history of accounting essay

history of accounting essay

History of Accounting

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1. Introduction

We also venture to capture details post-medieval period starting from 1500 and coming to the present-day accounting trends, how and why accounting has to evolve further in the future.

The evolution of accounting in the ancient world before Christ to the period after Christ, covering from the period from 500 BC to 1494, is really interesting as that period witnessed many path-breaking events in the accounting world. We further portray details and critical analysis of how Luca Pacioli, a Franciscan friar by profession, came to write the first book on the double-entry system of accounting with details normally found in today’s double-entry accounting. This has been done using critical analysis of the changing accounting systems over the period.

In the paper, we have made an attempt to show how accounting has evolved and developed from the very first days when man used fingers or drawing in the sand. Towards this, we have traced its roots from early civilization times like Sumerians, Egyptians all the way from 8000 to 500 BC.

Accounting is indeed the oldest profession on earth and plays the most important role in the economic development of a country. In the recent past, it has become one of the most significant tools for measuring value, for showing the value of an enterprise, and for providing critical information for not only management but also of interest to shareholders, investors, and all stakeholders.

2. Origins of Accounting

In ancient times, animal husbandry was the primeval form of production. Over time, however, agriculture became the main economic activity. This development led to some problems. The fields had to be organized and later cultivated. Agriculture needs teams of workers, ploughs and other tools, seeds, oxen, animals belonging to individuals; a very complex outfit. The activity also requires time and energy, physical resources that men cannot recover all by themselves. Therefore, it is a must that the men who owned the lands have to associate gathering all those necessary things; or, if any of the free citizens did not possess all of them separately, he had to have a partner who had them. Village corporations were born because of this situation.

There is not a well-defined line between accounting and accountancy, and in the following paragraphs the writer is not going to try to identify it. It does not seem very important, and maybe desirable from an evolutionary point of view, that we should distinguish these two entities. He is going to refer to both of them as accounting. The ancient art of accounting was born in the cradle of civilization, in Mesopotamia, and it has to do with a simple but harsh economic necessity, the necessity of trading, the buying and selling of goods. It was born several millennia ago, at a difficult time, in the society of the ancient Sumerians, who worshipped evil gods. When the gods were angry, and they used to become so very often, generally they punished the civilization, by causing rain and infertility of the earth.

3. Evolution of Accounting Practices

It can be said that modern terms such as, for example, “trade and barter” were a regular occurrence that basically based on games of trust, and that mathematical accounting was not essential. Particularly, these operations were undertaken for daily life consideration not for real trade. It is, however, interesting how the history of accounting and dual accounting also reflects the complexity of modern society. The significant factor of double entry that leads to the birth of the industrial revolution based on universally accepted accounting rules also results from historical reasons rather than being a natural choice. The history of this extraordinary technique is extremely contagious, as confirmed by a glance at the vast literature on the subject. But how was this creation born? What were the essential conditions for its invention, and what would have happened if it did not become widespread?

The story of accounting and money begins five hundred years ago with double-entry bookkeeping. Following the limitations of feudal society (in which extraction of physical work prevailed), attention shifted to financial transactions. As a result, at the beginning of the 15th century, an extraordinary new accounting technique was invented by Luca Pacioli – double-entry bookkeeping – which allowed business activity and profits to be monitored easily and also enabled determinant management actions. It made investors more wealthy and enabled enterprises to transform into powerful economic entities that ruled local and international markets. Households spending as well as business or governmental sector costs have not been rewarded before the year 1437 because of the restrictions of accounting, financing, and investment.

4. Impact of Technology on Accounting

Upon the invention of cuneiform, the Sumerians developed a system that used a series of markings to signify different items or products, and these items were assigned a numeric value. Some evidence suggests that the earliest versions of the text also provided some explanation, offering an even then innovative approach to documenting transactions. The Sumerians integrated this information in a central place where it was both formally recorded and joined with the existing wealth count. Through this innovation, the Sumerian ruler was able to make both economical decisions based on the information that was created and kept by proxy accountants. The birth of proxy accounting was the birth of public accounting in that it helped those not directly responsible for the central business to manage it. The news resulted in throngs and throngs of farmers, now administrators, toiling in the dirt and looking up. Hindsight concludes this was the fertile crescent of accounting, a time period that heralded the technology age and the creation of numbers for planning and decision-making purposes.

The impact of technology on accounting. There have been four major periods in the development of accounting. Information technology has had a major impact on these periods. In 5000 B.C., the time period known as the Age of Stone, man discovered the miracle of writing. Around 3000 B.C., the Ancient Sumerians first used cuneiform to create written records. The invention of writing occurred during the mid-4th millennium BC but, for centuries after that, most texts were written either on clay tablets or on papyrus. This started the first form of accounting called Mesopotamian bookkeeping, which involved counting and listing what someone owned as well as what he owed – payable and receivable. Wealth had been increasing by the invention of animal husbandry, crop cultivation, and the domestication of cereals and legumes because a surplus could be produced. Wealth was measured in amounts possible to count, such as heads of cattle or sheaves of wheat. Numeric notation allowed Mesopotamians to expand from counting wealth to planning and organizing the workforce. The Mesopotamians are also responsible for a simple and functional balance sheet.

5. Future Trends in Accounting

The future trends appear to be in the direction of a shift not only in the objectives of accounting research, but also in its subject matter consonant with contemporary developments in the capital market. The past accounting research focused attention more on the allocation of investor’s resources among alternative corporate entities. This emphasized the formulation of accounting policies to help investors in their decision-making process in order to enable them to judge the comparative profitability of the management and to assess the performance of various other components of the financial position of the company. This led to the allocation of resources just representing different claims on the profits already earned, and there was not much discussion of how those profits had been generated.

A rapidly changing business environment has made it essential for accountants to look at the implications of these changes in accounting, as well as in the preparation and presentation of financial statements. One of the major challenges of globalization is international accounting harmonization and convergence. This concept implies devising a framework to meet the needs of international users. This effort also necessitates the acceptance of a uniform set of accounting standards on key issues concerning business transactions and events, and an interpretative body for solving implementation issues. This move to convergence adds impetus to the search for sound principles to embed accounting standards. On the technology front, due to fast changes in information technology hardware, software, and networks—the very backbone of IT—there has been a sharp increase in the capacity to process large volumes of information from geographically diverse locations.

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