History Of Accounting


Unlike most other modern professions, accounting has a history that is usually discussed in terms of one seminal event – the invention and dissemination of the double entry bookkeeping processes. But a view of accounting history that begins with Luca Pacioli’s contributions overlooks a long evolution of accounting systems in ancient and medieval times.

More fundamental is the question, why should we care about the history of accounting at all? Certainly a glimpse back into this period helps illuminate our past generally, and it is the sort of winding, twisted path that makes for an entertaining story. But perhaps the most compelling reason is to help explain the phenomenal growth that the profession of accountancy has enjoyed worldwide since the first royal charters were granted to the Society of Accountants in Edinburgh less than 150 years ago. In 1904, 50 years after the emergence of the formal profession, about 6,000 practitioners carried the title of chartered accountant. In 1957, there were 38,690 chartered and incorporated accountants (Scottish, British and Irish). Today, the Institute of Chartered Accountants in England and Wales alone has a membership of over 120,000 worldwide. This is to say nothing of the many professionals in the other allied institutes in Canada, New Zealand, Ireland, Australia, Scotland and South Africa, along with American certified public accountants - comprising a vast, worldwide network of professional accountancy dominated by several, mammoth, worldwide accounting firms.

How and why did this relatively new profession develop? Its history is that of human commerce, and even more fundamentally, of writing and the use of numbers and counting. Some argue that accounting developed purely in response to the needs of the time brought about by changes in the environment and societal demands. Others claim that the development of the science of accounting has itself driven the evolution of commerce since it was only through the use of more precise accounting methods that modern business was able to grow, flourish and respond to the needs of its owners and the public. Either way, the history of accounting throws a light on economic and business

history generally, and may help us better predict what is on the horizon as the pace of global business evolution escalates.

Obviously this presentation can only be an overview on a subject whose complete bibliography would itself be massive. We have included this on the ACAUS Web site because we were aware that there were so few online resources available on accounting history. It is intended only as a brief introduction, to whet the appetite for a more in-depth look that additional reading can provide. For a listing of some good books on this subject see the conclusion of this history or order directly from our history selection in our online ACAUS Bookstore.

Ancient Accounting: Dawn of Man through Luca Pacioli

In attempting to explain why double entry bookkeeping developed in 14th century Italy instead of ancient Greece or Rome, accounting scholar A. C. Littleton describes seven "key ingredients" which led to its creation:

• Private property: The power to change ownership, because bookkeeping is concerned with recording the facts about property and property rights.

• Capital: Wealth productively employed, because otherwise commerce would be trivial and credit would not exist.

• Commerce: The interchange of goods on a widespread level, because purely local trading in small volume would not create the sort of press of business needed to spur the creation of an organized system to replace the existing hodgepodge of record-keeping.

• Credit: The present use of future goods, because there would have been little impetus to record transactions completed on the spot.

• Writing: A mechanism for making a permanent record in a common language, given the limits of human memory.

• Money: The "common denominator" for exchanges, since there is no need for bookkeeping except as it reduces transactions to a set of monetary values.

• Arithmetic: A means of computing the monetary details of the deal.

Accounting In Mesopotamia, circa 3500 B.C.

Five thousand years before the appearance of double entry, the Assyrian, Chaldaean-Babylonian and Sumerian civilizations were flourishing in the Mesopotamian Valley, producing some of the oldest known records of commerce. In this area between the Tigris and Euphrates Rivers, now mostly within the borders of Iraq, periodic floodings made the valley an especially rich area for agriculture. As farmers prospered, service businesses and small industries developed in the communities in and around the Mesopotamian Valley. The cities of Babylon and Ninevah became the centers for regional commerce, and Babylonian became the language of business and politics throughout the Near East.

There was more than one banking firm in Mesopotamia, employing standard measures of gold and silver, and extending credit in some transactions.

