quickly

as-sumed an important role in the development of

American commerce Two hundred years,

how-ever, would pass before accounting would

sepa-rate from bookkeeping, and nearly three hundred

years would pass before the profession of

ac-counting, as it is now practiced, would emerge

For individuals and businesses, accounting

records in Colonial America often were very

ele-mentary Most records of this period relied on

the single-entry method or were simply narrative

accounts of transactions As rudimentary as they

were, these records were important because the

colonial economy was largely a barter and credit

system with substantial time passing before

pay-ments were made Accounting records were often

the only reliable records of such historical

trans-actions

THE EMERGENCE OF ACCOUNTING

Prior to the late 1800s, the terms bookkeeping and

accounting were often used interchangeably

be-cause the recording/posting process was central

to both activities There was little need for

finan-cial statements (e.g., income statements) because

most owners had direct knowledge of their

busi-nesses and, therefore, could rely on elementary

bookkeeping procedures for information

Although corporations (e.g., banks, canal

companies) were present in the United States

prior to the early 1800s, their numbers were few

Beginning in the late 1820s, however, the number

of corporations rapidly increased with the ation and expansion of the railroads To operatesuccessfully, the railroads needed cost reports,production reports, financial statements, and op-erating ratios that were more complex than sim-ple recording procedures could provide Alfred

cre-D Chandler, Jr (1977), noted the impact of therailroads on the development of accounting in

his classic work, The Visible Hand, when he stated

‘‘after 1850, the railroad was central in the opment of the accounting profession in theUnited States’’ (p 110)

devel-With the increase in the number of tions, there also arose a demand for additionalfinancial information that A.C Littleton (1933/

corpora-1988) in his landmark book, The Rise of the counting Profession, called ‘‘figure’’ knowledge.

Ac-With no direct knowledge of a business, investorshad to rely on financial statements for informa-tion, and to create those statements, more com-plex accounting methods were required The ac-countant’s responsibility, therefore, expandedbeyond simply recording entries to include thepreparation, classification, and analysis of finan-cial statements As John L Carey (1969) wrote in

The Rise of the Accounting Profession, ‘‘the

nine-teenth century saw bookkeeping expanded intoaccounting’’ (p 15)

Additionally, as the development of the poration created a greater need for the services ofaccountants, the study of commerce and ac-counting became more important Althoughthere had been trade business schools and pub-lished texts on accounting/bookkeeping, tradi-tional colleges had largely ignored the study ofbusiness and accounting In 1881, however, theWharton School of Finance and Economy wasfounded, and two years later, the school addedaccounting to its curriculum As other majoruniversities created schools of commerce, ac-counting secured a significant place in the curric-ulum

cor-With a separation of management and ership in corporations, there also arose a need for

own-an independent party to review the finown-ancialstatements Someone was needed to represent the

