Chapter 1: The History and

Development of
Accounting
Ahmed Belkaoui
 Evolution of double-entry bookkeeping
Early history of accounting
Many attempts have been done to locate the origin of double-
entry bookkeeping. Some form of bookkeeping can be traced
as far back as to 3000BC.

the Chaldean-Babylonian, Assyrian and Sumerian civilizations,

(the producers of the first organized government in the world,
some of the oldest written languages, and the oldest
surviving business records)

the Egyptian civilizations,

(where scribes formed the pivots on which the whole
machinery of the treasury and the other departments
turned)

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 Evolution of double-entry bookkeeping
Early history of accounting
the Chinese civilization
(with government accounting playing a key and
sophisticated role during the Chao dynasty :1122-256 BC)

the Greek civilization

(where Zenon, a manager of the great estate of Appolonius,
introduced in 256 BC an elaborate system of responsibility
accounting)

the Roman civilization

(with laws requiring taxpayers to prepare statements of their
financial positions, and with civil rights depending on the
level of property declared by the citizens)

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 Evolution of double-entry bookkeeping
Early history of accounting
The presence of these forms of bookkeeping in the
ancient world has been attributed to various factors,
including:
the invention of writing,
the introduction of Arabic numerals and of the
decimal system,
the diffusion of knowledge of algebra,
the presence of inexpensive writing material,
the rise of literacy,
and the existence of a standard medium of exchange.

Littleton lists 7 preconditions for the emergence of

systematic bookkeeping
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 The Birth of Double Entry
Accounting
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Arithmet
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Copyright@2005 by Rohana Othman. All 5
3/31/17
rights reserved.
 Evolution of double-entry bookkeeping
Luca Paciolis contribution
He is generally associated with the introduction of double-
entry bookkeeping.

In 1494 he published his book (Summa de Arithmetica

Geometrica, Proportioni et Proportionalita), which include
two chapters describing double-entry bookkeeping.

His treatise reflected the practices of Venice at the time,

which became known as the Method of Venice or the
Italian Method. Therefore, he did not invent double-entry
bookkeeping but described what was being practiced at the
time.

Paciolis book was translated in several languages,

contributing to the spread and popularity of the Italian
method.
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 Evolution of double-entry bookkeeping
Development of double-entry bookkeeping
The Italian method spread throughout Europe in the sixteenth
and seventeenth centuries. Cushing outlines a series of
developments of the double-entry model. They include the
following:

1. Around the sixteenth century a few changes were made in the

bookkeeping techniques, noticeably, the introduction of specific
journals for the recording of different types of transactions.

2. The 16th and 17th centuries saw the evolution of the practice of
periodic financial statement.

3. The application of the double-entry system was extended to

other types of organization.

4. The 17th century saw the use of separate inventory accounts for
different types of goods.
 Evolution of double-entry bookkeeping
Development of double-entry bookkeeping
5. Beginning with the East India Company in the 17 th century, and
continuing with the growth of corporation following the industrial
revolution, accounting acquires a better status, characterized by the
need to inform absentee investors, the need for auditing, the need
for cost accounting, and a reliance on concepts of continuity,
periodicity and accrual.

6. Three methods of treating fixed assets evolved by the 18 th century.

7. Up to the early 19th century, depreciating property was accounted

for as unsold merchandise. In the last half of the 19 th century,
depreciation in the railroad industry was considered unnecessary
unless the property was deemed to be in improper working
condition. Saliero in 1915 provided some evidence of the existence
of the following depreciation methods: straight-line, reducing
balance method, sinking fund and annuity methods, and unit cost
method. It is only following the 1930s that depreciation charges
became more common.
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 Evolution of double-entry bookkeeping
Development of double-entry bookkeeping
8. Cost accounting emerged in the 19th century as a product of
the industrial revolution. It originated in the fifteenth century
textile factories.

9. The latter half of the 19th century saw the development of

techniques of accounting for prepayments and accruals, to
allow the computation of periodic profit.

10.The latter 19th and 20th centuries saw the development of

funds statements.

11. The 20th century saw the development of accounting methods

for complex issues, ranging from the computation of earnings
per share, accounting for business computations, accounting for
inflation, long-term leases, and pensions, to the crucial problem
of accounting for the new products of financial engineering.
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 The development of accounting
principles in the USA
Accounting theory and principles have been
subjected to a constant reexamination and
critical analysis. Four phases of this process
may be identified:

Management contribution phase (1900-33)

Institution Contribution Phase (1933-59)
Professional Contribution Phase (1959 73)
Politicization Phase (1973 Present)

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 Management contribution phase (1900-33)

The influence of management in the formulation of

accounting principles arose from the increasing
number of shareholders and the dominant economic
role played by industrial corporations after 1900.