During this era (which lasted until 500 B.C.), Sumeria was a theocracy whose rulers held most land and animals in trust for their gods, giving impetus to their record-keeping efforts. Moreover, the legal codes that evolved penalized the failure to memorialize transactions. The renowned Code of Hammurabi, handed down during the first dynasty of Babylonia (2285 - 2242 B.C.), for example, required that an agent selling goods for a merchant give the merchant a price quotation under seal or face invalidation of

a questioned agreement. Thus it is believed that most transactions were recorded and subscribed by the parties during this period.

The Mesopotamian equivalent of today's accountant was the scribe. His duties were similar, but even more extensive. In addition to writing up the transaction, he ensured that the agreements complied with the detailed code requirements for commercial transactions. Temples, palaces and private firms employed hundreds of scribes, and it was considered a prestigious profession.

In a typical transaction of the time, the parties might seek out the scribe at the gates to the city. They would describe their agreement to the scribe, who would take from his supply a small quantity of specially prepared clay on which to record the transaction. Clay was plentiful in this area, while papyrus was scarce and expensive.

The moist clay was molded into a size and shape adequate to contain the terms of the agreement. Using a wooden rod with a triangular end, the scribe recorded the names of the contracting parties, the goods and money exchanged and any other promises made. The parties then "signed" their names to the tablet by impressing their respective seals. In an age of mass illiteracy, men carried their signatures around their necks in the form of stone amulets engraved with the wearer's mark, and were buried with them at death. Often the seals included the owner's name and religious symbols, such as the picture and

name of the gods worshipped by the owner.

Accounting In Ancient Egypt, China, Greece and Rome

Governmental accounting in ancient Egypt developed in a fashion similar to the Mesopotamians. The use of papyrus rather than clay tablets allowed more detailed records to be made more easily. And extensive records were kept, particularly for the network of royal storehouses within which the "in kind" tax payments were kept.

Egyptian bookkeepers associated with each storehouse kept meticulous records, which were checked by an elaborate internal verification system. These early accountants had good reason to be honest and accurate, because irregularities disclosed by royal audits were punishable by fine, mutilation or death.

Although such records were important, ancient Egyptian accounting never progressed beyond simple list-making in its thousands of years of existence. Perhaps more than any other factors, illiteracy and the lack of coined money appear to have stymied its development. While the Egyptians tracked movements of commodities, they treated gold and silver not as units of fungible value, but rather as mere articles of exchange. The inability to describe all goods in terms of a single valuation measure made cumulation and summation difficult and the development of a cohesive accounting system all but impossible.

Pre-Christian China used accounting chiefly as a means of evaluating the efficiency of governmental programs and the civil servants who administered them. A level of sophistication was achieved during the Chao Dynasty (1122 - 256 B.C.), which was not surpassed in China until after the introduction of double entry processes in the 19 century. In the 5th century B.C., Greece used "public accountants" to allow its citizenry to maintain real authority and control over their government's finances. Members of the Athens Popular Assembly legislated on financial matters and controlled receipt and expenditure of public monies through the oversight of 10 state accountants, chosen by lot.

Perhaps the most important Greek contribution to accountancy was its introduction of coined money about 600 B.C. Widespread use of coinage took time, as did its impact on the evolution of accounting.

Banking in ancient Greece appears to have been more developed than in prior societies. Bankers kept account books, changed and loaned money, and even arranged for cash transfers for citizens through affiliate banks in distant cities. Government and banking accounts in ancient Rome evolved from records traditionally kept by the heads of families, wherein daily entry of household receipts and payments were kept in an adversaria or daybook, and monthly postings were made to a cashbook known as a codex accepti et expensi.

Medieval Accounting

The thousand years between the fall of the Roman Empire and the publication of Luca Pacioli's Summa are widely viewed as a period of accounting stagnation, and medieval practices outside Italy are often ignored in historical summaries. Yet, as historian Michael Chatfield has observed, medieval agency accounting, "laid the foundations for the doctrines of stewardship and conservatism, and the medieval era created the conditions for the rapid advance in accounting technology that occurred during the Renaissance."

