Dr. Anders’ World Famous

A Brief History of Accounting

 

[Yes—this will be on the exam.  No—I won’t normally hand out this much notes.]

 

The activity of accounting has been around for several thousand years.

 

Example:

          Part of Confucius’ job responsibilities as a government employee was accounting (500 BC).

 

Much of what we know about the daily lives of ancient peoples comes from accounting records, such as inventories and sales records, found at archeological sites.

 

Important period in history:

          11th  through 13th centuries (AD)

          What happened then between Europe and the Middle East???

          What country has a central location???

 

 

 

A Brief History of Accounting

 

After the Crusades:

·      Trade dramatically increased between Europe and the Middle East

·      Italy became the intersection for this trade

 

 

Business owners needed to know how well their “stewards” were managing.  They had to rely on written records.

 

Great need for better recording of transactions:

·      Businesses expanded in size and distance

·      Owner could no longer do everything himself

 

This led to:

 

è First major advance in accounting

Around the 13th century AD:

·      Modern accounting (“double-entry” accounting) was developed in Italian city states

      

A Brief History of Accounting

 

Genoa: a major center of commercial activity

·       Genoese system probably evolved from an ancient Roman system

·       Assumed the concept of a “business entity”

·       Used “money” to record transactions, so unlike items could be compared in common terms

·       Distinguished between:

Ø    Capital (owner’s investment)

Ø    Profits (earnings of the business)

·       Oldest known Genoese double-entry books date from 1340

Ø    However, system was already well developed

 

 

Florence: a major artistic center

·       Gold florin was accepted as standard coin across Europe

·       Developed large associations and partnerships that pooled capital

·       Distinguished between individual partner’s capital accounts

·       Allocated profits and losses between partners

 

 

Venice: a key commercial and port city

·       Perfected double-entry accounting

·       The “Method of Venice” is the true ancestor of modern accounting

 

 

A Brief History of Accounting

 

The Franciscan Roots of Modern Accounting

 

First surviving accounting textbook:

       “The Summa” written by Fra. Luca Pacioli in 1494

       (included illustrations by L. Da Vinci)

·       A best seller in its day

·       Publicized the Method of Venice

·      Helped to spread literacy in the middle class

 

 

Luca Pacioli—the “Father of Accounting”

·      A mathematician and merchant

·      Became a Franciscan friar

Ø    Franciscans came out of, and ministered to, merchant class

·      Did not invent double-entry accounting

Ø  but spread the knowledge

·      Pacioli stated that a merchant’s responsibilities were:

v To give glory to God in their enterprises

v To be ethical in all business activities

v To earn a profit

 

The Method of Venice

(Double-entry Accounting)

 

A binary (0,1) method for recording economic events

 

Invention of the “Debit” and “Credit” concepts from the Italian terminology

 

Allowed for much easier addition and subtraction before calculators were invented

 

 

Debit

Comes from the Italian “debito”

which comes from the Latin “debita” and “debeo”

which means:

       OWED TO the proprietor

       or an asset of the proprietor

 

 

Credit

Comes from the Italian “credito”

which comes from the Latin “credo”

which means:

Trust or belief (in the proprietor)   

or OWED BY the proprietor  

 

A Brief History of Accounting

 

 

The next important period of history:

                     19th century

 

What began in Britain in the 1830s,

spurred by Eli Whitney’s invention of the cotton gin

(in the U.S.)???

 

 

 

The industrial revolution took hold in the U.S. after the Civil War.

§      Mass production became possible

 

Businesses expanded in:

Ø  Physical size,

Ø  Degree of mechanization, and

Ø  Number of employees.

 

Government regulation and taxation also increased.

 

 

A Brief History of Accounting

 

During/after the industrial revolution--where did business owners get the funds to expand?

 

 

Businesses began operating as corporations to bring in funds from “outsiders”

Ø    Stocks

Ø    Bonds

 

How do stockholders and creditors know how well their investment is doing?

 

The need developed to provide information to outside investors.

 

 

èSecond major advance in Accounting (1900, 1930s):

·      First—requirement of reporting

·      Later—standardization of reports

The Present of Accounting

 

This brings us to the late 20th and early 21st centuries

 

From the 13th century to the present:

§       Double-entry accounting spread throughout the world

§       Accountants in each country adapted accounting practices to suit their:

Ø    Cultures

Ø    Laws & regulations

Ø    Capital market structures

Ø    Environments

§       National differences in accounting rules and practices render financial statements of companies based in different countries UNCOMPARABLE

 

 

èThird major advance in accounting:

§      Development of international accounting standards

§      Harmonization of accounting and reporting