ACCOUNTING: HISTORICAL PERSPECTIVES

owners’ interest and to verify that the statements

accurately presented the financial conditions of

the company Moreover, there was often an

ex-pectation that an independent review would

dis-cover whether managers were violating their

fi-duciary duties to the owners Additionally,

because the late nineteenth century was a period

of major industrial mergers, someone was

needed to verify the reported values of the

com-panies The independent public accountant, a

person whose obligation was not to the managers

of a company but to its shareholders and

poten-tial investors, provided the knowledge and skills

to meet these needs

In 1913, the responsibilities of and job

op-portunities for accountants again expanded with

the ratification of the Sixteenth Amendment to

the Constitution, which allowed a federal income

tax Accountants had become somewhat familiar

with implementing a national tax with the earlier

passage of the Corporation Excise Tax Law

De-spite the earlier law, however, many companies

had not set up proper systems to determine

tax-able income and few were familiar with concepts

such as depreciation and accrual accounting

As tax rates increased, tax services became

even more important to accounting firms and

often opened the door to providing other services

to a client Accounting firms, therefore, were

of-ten engaged to establish a proper accounting

system and audit financial statements as well as

prepare the required tax return

Thus, in contrast to bookkeeping which

of-ten had been considered a trade, the

responsibili-ties of accounting had expanded by the early

twentieth century to such an extent that it now

sought professional status One foundation of the

established professions (e.g., medicine, law) was

professional certification, which accounting did

not have In 1896, with the support of several

accounting organizations, New York State passed

a law restricting the title certified public

account-ant (CPA) to those who had passed a state

exami-nation and had acquired at least three years of

accounting experience Similar laws were soon

passed in several states

PROFESSIONAL ORGANIZATIONS

Throughout the history of accounting, sional organizations have made major contribu-tions to the development of the profession Forexample, in 1882, the Institute of Accountantsand Bookkeepers of New York (IABNY) was or-ganized with the primary aim of increasing thelevel of educational resources available for ac-countants In 1886, the IABNY became the Insti-tute of Accounts, and it continued to be active inpromoting accounting education for nearlytwenty years Meanwhile, the first national orga-nization for accounting educators, the AmericanAssociation of University Instructors in Ac-counting (AAUIP), was organized in 1916 In

profes-1935, the AAUIP was reorganized as the can Accounting Association

Ameri-The national public accounting organization,the American Association of Public Accountants(AAPA), was incorporated in 1887 Reflecting theneed of most professions for a code of ethics, theAAPA added a professional ethics section to itsbylaws in 1907 The AAPA was reorganized as theAmerican Institute of Accountants in the UnitedStates of America and then later as the AmericanInstitute of Accountants (AIA) In 1921, theAmerican Society of Certified Public Account-ants (ASCPA) was established and became a rival

to the AIA for leadership in the public accountingarea The rivalry continued until 1937, when theASCPA merged with the AIA In 1957, the AIAbecame the American Institute of Certified Pub-lic Accountants (AICPA)

In contrast to the public accounting sis of the AIA and ASCPA, the National Associa-tion of Cost Accountants (NACA) was founded

empha-in 1919 The NACA placed an emphasis on thedevelopment of cost controls and proper report-ing within companies In 1957, the NACAchanged its name to the National Association ofAccountants (NAA) in recognition of the expan-sion of managerial accounting beyond traditionalcost accounting Then, in 1991, recognizing itsemphasis on the managerial aspects of account-ing, the NAA became the Institute of Manage-ment Accountants

ACCOUNTING: HISTORICAL PERSPECTIVES

EXTERNAL AND INTERNAL REGULATION

During the nineteenth century, the federal

gov-ernment generally allowed accounting to regulate

itself Then, in 1913, Congress established the

Federal Reserve System and, one year later, the

Federal Trade Commission (FTC) From this

date forward, federal agencies have had an

in-creasing impact on the profession of accounting

The government’s first major attempt at the

formalization of authoritative reporting

stan-dards was in 1917 with the Federal Reserve

Board’s publication of Uniform Accounting In

1918, the bulletin was reissued as Approved

Meth-ods for the Preparation of Balance Sheet

State-ments Although directed toward auditing the

balance sheet, the report presented model

in-come and balance sheet statements Because the

proposal was only a recommendation, however,

its acceptance was limited

The impetus for stricter financial reporting

was provided by the collapse of the securities

market in 1929 and the revelation of massive

fraud in a company listed on the New York Stock

Exchange (NYSE) In 1933, the NYSE announced

that companies applying for a listing on the

ex-change must have their financial statements

audited by an independent public accountant

The scope of these audits had to follow the

re-vised guidelines set forth by the Federal Reserve

in 1929

Another major innovation in the regulation

of accounting was the passage of the Securities

Act of 1933 and the Securities and Exchange Act

of 1934 The 1933 act conferred upon the FTC

the authority to prescribe the accounting

meth-ods for companies to follow Under this act,

ac-countants could be held liable for losses that

resulted from material omissions or

misstate-ments in registration statemisstate-ments they had

certi-fied The 1934 act transferred the authority to

prescribe accounting methods to the newly

estab-lished Securities and Exchange Commission

(SEC) and required that financial statements filed

with the SEC be certified by an independent

pub-lic accountant

With the creation of the SEC and the passage

of new securities laws, the federal government

assumed a central role in the establishment ofbasic requirements for the issuance and auditing

