The history and development of accounting Chapter 1 The history and development of accounting

Early history of accounting There is evidence of double entry accounting in many early civilisations: Chaldean–Babylonian Assyrian Sumerian Egyptian Chinese Greek Roman

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

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 2. Periodic financial statements 3. Double-entry system extended to other types of organisations, e.g. monasteries, the State 4. Separate inventory accounts for different types of goods 5. Accounting acquired a better status, characterised by: 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 7. Development of depreciation methods from 1915 onwards 8. Emergence of cost accounting in the 19th century 9. Development of techniques of accounting for prepayments and accruals in the second part of the 19th century 10. Development of fund statements (late 19th and 20th centuries) 11. Development of accounting methods for complex issues

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) Characterised 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 (Cth) required companies to comply with ASRB-approved accounting standards 1991: Australian Accounting Standards Board (AASB) was established

Link between accounting and capitalism 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