History - 1

The History of Accounting

History - 2

Why study history of accounting?

Understanding of the importance of accounting to society throughout history

Awareness of the essential functions (roles) performed by accounting allows such understanding

Exploration of historical developments may lead to better predictions of future

History - 3

What is Accounting?

Take a few minutes to write a concise definition of accounting.

Be prepared to read it to the class.

History - 4

NATURE OF ACCOUNTING An information system designed to . . .

Identify Collect Measure Process Communicate

economic data to interested parties to assist decision-making.

“Accounting is the language of business”

History - 5

Accounting Environment

Accounting information helps decision makers evaluate

economic opportunities for gain and the related inherent risks of providing capital to a particular

venture.“Resource Allocation”

History - 6

“Economic activity is carried on by human beings interacting with their environment. This type of interaction of human effort (labor) and natural resources takes place through the medium of entities which are used as organizing units for the purpose of producing goods and services. In this process the existing resources must be allocated by some means among the available alternatives. To make these allocations properly, predictions as to the outcome of the available alternatives are essential. Results of the past and estimates of the future are used to form these predictions. These results, estimates and predictions are couched in part in quantitative terms so that comparisons and evaluations can be facilitated. Accounting is one form of quantitative expression that is widely used.”

Maurice Moonitz, The Basic Postulates of Accounting, Accounting Research Study No. 1. AICPA, 1961.

History - 7

Where do we begin?

Where does the history of accounting begin?

“Writing was not invented to write books but to keep books” 1

1Hoffer, Eric, The Temper of Our Times, Harper & Row, 1966.

History - 8

Kam’s History Ancient civilizations Accounting in Antiquity

– Egypt– Babylonia– Greece – Rome

Middle ages (Feudal System) Double-entry bookkeeping

– Luca Pacioli Accounting & Capitalism Managerial Cost Accounting Professional Accounting Societies

History - 9

Functions of Accounting

Recording & Wealth Measurement

Managerial control & Income Measurement

Protection of equities (stakeholders)

Modern analysis & interpretation

Achievement of broad social objectives

History - 10

FUNCTIONS OF ACCOUNTINGSignificant Events

RECORDING & WEALTH MEASUREMENT– Writing and numerical systems– “Capturing” the information– Feudal system– “Traveling merchants”

• Relatively simple business structures– Single entry accounting = “lists of

things”

History - 11

MANAGERIAL CONTROL & INCOME MEASUREMENT– Crusades open new commerce– Greater complexity and continuity of business

• Information is necessary to operate the business• Early cost accounting

– Town economies– Magna Carta/Renaissance/Age of exploration– Evolution of double-entry accounting

• Pacioli’s “Summa”• Periodic income determination

FUNCTIONS OF ACCOUNTINGSignificant Events

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DOUBLE-ENTRY ACCOUNTINGImplications

Identification of the “economic entity” Explanation of changes in resources Representation of “capital flow”

– Capital to Profit to Capital Quantifies capital and wealth Restricts observations

– Monetary measurement– Reliability

Systemized organization of business activities Standardization of business terminology

History - 13

PROTECTION OF EQUITIES – Industry revolution/Factory system– National economies– Need for significant capital– Rise of the corporation

•Separation of owners and managers•Stock exchanges•Taxing authorities

Larger scale (often based on income)•Anti-trust regulators

– Need for audited financial statements

FUNCTIONS OF ACCOUNTINGSignificant Events

History - 14

MODERN ANALYSIS & INTERPRETATION– World Wars I & II– International economies– Demand for greater economic analysis and

improved resource allocation– “Scientific management”– Sophisticated management accounting

• Standard costing & variance analysis• Relevant analysis• Capital budgeting• Quantitative techniques (Least squares,

regression, ROI, Cash flow projections,etc.)

FUNCTIONS OF ACCOUNTINGSignificant Events

History - 15

ACHIEVEMENT OF SOCIAL OBJECTIVES– Social legislation

• New Deal, Civil Rights, Great Society, Welfare, etc.)• Government involvement • Not-for-Profit organizations

– Computer technology– Space age– Demands for corporate social responsibility

• Environmental• Employee rights• Health concerns

– Increasing regard for business ethics– New regulations on business and financial markets

(SOX)

FUNCTIONS OF ACCOUNTINGSignificant Events

History - 16

Is Accounting a “Social Force?”

Does it shape the world around it,or is the reverse true?

History - 17

“Accounting of itself cannot be the vehicle of social and political change although knowledge and understanding of the financial data which accounting can produce may well be vitally important both to those who wish a change and those who wish to resist it; but accounting as a discipline cannot take sides although those who use it may well do so.”Flint, D., “Research on the Social and Political Aspects of Accounting, Unpublished note.

History - 18

“The interdependency of accounting and its environment results in change being brought about by a process of mutual adaption. Environmental demands lead to changes in accounting practice and changes in accounting practice lead to changes in environmental demands and expectations.”

Gilling, D.M., “Accounting and Social Change,” International Journal of Accounting,Spring 1976.

History - 19

Evolution of the Knowledge ProfessionalElliott & Jacobson

Economic paradigms– Hunting and

gathering– Agriculture– Industry– The Information

economy

Information professional– Shaman– Scribe– Accountant– Information

professional

History - 20

Power of Information

“In this society, knowledge is the primary resource for individuals and for the economy overall. Land, labor, and capital – the economist’s traditional factors of production – do not disappear, but they become secondary.”

Drucker, Peter F., “The New Society of Organizations,” Harvard Business Review, September-October 1992