of financial reports Additionally, these acts creased the importance of accountants and en-larged the accountant’s responsibility to the gen-eral public Under these acts, not only didaccountants have a responsibility to the public,they were now potentially liable for their actions

in-In 1938, the SEC delegated much of its thority to prescribe accounting practices to theAIA and its Committee on Accounting Proce-dures (CAP) In 1939, CAP issued its first of fifty-one Accounting Research Bulletins Responding

au-to criticism of CAP, the AICPA (formerly theAIA) in 1959 replaced the CAP with the Account-ing Principles Board (APB) The APB was de-signed to issue accounting opinions after it hadconsidered previous research studies, and in

1962, the APB issued its first of thirty-one ions Although the SEC had delegated much of itsstandard-setting authority to the AICPA, thecommission exercised its right to approve allstandards when it declared that companies didnot have to follow the rules set forth in APB No

opin-2, The Investment Credit

Responding to criticism of the APB, a studygroup chaired by Francis M Wheat was estab-lished to review the board structure and the rule-making process The committee recommendedthat an independent, full time, more diverse stan-dards board replace the APB Following the rec-ommendations, the Financial Accounting Stan-dards Board (FASB) was established in 1973 Thisboard is independent of the AICPA and issued itsfirst statement in 1973

THE CHANGING GENDERIZATION OF THE

WORK FORCE

With the separation of bookkeeping from counting, the demand for women bookkeepersdramatically increased, and by 1930, over 60 per-cent of all bookkeepers were women A similarincrease in the demand for women accountants,however, did not occur Although World War IIcreated some opportunities for women in ac-counting, at the start of the second half of thetwentieth century, accounting still was not con-

ac-ACCOUNTING: HISTORICAL PERSPECTIVES

sidered an appropriate career for most women.

In fact, in 1950, only 15 percent of the more than

300,000 accountants in the United States were

women Moreover, less than 4 percent of college

students majoring in accounting then were

women

In the 1960s, social and legal events began

that ultimately provided opportunities for

women in the profession of accounting As these

events occurred, the overall demand for

account-ing services and accountants also greatly

in-creased This demand became so large that the

traditional labor pool of men was not sufficient

to maintain the accounting work force

Concur-rently, women majoring in accounting increased

dramatically from less than 5 percent of all

ac-counting majors in 1960 to over 50 percent in

1985

Given the increase of women accounting

ma-jors and the inability of the traditional labor pool

to meet the work force demand, accounting

(es-pecially public accounting) increased the hiring

of women By 1990, women comprised a

major-ity of the accounting work force It would be the

turn of the twenty-first century, however, before

women began to obtain a significant number of

upper-level management positions in

account-ing

THE TWENTY-FIRST CENTURY

The accountant, the accounting firm, and the

accounting profession of the twenty-first century

are quite different from what existed at the

begin-ning of the twentieth century In contrast to a

bookkeeper manually recording entries in a large

bound volume, an accountant is now responsible

for information concerning all facets of a

busi-ness and is dependent on the latest technology for

processing that information In contrast to small

local firms, accounting firms now can be large

international organizations with reported

reve-nues of billions of dollars In addition to the

traditional audit/attest information, accounting

firms provide their clients with tax services,

fi-nancial planning, system analysis, consulting,

and legal services At the beginning of the

twenti-eth century, the accounting profession was just

emerging Today, the profession is comprised ofthousands of men and women working in publicand private firms as well as profit and nonprofitorganizations as members of management teams

or as valued consultants

(SEE ALSO: American Institute of CPAs; National sociation of Boards of Accountancy)

As-BIBLIOGRAPHY

Carey, John L (1969) The Rise of the Accounting Profession

from Technician to Professional 1896-1936 New York:

American Institute of Certified Public Accountants.

Carey, John L (1970) The Rise of the Accounting Profession

to Responsibility and Authority 1937-1969 New York:

American Institute of Certified Public Accountants.