While accounting under the Roman Empire was prescribed by the centralized legal codes of the time, medieval bookkeeping was localized and centered on the specialized institutions of the feudal manor. The systems of exchequer and manor necessitated numerous delegations of authority over property from the owners to actual possessors and users. The central task of accounting during this era was to allow the government or property owners to monitor those in the lower portions of the socio-economic

"pyramid." When William the Conqueror invaded England, he took possession of all property in the name of the king. In 1086, he conducted a survey of all real estate and the taxes due on them, known as the Domesday Book. The oldest surviving accounting record in the English language is the Pipe Roll, or "Great Roll of the Exchequer," which provides an annual description of rents, fines and taxes due the King of England, from A.D. 1130 through 1830.

Compiled from valuations in the Domesday Book and from statements of sheriffs and others collecting for the royal treasury, the Pipe Roll was the final record on parchment of a "proffer" system which extensively used a wooden stick as a basis of account-keeping. Twice a year, at Easter and Michaelmas (September 29), the various county sheriffs were called before the Exchequer at Westminster. At Easter a sheriff would pay about half of the total annual assessments his county owed.

In accepting a sheriff's payment on account (the proffer), the treasurer would have a wooden tally stick prepared and cut as a record of the transaction.

Used even before the introduction of the Pipe Roll, the tally stick was a nine-inch long, narrow, hazelwood stick, cut with notches of varying size to indicate the amount received. A cut the size of a human hand was 1,000 pounds; a thumb's width, 100 pounds; a cut the thickness of a "grain or ripe barley," one pound; and a shilling, just a notch. Chatfield describes the way in which the tally stick was used to make a receipt in an age when few could read or write:

After the amount of the sheriff's proffer had been carved, a diagonal cross cut was made an inch or two from the thicker end of the tally, and the whole stick was split down the middle into two identically notched parts of unequal length. The flat sides of both pieces were inscribed in Latin to show that they related to the same debt, and as additional protection, the cross cuts were made at various angles on different tallies, so that no "foil" or shorter piece could possibly be fitted to any "stock" but its own. The sheriff then departed with the stock as his receipt for payments rendered, and the foil was kept by the treasurer for the Exchequer archives.

At Michaelmas, each sheriff returns for the final accounting, at which he pays the whole year's revenues. The treasurer reads the amount due from the Pipe Roll, and the sheriff must justify any unusual expenses claimed. Final settlement occurs at a table covered by a checkered cloth, for which the Exchequer is named. "Counters" are placed on the squares to visually represent the amount due the king from that county. Another row of counters represents the Easter payment, which is verified by fitting together the sheriff's tally stock with the Exchequer's foil to demonstrate that the notches and cuttings correspond.

Italian Renaissance: Birth of Double Entry Bookkeeping

The innovative Italians of the Renaissance (14th -16th century) are widely acknowledged to be the fathers of modern accounting. They elevated trade and commerce to new levels, and actively sought better methods of determining their profits.

Although Arabic numerals were introduced long before, it was during this period that the Italians became the first to use them regularly in tracking business accounts – an improvement over Roman numerals the importance of which cannot be overstated. They kept extensive business records, as the use of capital and credit on a large scale developed: The evolutionary trend toward double entry bookkeeping was underway.

Luca Pacioli and The Summa

Luca Pacioli was a true Renaissance man, with knowledge of literature, art, mathematics, business and the sciences, at a time when few could even read. Born about 1445 at Borgo San Sepulcro in Tuscany, Frater Luca Bartolomes Pacioli acquired an amazing knowledge of diverse technical subjects – religion, business, military science, mathematics, medicine, art, music, law and language. He accepted the popular belief in the inter-relatedness of these widely varying disciplines and in the special importance

of those, such as mathematics and accounting, which exhibit harmony and balance.