The diffusion of stock ownership gave management

complete control over the format and content of
accounting disclosures.

The intervention of management may be

characterized best by ad hoc solutions to urgent
problems and controversies.

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 The consequences of the dependence on management
initiative include:

1. Given the pragmatic character of the solutions

adopted, most accounting techniques lacked
theoretical support.
2. The focus was on the determination of taxable income
and the minimization of income taxes.
3. The techniques adopted were motivated by the desire
to smooth earnings.
4. Complex problems were avoided and expedient
solutions were adopted.
5. Different firms adopted different accounting
techniques for the same problem.
Management contribution phase (1900-33)

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 William Z. Ripley and J.M.B. Hoxley: argued for
improvement in standards of financial reporting.

Adolph A. Berle and Gardiner C. Means: called for

the protection of investors.

The main players of the time:

American Institute of Accountants (AIA)
In 1917 established a Board of Examiners to
create a uniform CPA examination,
The New York Stock Exchange
From 1900 required all corporations applying
for listing to agree to publish annual
financial statement.
Management contribution phase (1900-33)
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 Important issues and events :
o Establishing realistic product costs to serve as basis
for selling prices and measuring management
efficiency.

No selling costs, interest charges or administrative

expenses are included in the factory overhead costs.

o The growing effect on accounting theory of taxation

of business income.

The 1918 Act was the first to recognize the role of

accounting procedures in the determination of taxable
income, which set the stage for the beginning of a
harmonization between tax accounting and financial
accounting.
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Management contribution phase (1900-33)
 Institution Contribution Phase (1933-59)
Marked the creation and the increasing role of
institutions on the development of accounting
principles.

(a)The creation of the Securities and Exchange

Commission (SEC)

() In 1934 Congress created the SEC to

administer various federal investment laws
including the Securities Act of 1933
(regulates the issuance of securities in the
interstate markets) and Securities Act of
1934 (regulates the trading of securities)
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 The SECs role in the development of
accounting principles:
Section 13 (b) of the 1934 Securities
Exchange Act provides the SEC the authority
to prescribe accounting guidelines or forms
for reports submitted to it.

On April 25, 1938, the SEC sent a definitive

message that unless the profession
established a standard-setting body, the SEC
would use its mandate and develop
accounting principles.
Institution Contribution Phase (1933-
59)

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(b) The approval by the AIA of broad principles.
George O. May, an Englishman, proposed that the
AICPA begin a cooperative effort with the stock
exchange committee in developing accounting
standards.

Among other things, the committee proposed the

first formal attempt to develop generally
accepted accounting techniques, known as Mays
broad principles. They include:

(i) That income accounts should not include

unrealized profit, and expenses ordinarily
chargeable against income should not
Institution be charged
Contribution Phase (1933-
59)
against unrealized profit. 17
(ii) That capital surplus (additional paid-in capital)
should not be charged with amounts chargeable
ordinarily to income.

(iii) That earned surplus (or retained earnings) of a

subsidiary company created prior to acquisition was not
part of the consolidated earned surplus of the parent.

(iv) That dividends on treasury stock may not be

credited to the companys income.

(v) That amounts receivable from officers, employees,

and affiliated companies should be shown separately.

Institution Contribution Phase (1933-

59)

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(c) The new role of the Committee on Accounting Procedures

In 1938, the Institute decided to empower the Committee

on Accounting Procedure (CAP) to issue pronouncements.

In 1938 1939 alone, CAP issued twelve Accounting

Research Bulletins (ARBs) during that period continued to
do so during the war years.

1946 1953, issued eighteen ARBs, with a strategy of

eliminating questionable and suspect accounting practices,
and focusing on particular reporting problems

Institution Contribution Phase (1933-

59)

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 However, the period 1957 to 1959 was marked with an
intensive criticism of the CAP for various reasons, including:

failure to give adequate hearings to financial executives

and accounting practitioners;

failure to work on unpopular issues;

failure to develop a comprehensive statement of basic

accounting principles;

being in disagreement with the SEC, which was displeased

by the CAPs preference for the current operating
performance conception of income statement and by the
failure of CAP to limit the alternatives available to the
management.

Institution Contribution Phase (1933-

59)
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Professional Contribution Phase (1959
73)
The AICPA accepted the recommendations to
dissolve CAP and its research department and
established in 1959 the Accounting Principles
Board (APB) and the Accounting Research
Division with the mission to advance the written
expression of generally accepted accounting
principles.

