History of accounting

From Wikipedia, the free encyclopedia

The history of accounting or accountancy is thousands of years old and can be traced
to ancient civilizations.[1][2][3]
The early development of accounting dates back to ancient Mesopotamia, and is closely related to
developments in writing, countingand money[1][4][5] and early auditing systems by the
ancient Egyptians and Babylonians.[2] By the time of the Emperor Augustus, theRoman
government had access to detailed financial information.[6]
In India Chanakya wrote a manuscript similar to a financial management book, during the period of
the Mauryan Empire. His book "Arthashasthra" contains few detailed aspects of maintaining books
of accounts for a Sovereign State.
The Italian Luca Pacioli, recognized as The Father of accounting and bookeeping was the first
person to publish a work on double-entry bookkeeping, and introduced the field in Europe.[7][8]
The modern profession of the chartered accountant originated in Scotland in the nineteenth century.
Accountants often belonged to the same associations as solicitors, who often offered accounting
services to their clients. Early modern accounting had similarities to today's forensic accounting.
Accounting began to transition into an organized profession in the nineteenth century,[9] with
localprofessional bodies in England merging to form the Institute of Chartered Accountants in
England and Wales in 1880.[10]

Early development of accounting[edit]

See also: History of mathematics, History of writing, and History of money
Accounting records dating back more than 7,000 years have been found in Mesopotamia,[11] and
documents from ancient Mesopotamia show lists of expenditures, and goods received and traded.
[1]

The development of accounting, along with that of money and numbers, may be related to the

taxation and trading activities of temples:

"another part of the explanation as to why accounting employs the numerical metaphor is [...] that
money, numbers and accounting are interrelated and, perhaps, inseparable in their origins: all
emerged in the context of controlling goods, stocks and transactions in the temple economy of
Mesopotamia."[1]
The early development of accounting was closely related to developments in writing, counting,
and money. In particular, there is evidence that a key step in the development of countingthe

transition from concrete to abstract countingwas related to the early development of accounting
and money and took place in Mesopotamia[1]
Other early accounting records were also found in the ruins of
ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The people of that
time relied on primitive accounting methods to record the growth of crops and herds. Because there
was a natural season to farming and herding, it was easy to count and determine if a surplus had
been gained after the crops had been harvested or the young animals weaned. [11]

Expansion of the role of the accountant[edit]

Between the 4th millennium BC and the 3rd millennium BC, the ruling leaders and priests in
ancient Iran had people oversee financial matters. In Godin Tepe ( ) and Tepe Yahya () ,
cylindrical tokens that were used for bookkeeping on clay scripts were found in buildings that had
large rooms for storage of crops. In Godin Tepe's findings, the scripts only contained tables with
figures, while in Tepe Yahya's findings, the scripts also contained graphical representations. [4] The
invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind.
[5]

During the 1st millennium BC, the expansion of commerce and business expanded the role of the
accountant. The Phoenicians invented a phonetic alphabet "probably for bookkeeping purposes",
and there is evidence that an individual in ancient Egypt held the title "comptroller of the scribes".
There is also evidence for an early form of accounting in the Old Testament; for example the Book of
Exodus describes Moses engaging Ithamar to account for the materials that had been contributed
towards the building of thetabernacle.[2]
By about the 4th century BC, the ancient Egyptians and Babylonians had auditing systems for
checking movement in and out of storehouses, including oral "audit reports", resulting in the term
"auditor" (from audire, to hear in Latin). By the 2nd century BC, the importance of taxation had
created a need for the recording of payments, and theRosetta Stone also includes a description of
a tax revolt.[2]

Roman empire[edit]
Part of the Res Gestae Divi Augusti from the Monumentum Ancyranum (Temple of Augustus and Rome)
at Ancyra, built between 25 BCE - 20 BCE.