Chandler, Alfred D Jr., (1977) The Visible Hand: The

Man-agerial Revolution in American Business Cambridge, MA:

Harvard University Press.

Chatfield, Michael, and Vangermeersch, Richard, eds.

(1996) The History of Accounting: An International

Ency-clopedia New York: Garland.

Edwards, James Don (1978) History of Public Accounting in

the United States Tuscaloosa, AL: University of Alabama

Press.

Hills, George H (1982) The Law of Accounting and

Finan-cial Statements New York: Garland (Original work

pub-lished 1957) Johnson, H Thomas, and Kaplan, Robert S (1987).

Relevance Lost: The Rise and Fall of Management ing Boston: Harvard Business School Press.

Account-Littleton, A.C (1988) Accounting Evolution to 1900 New

York: Garland (Original work published 1933) Lockwood, Jeremiah (1938) ‘‘Early University Education in

Accountancy.’’ Accounting Review 38(2): 131-143 Miranti, Paul J Jr., (1990) Accountancy Comes of Age: The

Development of an American Profession Chapel Hill:

Uni-versity of North Carolina Press.

Previts, Gary John, and Merino, Barbara Dubis (1998) A

History of Accountancy in the United States: The Cultural Significance of Accounting Columbus: Ohio State Univer-

Study on Establishment of Accounting Principles (1972)

‘‘Recommendation on the Study on Establishment of

Accounting Principles.’’ The Journal of Accountancy

133(5) (May): 66-71.

ACCOUNTING: HISTORICAL PERSPECTIVES

Wootton, Charles W., and Kemmerer, Barbara E (1996).

‘‘The Changing Genderization of Bookkeeping in the

United States, 1870-1930.’’ Business History Review 70(4)

(Winter): 541-586.

Wootton, Charles W., and Kemmerer, Barbara E (2000).

‘‘The Changing Genderization of the Accounting

Work-force in the US, 1930-1990.’’ Accounting, Business &

Fi-nancial History 10(2) (July): 303-324.

CHARLESW WOOTTON

CAROLJ NORMAND

ACCOUNTING INFORMATION

SYSTEMS

Accounting Information Systems (AISs)

com-bine the study and practice of accounting with

the design, implementation, and monitoring of

information systems Such systems use modern

information technology resources together with

traditional accounting controls and methods to

provide users the financial information necessary

to manage their organizations

AIS TECHNOLOGY

Input The input devices commonly

associ-ated with AIS include: standard personal

compu-ters or workstations running applications;

scan-ning devices for standardized data entry;

electronic communication devices for electronic

data interchange (EDI) and e-commerce In

ad-dition, many financial systems come

‘‘Web-en-abled’’ to allow devices to connect to the World

Wide Web

ProcessBasic processing is achieved through

computer systems ranging from individual

per-sonal computers to large-scale enterprise servers

However, conceptually, the underlying

process-ing model is still the ‘‘double-entry’’ accountprocess-ing

system initially introduced in the fifteenth

cen-tury

Output Output devices used include

com-puter displays, impact and nonimpact printers,

and electronic communication devices for EDI

and e-commerce The output content may

en-compass almost any type of financial reports

from budgets and tax reports to multinationalfinancial statements

MANAGEMENT INFORMATION

SYSTEMS (MIS)

MISs are interactive human/machine systemsthat support decision making for users both inand out of traditional organizational boundaries.These systems are used to support an organiza-tion’s daily operational activities; current and fu-ture tactical decisions; and overall strategic direc-tion MISs are made up of several majorapplications including, but not limited to, thefinancial and human resources systems

Financial applications make up the heart of

an AIS in practice Modules commonly mented include: general ledger, payables, pro-curement/purchasing, receivables, billing, inven-tory, assets, projects, and budgeting

imple-Human resource applications make up

another major part of modern information tems Modules commonly integrated with theAIS include: human resources, benefits adminis-tration, pension administration, payroll, andtime and labor reporting

sys-AIS—INFORMATION SYSTEMS IN CONTEXT

AISs cover all business functions from backboneaccounting transaction processing systems to so-phisticated financial management planning andprocessing systems