Between 1959 and 1973, the APB issued 31

Opinions dealing with controversial issues.

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 The American Accounting Association also participated
in the process through several research studies and
attempts to develop an integrated statement of basic
accounting theory.

The APB was criticized for:

limited controversial or ad hoc Opinions (APB 8 on
pension accounting, APB 11 on income tax
allocation, APBs 2 and 4 on investment tax credit);

failing to solve problems of accounting for business

combinations and goodwill.

Professional Contribution Phase (1959 73)

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 The intervention of professional associations and
agencies in the formulation of an accounting
theory was spurred on by efforts to eliminate
undesirable techniques and to codify acceptable
techniques.

The problems associated with the dependence on

such associations and agencies include the
following:

1. The association and agencies did not rely on

any established theoretical framework.
2. The authority of the statements was not clear-
cut. Professional Contribution Phase (1959 73)

3. The existence of alternative treatments allowed

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flexibility in the choice of accounting techniques.
 Politicization Phase (1973 Present)

A situation created by the generally accepted view

that accounting numbers affect economic behavior
and, consequently, that accounting rules should be
established in the political arena.

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 Horngren states:
The setting of accounting standards is as much a
product of political action as flawless logic or
empirical findings.

Why? Because the setting of standards is a social

decision. Standards place restrictions on behavior;
therefore, they must be accepted by the affected
parties.

Acceptance may be forced or voluntary, or some of

both. In a democratic society, getting acceptance
is an exceedingly complicated process that requires
Politicization Phase (1973 Present)
skillful marketing in a political arena. 25
 Since its inception, the FASB has adopted a
deductive and a quasi-political approach to the
formulation of accounting principles. This
approach can be seen through:

1. its effort to develop a theoretical framework or

accounting institution,

2. acknowledging the fact that the contribution of

various interest groups that have emerge, is
required for the general acceptance of new
standards.

Politicization Phase (1973 Present)

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 Accounting and capitalism

Prior to capitalism, business/trade existed as a system

where the central government attempted to control and
regulate all phases of business activity.

In the late 18th century, capitalism emerge due to

the neglectfulness of middleclass officials in executing

their duties,
and the favouring of the merchants and the guilds.

Basic principle of capitalism:

Economic initiative should come from individual rather than
the government.

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 Some economic historians claim that the
double-entry bookkeeping has been vital to
the development and evolution of
capitalism. This link between accounting
and capitalism became known as the
Sombart thesis or argument (1919).

Accounting and capitalism

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 According to Sombart, the development of
capitalism is parallel and connected intimately to
double-entry.

Double-entry bookkeeping has made it possible (a)

for the capitalistic entrepreneur to plan, conduct
and measure the impact of his/her activities, and
(b) for a separation of owners and the business
itself, thus allowing the growth of the corporation.

Accounting and capitalism

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 Yameys disagreement with Sombart

Yamey (1949) felt that Sombart had exaggerated

the contribution of double-entry bookkeeping to the
development of the capitalist economy. His
contentions are as follows:

(1)Yamey indicates that businessmen in the 16th

through 18th centuries did not use double-entry
bookkeeping to keep track of profits and capital, but
simply as a record of transactions. The basis of this
argument is that there were irregular rather than
Accounting and capitalism
systematic balancing of books.
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 (2) He also argues that (a) double-entry
bookkeeping is not necessary for
determining profits and capital, (b) double-
entry is only useful for routine problems,
and (c) it is not necessarily useful in helping
businessmen select the best opportunities
available to them.

Accounting and capitalism

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 However, Winjun (1971) provided evidence
that contradicts Yameys, whereby it was
found that as early as the 16 th century, profit
and loss determination was an important
facet of double-entry bookkeeping.

Kam (1986) refuted Yameys argument that

single entry is sufficient by saying that
double-entry is a better tool to determine
profits and capital.
Accounting and capitalism

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 Relevance of accounting history

Accounting history makes it possible to

better understand our present and to
forecast or control our future.

It is a study of the heritage of accounting

and its contribution to accounting
pedagogy, policy and practice.

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 With regards to pedagogy: accounting history can be
very helpful to a better understanding and appreciation
of the field of accounting and its evolution as a social
science.

With regards to policy perspective: accounting

history is instrumental to a better understanding of the
accounting problems and their institutional contexts as
well as the formulation of public policy.

With regards to accounting practice: accounting

history could provide a better assessment of the existing
practices by a comparison with the methods used in the
past.
Relevance of accounting history

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 THE END

THANK YOU

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