By the time of Emperor Augustus (63 BC - AD 14), the Roman government had access to detailed
financial information as evidenced by the Res Gestae Divi Augusti (Latin: "The Deeds of the Divine
Augustus"). The inscription was an account to the Roman people of the Emperor Augustus'
stewardship, and listed and quantified his public expenditure, including distributions to the people,
grants of land or money to army veterans, subsidies to the aerarium (treasury), building of temples,

religious offerings, and expenditures on theatrical shows and gladiatorial games, covering a period
of about forty years. The scope of the accounting information at the emperor's disposal suggests that
its purpose encompassed planning and decision-making.[6]
The Roman historians Suetonius and Cassius Dio record that in 23 BC, Augustus prepared
a rationarium (account) which listed public revenues, the amounts of cash in the aerarium (treasury),
in the provincial fisci (tax officials), and in the hands of the publicani (public contractors); and that it
included the names of the freedmen and slaves from whom a detailed account could be obtained.
The closeness of this information to the executive authority of the emperor is attested by Tacitus'
statement that it was written out by Augustus himself.[12]
Records of cash, commodities, and transactions were kept scrupulously by military personnel of
the Roman army. An account of small cash sums received over a few days at
the fort of Vindolanda circa AD 110 shows that the fort could compute revenues in cash on a daily
basis, perhaps from sales of surplus supplies or goods manufactured in the camp, items dispensed
to slaves such as cervesa (beer) and clavi caligares (nails for boots), as well as commodities bought
by individual soldiers. The basic needs of the fort were met by a mixture of
directproduction, purchase and requisition; in one letter, a request for money to buy
5,000 modii (measures) of braces (a cereal used in brewing) shows that the fort bought provisions
for a considerable number of people.[13]
The Heroninos Archive is the name given to a huge collection of papyrus documents, mostly letters,
but also including a fair number of accounts, which come from Roman Egypt in 3rd century AD. The
bulk of the documents relate to the running of a large, private estate[14] is named after Heroninos
because he was phrontistes (Koine Greek: manager) of the estate which had a complex and
standarised system of accounting which was followed by all its local farm managers. [15] Each
administrator on each sub-division of the estate drew up his own little accounts, for the day-to-day
running of the estate, payment of the workforce, production of crops, the sale of produce, the use of
animals, and general expenditure on the staff. This information was then summarized as pieces of
papyrus scroll into one big yearly account for each particular sub-division of the estate. Entries were
arranged by sector, with cash expenses and gains extrapolated from all the different sectors.
Accounts of this kind gave the owner the opportunity to take better economic decisions because the
information was purposefully selected and arranged.[16]

Medieval and renaissance periods[edit]

Double-entry bookkeeping[edit]
Main articles: Luca Pacioli and Double-entry bookkeeping system
When medieval Europe moved towards a monetary economy in the 13th
century, sedentary merchants depended on bookkeeping to oversee multiple simultaneous

transactions financed by bank loans. One important breakthrough took place around that time: the
introduction of double-entry bookkeeping,[7] which is defined as any bookkeeping system in which
there was a debit and credit entry for each transaction, or for which the majority of transactions were
intended to be of this form.[17] The historical origin of the use of the words "debit" and "credit" in
accounting goes back to the days of single-entry bookkeeping, which had as its chief objective
keeping track of amounts owed by customers (debtors) and amounts owed
to creditors. Debit in Latin means "he owes" and credit in Latin means "he trusts".[18]
The earliest extant evidence of full double-entry bookkeeping appears in the Farolfi ledger of 12991300.[7] Giovanno Farolfi & Company, a firm of Florentine merchants headquartered in Nmes, acted
as moneylenders to the Archbishop of Arles, their most important customer.[19] The oldest discovered
record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts of the city
of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form
and carry forward balances from the preceding year, and therefore enjoy general recognition as a
double-entry system.[20]
Ragusan economist Benedetto Cotrugli's 1458 treatise Della mercatura e del mercante
perfetto contained the earliest known manuscript of a double-entry bookkeeping system. His
manuscript was first published in 1573.[21]
Luca Pacioli's Summa de Arithmetica, Geometria, Proportioni et Proportionalit (early Italian:
"Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in
1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (Latin:
"Details of Calculation and Recording"). Pacioli wrote primarily for, and sold mainly to, merchants
who used the book as a reference text, as a source of pleasure from the mathematical puzzles it
contained, and to aid the education of their sons. His work represents the first known printed treatise
on bookkeeping; and it is widely believed[by whom?] to be the forerunner of modern bookkeeping practice.
InSumma de arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed
book, symbols which became standard notation in Italian Renaissance mathematics. Summa de
arithmetica was also the first known book printed in Italy to contain algebra.[22]
Ragusan economist Benedetto Cotrugli's 1458 treatise Della mercatura e del mercante
perfetto contained the earliest known manuscript of a double-entry bookkeeping system, however
Cotrugli's manuscript was not officially published until 1573. In fact even at the time of writing his
work in 1494 Pacoili was aware of Cotruglis efforts and credited Cortrugli with the origination of the
double entry book keeping system.[23][24]
Although Luca Pacioli did not invent double-entry bookkeeping,[25] his 27-page treatise on
bookkeeping contained the first known published work on that topic, and is said to have laid the
foundation for double-entry bookkeeping as it is practiced today.[26] Even though Pacioli's treatise