Financial reporting starts at the operational

levels of the organization, where the transactionprocessing systems capture important businessevents such as normal production, purchasing,and selling activities These events (transactions)are classified and summarized for internal deci-sion making and for external financial reporting

Cost accounting systems are used in

manufac-turing and service environments These allow ganizations to track the costs associated with theproduction of goods and/or performance of ser-vices In addition, the AIS can provide advancedanalyses for improved resource allocation andperformance tracking

or-Management accounting systems are used to

allow organizational planning, monitoring, and

ACCOUNTING INFORMATION SYSTEMS

control for a variety of activities This allows

managerial-level employees to have access to

ad-vanced reporting and statistical analysis The

sys-tems can be used to gather information, to

de-velop various scenarios, and to choose an optimal

answer among alternative scenarios

DEVELOPMENT

The development of an AIS includes five basic

phases: planning, analysis, design,

implementa-tion, and support The time period associated

with each of these phases can be as short as a few

weeks or as long as several years

Planning—project management objectives

and techniques The first phase of systems

devel-opment is the planning of the project This

en-tails determination of the scope and objectives of

the project, the definition of project

responsibili-ties, control requirements, project phases, project

budgets, and project deliverables

Analysis The analysis phase is used to both

determine and document the accounting and

business processes used by the organization Such

processes are redesigned to take advantage of best

practices or of the operating characteristics of

modern system solutions

Data analysis is a thorough review of the

ac-counting information that is currently being

col-lected by an organization Current data are then

compared to the data that the organization

should be using for managerial purposes This

method is used primarily when designing

ac-counting transaction processing systems

Decision analysis is a thorough review of the

decisions a manager is responsible for making

The primary decisions that managers are

respon-sible for are identified on an individual basis

Then models are created to support the manager

in gathering financial and related information to

develop and design alternatives, and to make

ac-tionable choices This method is valuable when

decision support is the system’s primary

objec-tive

Process analysis is a thorough review of the

organization’s business processes Organizational

processes are identified and segmented into a

series of events that either add or change data.These processes can then be modified or reengi-neered to improve the organization’s operations

in terms of lowering cost, improving service, proving quality, or improving management in-formation This method is appropriate when au-tomation or reengineering is the system’sprimary objective

im-DesignThe design phase takes the conceptualresults of the analysis phase and develops de-tailed, specific designs that can be implemented

in subsequent phases It involves the detailed sign of all inputs, processing, storage, and out-puts of the proposed accounting system Inputsmay be defined using screen layout tools andapplication generators Processing can be shownthrough the use of flowcharts or business processmaps that define the system logic, operations,and work flow Logical data storage designs areidentified by modeling the relationships amongthe organization’s resources, events, and agentsthrough diagrams Also, entity relationship dia-gram (ERD) modeling is used to document large-scale database relationships Output designs aredocumented through the use of a variety of re-porting tools such as report writers, data extrac-tion tools, query tools, and on-line analyticalprocessing tools In addition, all aspects of thedesign phase can be performed with software toolsets provided by specific software manufacturers

de-Reporting is the driving force behind an AIS

development If the system analysis and designare successful, the reporting process provides theinformation that helps drive management deci-sion making Accounting systems make use of avariety of scheduled and on-demand reports Thereports can be tabular, showing data in a table ortables; graphic, using images to convey informa-tion in a picture format; or matrices, to showcomplex relationships in multiple dimensions.There are numerous characteristics to con-sider when defining reporting requirements Thereports must be accessible through the system’sinterface They should convey information in aproactive manner They must be relevant Accu-racy must be maintained Lastly, reports must

