Standardization of Accounting

The last leg of our journey brings us to the 20^th century when two principal events propel standardization of accounting in the United States: (1) the Sixteenth Amendment to the Constitution in 1913 and (2) the stock market crash of 1929.

The Sixteenth Amendment establishes a system of federal income taxation, which requires the periodic determination of income by individuals and businesses. It has a profound effect on the accounting profession because it requires records to support the determination of taxable income, which essentially makes accounting system mandatory (обязательный). It propels standardization in accounting because it limits the number of reporting options to make income determination more uniform (единообразный) across companies. However, it conflicts in many ways with generally accepted accounting practices of the time. For example, it requires businesses to report income on a calendar-year basis, which conflicts with the acceptability of reporting income on a fiscal-year basis in the accounting profession. A fiscal year is a yearlong period that encompasses a natural business cycle and allows a business to prepare its required accounting information during its slowest business period. All businesses must compute and report income for tax purposes; however, only corporations are actually taxed on business income. Sole proprietorship and partnership income is taxed at the individual owner’s level.

The stock market crash of 1929, followed by the Depression of the 1930s, leads to federal regulation of the securities market. Such regulation appears in the form of the Securities and Exchange Act of 1933, which requires that all companies issuing capital stock (акции) to the public must register with the Federal Trade Commission (FTC) and file and disclose to the public certain financial information. The Securities and Exchange Act of 1934 requires the submission of annual financial information for all publicly owned corporations to a new commission called the Securities and Exchange Commission (SEC). This regulation requires full disclosure of financial results so that investors can compare companies. In general, the SEC allows the accounting profession to determine accounting rules for businesses.

2. Using your notes of the text, fulfill the following test.

1) In ancient Babylonia bookkeeping functions were performed by

a. merchants

b. professional bookkeepers

c. scribes

2) To record business transactions Babylonians used

a. accounts

b. clay tablets

c. journals

3) The common form of venture in medieval Italy was

a. a corporation

b. a partnership

c. a single proprietorship

4) With the rise of partnerships as a business form the role of the accounting system was

a. to help divide the goods between the partners

b. to distinguish between business and personal affairs

c. to determine the amount of income taxes

5) The business entity concept meant that

a. business and personal affairs should be kept separate

b. the business will continue into the foreseeable future

c. business should be terminated at the end of the venture

6) The greatest achievement in the evolution of bookkeeping that occurred in the 15^th century was

a. the introduction of the going concern concept

b. the introduction of accounting standards

c. the description and spread of the double-entry system

7) One of the accounting concepts that emerged in the 15^th century was

a. the business entity concept

b. the monetary unit concept

c. the going concern concept

8) The 18^th century development of crucial economic and historical significance was

a. the Agricultural Revolution

b. the Information Revolution

c. the Industrial Revolution

9) The new form of business entity that developed with the rise of manufacturing firms and accumulation of wealth was

a. a single proprietorship

b. a corporation

c. a partnership

10) The standardization of accounting in the USA was started

a. in 1913 with the adoption of the 16^th Amendment to the Constitution

b. in 1933 with the Securities and Exchange Act

c. in 1973 with the Financial and Accounting Standards Board (FASB) establishing accounting standards and principles.

3. Scanning the relevant sections of the reading material again find the answers to the following questions.

1) Why did Babylonian scribes become the earliest bookkeepers?

2) Who was interested in accounting information about business in medieval Italy?

3) Why was it necessary to terminate business at the end of each trading venture in the Middle Ages?

4) What were the prerequisites of the spread of the double-entry system of bookkeeping?

5) What was the main idea of the double-entry system?

6) What is the idea underlying the monetary unit concept?

7) What does the periodicity concept mean and what does it enable to do?

8) What makes a corporation an attractive form of business venture?

9) Why did the requirements placed on accountants rise with the advent of corporations?

10) What were the implications of adopting the 16^th Amendment to the US Constitution and of the stock market crash of 1929 for the accounting profession in the USA?

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