His friend Leonardo da Vinci helped prepare the drawings for Pacioli's 1497 work, Divina Proportione; In turn, Pacioli is reputed to have calculated for da Vinci the quantity of bronze needed for the artist's huge statue of Duke Lidovico Sforza of Milan.

Around 1482, after completing his third treatise on mathematics, Pacioli, who like many of his time sought preferment as a teacher, became a Franciscan friar. He traveled throughout Italy lecturing on mathematics, and, in 1486, completed his university education with the equivalent of a doctorate degree. Pacioli never claimed to have invented double entry bookkeeping. Thirty-six years before his monumental treatise on the subject, Benedetto Cotrugli wrote Delia Mercatura et del Mercante Perfetto (Of Trading and the Perfect Trader), which included a brief chapter describing many of the features of double entry. Although this work had not been published for more than a century, Pacioli was familiar with the manuscript and credited Cotrugli with originating the double entry method.

Pacioli's System: Memorandum, Journal and Ledger

"De Computis" begins with some basic instruction for commerce. The successful merchant, declares Pacioli, needs three things: sufficient cash or credit, good bookkepers and an accounting system which allows him to view his finances at a glance. Before commencing business, one should prepare an inventory listing all business and personal assets and debts. This inventory must be completed within one day, and property should be appraised at current market values and arranged according to mobility and value, with cash and other valuables listed first since they are most easily lost. The memorandum, or memorial, was Pacioli’s equivalent of a daybook, for the recording, in chronological order, of business transactions as they occurred. The transaction could be entered in any

of the various monetary units then in use in the Italian city-states of the time, with conversion to a common currency for double entry left for later.

The journal was the merchant's private account book. Entries consisted of a narrative debit, credit and explanation in one continuous paragraph. The journal had only one column, which was not totaled. There were no compound entries. Pacioli's ledger was, of his three books, the most like its modern equivalent. The money and date columns were almost identical to those in modern ledgers, with entries consisting of brief paragraphs,debits on the left side of a double page (deve dare) and credits on the right (deve avere).

The bookkeeper posts "cash in hand" as a debit on page one of the ledger, just as it was entered first in the journal. As ledger postings are made, two diagonal lines are drawn through each journal entry, one from left to right when the debit is posted and the other from right to left when the credit is posted. The first 16 chapters of "De Computis" describe this basic system of books and accounts, while the remaining 20 are devoted to specialized accounting issues of merchants. These include bank deposits and withdrawals, brokered purchases, drafts, barter transactions, joint venture trading, expense disbursements and closing and balancing books.

The trial balance (summa summarium) is the end of Pacioli's accounting cycle. Debit amounts from the old ledger are listed on the left side of the balance sheet and credits on the right. If the two totals are equal, the old ledger is considered balanced. If not, says Pacioli, "that would indicate a mistake in your Ledger, which mistake you will have to look for diligently with the industry and intelligence God gave you."

Significance of the Summa

In the first century after its publication, the Summa was translated into five languages, and numerous books on double entry bookkeeping appeared in Dutch, German, English and Italian whose descriptions were obviously lifted from "De Computis." Many consider these works inferior explanations of the system so clearly articulated by Pacioli. One historian has described the works issued during this period as, "at the best, revisions of Pacioli, at the worst servile transcriptions without even the courtesy of referring to the original author."

Nevertheless, they helped quickly spread the knowledge of the "Italian method" throughout Europe. Perhaps most surprising is how little bookkeeping methods have changed since Pacioli. Both the sequence of events in the accounting cycle and the special procedures he described in "De Computis" are familiar to modern accountants. In fact, the primary differences between current bookkeeping practices and the "Method of Venice" are additions and refinements brought about by the needs of a larger scale of business operation. The small proprietorships of 15th century Italy had no need for specialized journals, subsidiary ledgers, controlling accounts, formal audit systems, cost accounting or budgeting. Some omissions, such as the failure to touch on accruals and deferrals, probably occurred because Pacioli felt they were too advanced for a beginner’s treatise. But numerous tiny details of bookkeeping techniques set forth by