ACCOUNTING INFORMATION SYSTEMS

meet the information processing (cognitive) style

of the audience they are to inform

Reports are of three basic types: A filter report

that separates select data from a database, such as

a monthly check register; a responsibility report to

meet the needs of a specific user, such as a weekly

sales report for a regional sales manager; a

comparative report to show period differences,

percentage breakdowns and variances between

actual and budgeted expenditures An example

would be the financial statement analytics

show-ing the expenses from the current year and prior

year as a percentage of sales

Screen designs and system interfaces are the

primary data capture devices of AISs and are

de-veloped through a variety of tools Storage is

achieved through the use of normalized

data-bases that assure functionality and flexibility

Business process maps and flowcharts are used

to document the operations of the systems

Mod-ern AISs use specialized databases and processing

designed specifically for accounting operations

This means that much of the base processing

capabilities come delivered with the accounting

or enterprise software

Implementation The implementation phase

consists of two primary parts: construction and

delivery Construction includes the selection of

hardware, software and vendors for the

imple-mentation; building and testing the network

communication systems; building and testing the

databases; writing and testing the new program

modifications; and installing and testing the total

system from a technical standpoint Delivery is

the process of conducting final system and user

acceptance testing; preparing the conversion

plan; installing the production database; training

the users; and converting all operations to the

new system

Tool sets are a variety of application

develop-ment aids that are vendor-specific and used for

customization of delivered systems They allow

the addition of fields and tables to the database,

along with ability to create screen and other

interfaces for data capture In addition, they help

set accessibility and security levels for adequate

internal control within the accounting tions

applica-Security exists in several forms Physical

secu-rity of the system must be addressed In typicalAISs the equipment is located in a locked roomwith access granted only to technicians Softwareaccess controls are set at several levels, depending

on the size of the AIS The first level of securityoccurs at the network level, which protects theorganization’s communication systems Next isthe operating system level security, which pro-tects the computing environment Then, data-base security is enabled to protect organizationaldata from theft, corruption, or other forms ofdamage Lastly, application security is used tokeep unauthorized persons from performing op-erations within the AIS

Testing is performed at four levels Stub or

unit testing is used to insure the proper operation

of individual modifications Program testing volves the interaction between the individualmodification and the program it enhances Sys-tem testing is used to determine that the programmodifications work within the AIS as a whole.Acceptance testing ensures that the modificationsmeet user expectations and that the entire AISperforms as designed

in-Conversion entails the method used to change

from an old AIS to a new AIS There are severalmethods for achieving this goal One is to run thenew and old systems in parallel for a specifiedperiod A second method is to directly cut over tothe new system at a specified point A third is tophase in the system, either by location or systemfunction A fourth is to pilot the new system at aspecific site before converting the rest of the or-ganization

Support The support phase has two

objec-tives The first is to update and maintain the AIS.This includes fixing problems and updating thesystem for business and environmental changes.For example, changes in generally accepted ac-counting principles (GAAP) or tax laws mightnecessitate changes to conversion or referencetables used for financial reporting The secondobjective of support is to continue development

by continuously improving the business through

ACCOUNTING INFORMATION SYSTEMS

adjustments to the AIS caused by business and

environmental changes These changes might

re-sult in future problems, new opportunities, or

management or governmental directives

re-quiring additional system modifications

ATTESTATION

AISs change the way internal controls are

imple-mented and the type of audit trails that exist

within a modern organization The lack of

tradi-tional forensic evidence, such as paper,

necessi-tates the involvement of accounting professionals

in the design of such systems Periodic

involve-ment of public auditing firms can be used to

make sure the AIS is in compliance with current

internal control and financial reporting

stan-dards

After implementation, the focus of

attesta-tion is the review and verificaattesta-tion of system

oper-ation This requires adherence to standards such

as ISO 9000-3 for software design and

develop-ment as well as standards for control of

informa-tion technology

Periodic functional business reviews should

be conducted to be sure the AIS remains in

compliance with the intended business functions

Quality standards dictate that this review should

be done according to a periodic schedule

ENTERPRISE RESOURCE PLANNING (ERP)

ERP systems are large-scale information systems

that impact an organization’s AIS These systems

permeate all aspects of the organization and

re-quire technologies such as client/server and

rela-tional databases Other system types that

cur-rently impact AISs are supply chain management

(SCM) and customer relationship management

(CRM)