exhibits almost no originality, it is generally considered[by whom?] as an important work, mainly because
of its wide circulation; it was written in the vernacular Italian language, and it was a printed book.[27]
Pacioli saw accounting as an ad-hoc ordering system devised by the merchant. Its regular use
provides the merchant with continued information about his business, and allows him to evaluate
how things are going and to act accordingly. Pacioli recommends the Venetian method of doubleentry bookkeeping above all others. Three major books of account are at the direct basis of this
system:
1. the memoriale (Italian: memorandum)
2. the giornale (Journal)
3. the quaderno (ledger)
The ledger classes as the central document and is accompanied by an alphabetical index.[28]
Pacioli's treatise gave instructions on recording barter transactions and transactions in a variety of
currencies both of which were far more common than today. It also enabled merchants to audit
their own books and to ensure that the entries in the accounting records made by their bookkeepers
complied with the method he described. Without such a system, all merchants who did not maintain
their own records were at greater risk of theft by their employees and agents: it is not by accident
that the first and last items described in his treatise concern maintenance of an accurate inventory.[29]

The Renaissance cultural context[edit]

Accounting as it developed in Renaissance Europe also had moral and religious connotations,
recalling the judgment of souls and the audit of sin. [30]

Financial and management accounting[edit]

Main articles: Financial accounting and Management accounting
The development of joint-stock companies (especially from about 1600) built wider audiences for
accounting information, as investors without firsthand knowledge of theiroperations relied on
accounts to provide the requisite information.[31] This development resulted in a split of accounting
systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes,
and subsequently also in accounting and disclosure regulations and a growing need for independent
attestation of external accounts by auditors.[8]

Modern professional accounting[edit]

The modern profession of the chartered accountant originated in Scotland in the nineteenth century.
During this time, accountants often belonged to the same associations assolicitors, and the latter

solicitors sometimes offered accounting services to their clients. Early modern accounting had
similarities to today's forensic accounting:[32]
"Like forensic accountants today, accountants then incorporated the duties of expert financial
witnesses into their general services rendered. An 1824 circular announcing the accounting
practice of one James McClelland of Glasgow promises he will make statements for laying
before arbiters, courts or council.[32]
In July 1854 The Institute of Accountants in Glasgow petitioned Queen Victoria for a Royal
Charter. The Petition, signed by 49 Glasgow accountants, argued that the profession of
accountancy had long existed in Scotland as a distinct profession of great respectability, and that
although the number of practitioners had been originally few, the number had been rapidly
increasing. The petition also pointed out that accountancy required a varied group of skills; as
well as mathematical skills for calculation, the accountant had to have an acquaintance with the
general principles of the legal system as they were frequently employed by the courts to give
evidence on financial matters. The Edinburgh Society of accountants adopted the name
"Chartered Accountant" for members.[33]
By the middle of the 19th century, Britain's Industrial Revolution was in full swing,
and London was the financial centre of the world. With the growth of the limited liability
companyand large scale manufacturing and logistics, demand surged for more technically
proficient accountants capable of handling the increasingly complex world of high speed global
transactions, able to calculate figures like asset depreciation and inventory valuation and
cognizant of the latest changes in legislation such as the new Company law, then being
introduced. As companies proliferated, the demand for reliable accountancy shot up, and the
profession rapidly became an integral part of the business and financial system.
To improve their status and combat criticism of low standards, local professional bodies in
England amalgamated to form the Institute of Chartered Accountants in England and Wales,
established by royal charter in 1880.[10] Initially with just under 600 members, the newly formed
institute expanded rapidly; it soon drew up standards of conduct andexaminations for admission
and members were authorised to use the professional designations "FCA" (Fellow Chartered
Accountant), for a firm partner and "ACA" (Associate Chartered Accountant) for a qualified
member of an accountant's staff. In the United States the American Institute of Certified Public
Accountants was established in 1887.