Chapter 1

The history and

development of
accounting
 Relevance of Accounting History
• Definition:
– Accounting history is the study of the
evolution in accounting thought, practices
and institutions in response to changes in
the environment and societal needs
• It is important to:
– Accounting pedagogy,
– policy development and
– Accounting practices
• It facilitates better understanding of
present and to forecast or control future
 Early history of accounting
 There is evidence of accounting practices in many
early civilisations dating back to about 3,000 BC:
 Chaldean–Babylonian, Assyrian & Sumerian
 Oldest surviving business records & organized
government services
 Egyptian
 Treasury system & logistics
 Chinese
 Government accounting system
 Greek
 Responsibility accounting
 Roman
 Laws requiring taxpayer’s financial statement
 Early history of accounting (cont’d)

 C. Littleton’s seven preconditions for the

emergence of systematic bookkeeping
are:
 the art of writing
 arithmetic
 private property
 money
 credit
 commerce
 capital
Ancient Writing Stuff
Accounting Development: Evidence from Quran
DEBT CONTRACT AND ACCOUNTING
DEBT CONTRACT AND ACCOUNTING

SURAH BAQARAH – AYAT 282

 LESSONS FROM BAQARAH
282
• Importance of recording (writing)
– Reliable evidence
– Prevent doubts
• Future transactions only
• Protection of the weaker party
• Qualified accountants (who Allah has
taught)
• Integrity of accountant
• Protection of the honest auditor
 Origins of double-entry
accounting
 Also known as ‘Italian bookkeeping’ because it
was promulgated by Italian traders
 First-known double-entry accounting books are
those of Massari of Genoa in 1340
 Luca Pacioli, a Franciscan friar, is credited with
introducing double-entry bookkeeping because
his is the first published discussion on the topic
(1494), in which:
 he described the use of debits and credits to
secure a double entry
 he advised the computation of a periodic profit
and the closing of the books
 Cushing’s 11 developments
1. Introduction of specific journals (16th century)
2. Periodic financial statements (16th & 17th century)
3. Double-entry system extended to other types of
organizations, e.g. monasteries, the State (1559
to 1795 AD)
4. Separate inventory accounts for different types of
goods (17th century)
5. Accounting needed to acquire a better status,
characterized by (17th century):
 need to inform absentee investors
 need for auditing
 need for cost accounting
 reliance on concepts of continuity, periodicity
and accrual
 Cushing’s 11 developments (cont’d)
6. Evolution of three methods of treating fixed
assets by the 18th century
– The asset is carried forward at original cost
– The asset account is closed at balance date
and the difference between total debit and
credit is carried forward at the account
balance.
– The asset is revalued (e.g., using fair
market value)
7. Development of depreciation methods from
1915 onwards
 Cushing’s 11 developments
(cont’d)
8. Emergence of cost accounting in the 19th
century (industrial revolution)
9. Development of techniques of prepayments
and accruals in the second part of the 19th
century to allow periodic profit calculations
10. Development of fund statements (late
19th and 20th centuries)
11. 20th & 21st century, Development of
accounting methods for complex issues
e.g., earnings per share, inflations, leases
& pensions.
 The development of
accounting principles
 Management contribution phase (1900–33):
 management had complete control over the
selection of financial information disclosed
in annual reports
 Institution contribution phase (1933–46) and
professional contribution phase (1959–73):
 professional bodies played a significant role
in developing principles
 Overt politicisation phase (1973–present):
 movement towards a politicisation of
accounting
 Management contribution
phase (1900–33)
 Characterized by ad hoc solutions to
urgent problems and controversies
 Lack of theoretical support
 Focus on minimisation of income
taxes
 Smoothing of earnings
 Complex problems avoided in favour
of expedient solutions
 Management contribution phase
(1900–33) (cont’d)

Significant influences of the period

 Interest as a cost controversy:
 the need to invest large amounts of
capital for long periods increased
overhead
 the inclusion of overhead in product
cost became an issue
 Growing effect of taxation of business
income
 Management contribution phase
(1900–33) (cont’d)

Arguments for improvement in

standards of financial reporting
 From 1900, New York Stock Exchange
required corporations to publish annual
financial statements
 Calls for protection of investors
 Board of Examiners established in 1917
to create a uniform certified practising
accountant (CPA) examination
 Institution contribution phase
(1933–46)
 Increasing role of institutions on development of
accounting principles:
 creation of the Securities and Exchange
Commission to administer federal investment
laws
 emergence of accounting principles
 companies were permitted to choose their
accounting methods but had to disclose them
 Committee on Accounting Procedure (CAP)
began issuing accounting research bulletins
(ARBs) in 1938
 Professional contribution
phase (1959–73)
 Establishment of the Accounting Principles
Board (APB) and the Accounting Research
Division
 The APB was unsuccessful and was
criticised for being over-dependent on
professional associations:
 no established theoretical framework
 authority of its statements not clear-cut
 alternative treatments allowed flexibility
in the choice of accounting techniques
 Overt politicisation phase
(1973–present)
 Development of a theoretical
framework
 Emergence of various interest groups
 Metcalf report released:
 charged that US ‘big eight’
accounting firms monopolise the
auditing of large corporations and
control the standard-setting process
 made recommendations aimed at
enhancing corporate accountability
 History of accounting in
Australia
 Same major phases as US accounting
 For much of the 19th century, most
colonies adopted the British model of
companies legislation
 Sydney Stock Exchange (SSE) also
influenced accounting practices:
 from 1925, SSE demanded publication of
balance sheets and profit-and-loss
accounts
 such disclosures sometimes preceded
legislation by many years
 Institutional contribution
phase in Australia
 Professional opinions on the general
principles of accounting practice were
released in 1937
 The Commonwealth Institute of
Accountants (CIA) appointed a Committee
on Accounting Principles (CAP) in 1938
 The Institute of Chartered Accountants in
Australia (ICAA) issued the first in a series
of Recommended Accounting Principles in
1944
 Institutional contribution phase in
Australia (cont’d)
 Corporate collapses and the 1960s mining share
boom meant a regulatory agency was required to
protect investors:
  1974: The Interstate Corporate Affairs
Commission was created to bring about
uniformity in state companies legislation
  1979: The National Companies and Securities
Commission (NCSC) was established
  1981: All states adopted the Commonwealth
Companies Act
  1989: The Australian Securities Commission
(ASC) was created to replace the NCSE
Professional contribution phase
in Australia
 In the 1960s, the ICAA created
several research committees on
accounting principles
 In 1965, the Accounting Research
Foundation was established by the two
accounting bodies, and:
 was responsible for creating
accounting standards in Australia
 contributed to the development of a
conceptual framework
 Politicisation of accounting
phase in Australia
 Corporate collapses of the 1960s led to the
introduction of legislation to regulate
accounting:
 1983: Companies and Securities
Legislation (Miscellaneous Amendments)
Act 1983 required companies to comply
with ASRB-approved accounting
standards
 1991: Australian Accounting Standards
Board (AASB) was established
 Link between accounting
and capitalism
• Capitalism is an economic system in which
capital assets are privately owned and goods and
services are produced for profit in a marketplace.
 The Sombart thesis argues that double-entry
bookkeeping has contributed to the development of
capitalism because:
 it permits the capitalist entrepreneur to plan,
predict and measure the impact of their activities
 the separation of owners and business allows the
growth of the corporation
 Yamey argues that double-entry bookkeeping was
originally used only as a record of transactions – not
to keep track of profits and capital