Traditional AISs recorded financial

informa-tion and produced financial statements on a

peri-odic basis according to GAAP pronouncements

Modern ERP systems provide a broader view of

organizational information, enabling the use of

advanced accounting techniques, such as

activ-ity-based costing (ABC) and improved

manage-rial reporting using a variety of analytical

(SEE: Motivation)

ACTIVITY-BASED MANAGEMENT

Activity-based management (ABM) is an proach to management in which process manag-ers are given the responsibility and authority tocontinuously improve the planning and control

ap-of operations by focusing on key operationalactivities ABM strategically incorporates activityanalysis, activity-based costing (ABC), activity-based budgeting, life-cycle and target costing,process value analysis, and value-chain analysis.Enhanced effectiveness and efficiencies are ex-pected for both revenue generation and cost in-currences Since the focus is on activities, im-proved cost management is achieved throughbetter managing those activities that consume re-sources and drive costs The focus for control isshifted away from the financial measurement ofresources to activities that cause costs to be in-curred

As an overall framework, ABM relies on ABCinformation ABC deals with the analysis andassignment of costs In order to complete costanalyses, activities need to be identified and clas-sified An activity dictionary can be developed,listing and describing all activities within an orga-nization, including information on each activity’slocation, performance measure(s), and keyvalue-added and non-value-added attributes.(See ‘‘ABC/ABM Dictionary,’’ which was used tohelp construct many of the definitions used inthis entry.) ABC information is extremely helpful

in the strategic analysis of areas such as processand plant layout redesign, pricing, customer val-

ACHIEVEMENT MOTIVATION THEORY

ues, sourcing, evaluation of competitive position,

and product strategy

ACTIVITY AND ACTIVITY ANALYSIS

An activity is a business task, or an aggregation of

closely related purposeful actions, with clear

be-ginning and ending points, that consumes

re-sources and produces outputs An activity could

be a single task or a simple process Resources are

inputs, such as materials, labor, equipment, and

other economic elements consumed by an

activ-ity in the production of an output Outputs are

products, services, and accompanying

informa-tion flowing from an activity In seeking

continu-ous business improvement, an overall

examina-tion of variaexamina-tions in performances of key

organizational activities and their causes is

re-ferred to as activity analysis Performance is

mea-sured by a financial or nonfinancial indicator that

is causally related to the performance (adding

value to a product or service) of an activity and

can be used to manage and improve the

perform-ance of that activity

The level of an activity within an

organiza-tion depends on that level of operaorganiza-tions

sup-ported by that activity For instance, a unit-level

activity is one that is performed directly on each

unit of output of an organizational process A

batch-level activity is one performed on a small

group, or batch, of output units at the same time

For example, the setup activity to run a batch job

in a production process and the associated cost

for completing such a setup is a batch-level

activ-ity A customer-sustaining activity supports an

individual or a particular grouping of customers,

such as mailings or customer service A

product-sustaining activity supports an individual

prod-uct or prodprod-uct line, such as prodprod-uct (re)design or

(re)engineering These last two types of activities

are sometimes referred to as service-sustaining

activities Lastly, a facility-sustaining activity

sup-ports an entire facility, such as the actions of the

manager of an entire plant, with an associated

cost equal to the manager’s compensation

pack-age Not every activity within an organization is

significant enough to isolate in an activity

analy-sis

A process is a set of logically related activitiesperformed in order to achieve a particular objec-tive, such as the production of a unit of product

or service Identification of all such processeswithin an organization along with a specification

of the relationships among them provides a valuechain Value chains are often presented in terms

of functional areas (a function provides the nization with a particular type of service or prod-uct, such as finance, distribution, or purchasing).Within each of these key processes, activities can

orga-be classified as primary activities, secondary tivities, and other activities Primary activitiescontribute directly to the providing of the finalproduct or service Secondary activities directlysupport primary activities The ‘‘other activities’’category is comprised of those actions too farremoved from the intended output to be individ-ually noted They should be examined to deter-mine if they are necessary and should be contin-ued

