Definition: Enterprises concerned with designing financial information systems, recording economic transactions, auditing financial statements, and offering business services such as tax planning, payroll processing, and valuation of assets.
Significance: The accounting industry serves all sectors of the economy, including for-profit enterprises, nonprofit organizations, and local, state, and national governments. It compiles and interprets data to enable informedbusiness decisions and coordinate business relationships. The industry has been crucial to the efficient management of American business, and accounting is sometimes called “the language of business.”
The demand for audited financial records in American business emerged as early as 1628, when the Massachusetts Bay Company was chartered as a joint-stock company to finance the Pilgrims bound for New England. Modern accounting can be traced back to around 1817 in the classrooms of the United States Military Academy atWest Point, New York. The academy established the technique of measuring human performance in the context of grading students. This effort to measure human productivity then spread to the burgeoning railroad industry.
The railroads were a commercial enterprise of unprecedented scale. They required enormous sums of capital and large numbers of workers and managers, and they posed numerous challenges of organization and operation. Accounting data began to be used not only to run the railroads efficiently but also to manage their business profitably and to control the behavior of employees. These uses of accounting information within organizations soon spread to the rest of the large corporations that made up the American economy. Such innovations as the well-known Du Pont model of financial ratios would cement the use of accounting information as an indispensable tool of management.
As part of the Progressive movement for government and business reform toward the end of the nineteenth century, accountants began to organize themselves as a public profession. Beginning with New York in 1897, state societies of public accountants formed to institute educational standards, licensing requirements, and codes of conduct to raise and regulate the quality of accountants auditing corporate financial statements. In addition, by the early twentieth century, university-based research contributed to the development of accounting theory as a framework for accounting practice.
The public accounting industry was put on a firm footing with the passage of the Federal Securities Acts of 1933 and 1934. These laws and others like them, including the Sarbanes-Oxley Act of 2002, are aimed at protecting investors by regulating the content and form of financial information about publicly traded corporations. By the early twenty-first century, the accounting industry had become an integral part of American business in general and American capital markets in particular. It assisted investors and enabled managers in running businesses more efficiently and profitably.
The Du Pont Model of Financial Ratios
The Du Pont model of financial ratios became a common equation in the accounting industry for examining a corporation’s return on equity (ROE). Its purpose is to break down the corporation’s ROE into separate components to understand each component’s contribution to the bottom line. The basic formula is as follows:
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
Thus, the Du Pont formula models a company’s ability to turn equity into profit as a function of three factors:

• the ability to sell goods for more than they cost to make or obtain (net profit margin)
  
• the ability to sell and restock inventory efficiently (asset turnover)
  
• the ability to leverage assets effectively (equity multiplier)

Different businesses may rely more heavily on different components of the ROE, but they all must take all three into account when evaluating financial performance.
Further Reading
Edwards, John Richards, ed. The History of Accounting: Critical Perspectives on Business and Management. 4 vols. New York: Routledge, 2000.
Eichenwald, Kurt. Conspiracy of Fools: A True Story. New York: Broadway, 2005.
Fleischman, Richard, ed. Accounting History (SAGE Library in Business and Management). 3 vols. London: Sage, 2006.
See also: Banking; Business crimes; Enron bankruptcy; corporate income tax; Internal Revenue Code; Service industries; Taxation.