Scotland - Birthplace of the Modern Profession

It is not unfitting that when we come to deal with the modern profession of accountant, Scotland should occupy the place of priority. It is there that the Chartered Accountant originated, and in Scotland we find the oldest existing societies of public accountants. We are not unmindful of the claims of Italy, to which country we are indebted for so much in connection with the profession, but however important a position accountants occupied there during the seventeenth and eighteenth centuries, their influence undoubtedly diminished thereafter, and the old Gilds and Colleges became either dormant or extinct.

In tracing the growth of the profession in Scotland as elsewhere one meets with many difficulties. In Edinburgh it was for long associated with the profession of law, so that we frequently find the designation of Writer applied in one place to the same individual who is in another designated Accountant. There are several instances of members of the Society of Writers to the Signet, the leading Solicitors' Society in Scotland, practising as accountants. Moreover, until comparatively recent times, much accountant’s work was done in solicitort’s offices. Again, to a certain extent in Edinburgh, but to a greater extent in the more commercial city of Glasgow, the designation of accountant was, in early times, confounded with that of merchant, a term of much wider significance then than now.

It may be of interest to quote here, as a very full compendium of the kind of work

which a Glasgow accountant of the early part of the last century professed to undertake, the list of duties which Mr. James McClelland attached to the circular, dated 12th March 1824, in which he announced that he had commenced business on his own account:

1. Factor and trustee on sequestered estates.

2. Trustee or factor for trustees of creditors acting under trust deeds.

3. Factor for trustees acting for the heirs of persons deceased.

4. For gentlemen residing in the country for the management of heritable or other property.

5. Agent for houses in England and Scotland connected with bankruptcies in


6. The winding up of dissolved partnership concerns and the adjusting of

partners' accounts.

7. The keeping and balancing of all account-books belonging to merchants, manufacturers, shopkeepers, &c.

8. The examining and adjusting of all disputed accounts and account-books. The making up of statements, reports, and memorials on account-books or disputed accounts and claims for the purpose of laying before arbiters, courts, or counsel.

9. The looking after and recovering old debts and dividends from bankrupt


10. And all other departments of the accountant business.

On 6th July 1854 [The Institute of Accountants in Glasgow petitioned Queen Victoria] for the grant of a Royal Charter. The Petition, which was signed by fortynine accountants in the City of Glasgow, set forth: That the profession of an Accountant has long existed in Scotland as a distinct profession of great respectability; that originally the number of those practising it was few but that, for many years back, the number has been rapidly increasing, and the profession in Glasgow now embraces a numerous as well as highly respectable body of persons; that the business of an Accountant requires, for the proper prosecution of it, considerable and varied attainments; that it is not confined to the department of the Actuary, which forms indeed only a branch of it, but that, while it comprehends all matters connected with arithmetical calculation, or involving investigation into figures, it also ranges over a much wider field, in which a considerable acquaintance with the general principles of law, and a knowledge in particular of the Law of Scotland, is quite indispensable; that Accountants are frequently employed by Courts of Law . . . to aid those Courts in their investigation of matters of Accounting, which involve, to a greater or less extent, points of law of more or less difficulty; that they act under such remits very much as the Masters in Chancery are understood to act in England, and . . . that it is obvious that to the due performance of a profession such as this a liberal education is essential . . . .

Professional Accountancy Travels Across the Globe

George Watson (1645-1723), one of the early Scottish accountants, trained in Holland and passed along instructional materials used by his fellow professionals. By the middle of the19th century, England was in the midst of prosperous times brought on by the Industrial Revolution. It was the leading producer of coal, iron and cotton textiles, and was the financial center of the world. With this financial surge came a demand for accountants, both for the healthy concerns and those companies declaring bankruptcy in the midst of the competition. In 1880, the newly formed Institute of Chartered Accountants in England and Wales brought together all the accountancy organizations in those countries. In addition to the 587 members initially enrolled, an additional 606 members were soon admitted on the basis of their experience. Standards of conduct and examinations for admission to the Institute were drawn up, and members began using the professional designations "FCA" (Fellow Chartered Accountant, for a firm partner or proprietor in practice) and "ACA" (Associate Chartered Accountant, signifying a qualified member of an accountant's staff, or a member not in practice).