ac-VALUE-ADDED AND NON-ac-VALUE-ADDED

Each of the key (primary and secondary)activities noted from our analysis must be catego-rized as either value-added or non-value-added.This analysis is referred to as value analysis Anactivity is value-added to the extent that its per-formance contributes to the completion of theproduct or service for consumers While value-added activities are necessary, the efficiency withwhich they are performed often can be improvedthrough best practice analysis and bench-marking This process of improvement is referred

to as business process redesign or reengineering.Because many activities may not fit neatlyinto a value-added/non-value-added dichotomy,weightings may be assigned to indicate the extent

to which an activity is value-added, such as ascale ranging from one to eight, with an eightrepresenting total value-additivity and a zero,none A non-value-added activity transforms aproduct or service in a way that adds no useful-ness to the product or service Non-value-addedactivities should be minimized or eliminated Anoverall value-chain analysis would examine allthe activities and associated processes in an at-

ACTIVITY-BASED MANAGEMENT

tempt to provide greater value at the same cost,

the same value at less cost, or both

ACTIVITY-BASED COSTING

Because costs are initially assigned from resource

cost pools to activity cost pools and from there to

final cost objects, activity-based costing is viewed

as a two-stage allocation process Once activities

have been identified, an activity-based costing

analysis can be completed Activity-based costing

is a form of cost refinement, designed to obtain

greater accuracy than traditional allocations in

cost assignments for product costing and

deci-sion-making purposes Costs are assigned to

ac-tivities from resource cost pools Costs are first

accumulated according to the type of resource,

such as materials or labor, with which they are

associated Then resource (cost) drivers, which

measure the consumption of a resource by an

activity, are identified and used to assign the costs

of resource consumptions to each activity The

result of this assignment is an activity cost pool

for each activity

From the activity cost pool, the focus shifts to

one or more activity drivers An activity driver

measures the frequency or intensity with which a

cost object requires the use of an activity, thereby

relating the performance of an activity’s tasks to

the needs of one or more cost objects A cost

object is why activities are performed; it is a unit

of product or service, an operating segment of

the organization, or even another activity for

which management desires an assignment of

costs for unit costing or decision making

pur-poses The activity cost pools are then reassigned

to the final cost objects according to the intensity

with which each cost object used the respective

activity drivers

A cost driver may be defined to be ‘‘any

factor that has the effect of changing the level of

total cost for a cost object.’’ (Blocher et al., 1999,

p 8) In general, four types of cost drivers can be

identified: volume-based, activity-based,

struc-tural, and executional (Blocher, et al., 1999,

p 61) Activity-based management focuses on

activity-based cost drivers In investigating and

specifying cost drivers, many methods are used,

such as cause-and-effect diagrams, cost tions, and Pareto analysis

simula-Traditional cost assignment systems typicallywould assign directly to the cost objects the costs

of those resource consumptions that can be nomically traced directly to units of output re-quiring the resources The remaining costs, re-ferred to as indirect costs, would be accumulatedinto one or more cost pools, which would subse-quently be allocated to the cost objects according

eco-to volume-related bases of allocation When ferent products consume resources at rates thatare not accurately reflected in their relative num-bers (volumes), a traditional cost allocation ap-proach will result in product cost cross-subsidi-zation That is, a high-volume, relatively simpleproduct will end up overcosted and subsidizing asubsequently undercosted, low-volume, rela-tively complex product, resulting in inaccurateunit costing and suboptimal product-line pricingdecisions and performance evaluations Activity-based costing tries to take the nonuniformity ofresource consumption across products into ac-count in the assignment of costs

dif-(SEE ALSO: Management)

BIBLIOGRAPHY

‘‘ABC/ABM Dictionary.’’ http://www.saffm.hq.af.mil/ SAFFM/FMC/ABC/dictionary.htm.

Blocher, Edward J., Chen, Jung H., and Lin, Thomas W.

(1999) Cost Management: A Strategic Emphasis New

Hilton, Ronald W., Maher, Michael W., and Selto, Frank H.

(1999) Cost Management: Strategies for Business

Deci-sions New York: Irwin/McGraw-Hill.

CLIFFORDBROWN

LAWRENCEKLEIN ACTIVITY-BASED MANAGEMENT