In the late 1800s, large amounts of British capital were flowing to the rapidly growing industries in the United States. Scottish and British accountants traveled to the U.S. to audit these investments, and a number of them stayed on and set up practice in America. Several existing American accounting firms trace their origins to one or more of these visiting Scottish or British chartered accountants. City directories from the year 1850 list 14 accountants in public practice in New York, four in Philadelphia and one in Chicago. By 1886, there were 115 listed in New York, 87 in Philadelphia and 31 in Chicago. Groups of accountants joined together to form professional societies in cities across America. In 1887, the first national accounting society was formed - the American Association of Public Accountants, predecessor to the American Institute of Certified Public Accountants.

Into The Twentieth Century and Beyond

However prosperous, the United States was still an infant nation when the American Institute of Certified Public Accountants was formed. The Civil War ended with the U.S. still a predominantly farming-based economy. It was only the year before that the Apache chief Geronimo had surrendered to the federal authorities. The ensuing decades saw enormous economic growth as industry began to overtake agriculture in financial importance. This period of growth also saw its share of financial scandals. Over-capitalization and stock speculation caused financial panics in 1873 and 1893. Watered railroad stocks were in the headlines, along with concerns about growing monopolies in several industries.

Labor unions developed in response to corporate exploitation of workers. Congress responded by passing the first Interstate Commerce Act and the Sherman Antitrust Act, marking the beginnings of federal regulation of business. When TheodoreRoosevelt became President after the 1901 assassination of William McKinley, he supported the use of governmental power to control the growing industrial monopolies and the price increases they caused. The Roosevelt administration helped persuade Congress to establish the Department of Commerce and Labor to gather the facts needed to enforce antitrust laws. The Interstate Commerce Commission's powers over transportation were broadened, and the ICC established a uniform system of accounting -

the first instance of accounting used as an instrument of federal regulation.

Unlike the British, who used the balance sheet in an effort to monitor management's use of stockholders' monies, American corporations of the early 20th century had no comparable history of losses from stock speculation. Rather, American balance sheets were drafted mainly with bankers in mind, and bankers of the era cared more about a company's liquidity than earning power. Beginning in 1920, business practices began changing drastically as the U.S. went through an inventory depression in which wholesale prices fell 40 percent. Cash flow slowed, loans defaulted and credit became less available to corporations. In response, businesses sought financing from sources less tied to

their current cash flow. The offering of corporate stock issues became a leading method of financing expansion. As stockholders, rather than bankers, became the primary audience of financial statements, the income statement began to take center stage over the balance sheet.

Other factors, such as the rise of income taxation and cost accounting, also shifted the focus to revenues and expenses. At the turn of the century, there were at least four types of funds statements in use - those that summarized changes in cash, in current assets, in working capital and overall financial activities. Accountant H. A. Finney led the movement for use of a funds statement that focused on liquidity by tracking the sources of changes in working capital. He used a worksheet approach to highlight meaningful balance sheet changes by aggregating most of the fluctuations that affect working capital, and offered a standardized method for calculating them.

In the 1940s, the accounting profession increasingly used the funds statement to measure the actual flow of monies, rather than simply the sum of working capital changes between balance sheet dates. The funds statement increasingly became a staple for the financial statement and, in 1971, the American Institute of Certified Public Accountants began requiring its inclusion in stockholders' annual reports. Nowadays, with more than 330,000 members, the AICPA is the premier national professional association for CPAs in the United States. Their web site is full of useful resources, including the latest American accounting news, along with organization-specific materials.

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