Accounting plays an important role in facilitating all forms of economic activity within the private, public and non-profit sectors. Evolution of Accounting started in ancient history and developed vastly after industrial revolution. Accounting can be considered as the blood of a successful organisation. All companies ranging from small to large needs accounting to gauge how their business is doing. According to the American Accounting Association, accounting is defined as “The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information”. (Wohlner, 2019)
The history of accounting goes back to the ancient Mesopotamian era. They used writing methods to records the transactions. There is evidence of usage of accounting in Egypt, Babylonians and Indians. The Italian “Luca Pacioli”, who introduced a double-entry method for accounting is considered as The Father of Accounting and Book-Keeping. He published a book, “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” in 1494, which described the benefits of a double-entry system for bookkeeping.
Bookkeepers are the early stage accountants who did their work based on barter and trade system in pre-2000 BC. Bookkeeping not used in cash and commerce economy in this era. Ledgers in this time is a continuous record kept by the business about all daily transactions. These are some example entries of a ledger used in this era.
- Monday, February 18: Exchange 3 bags of pumpkins for William Strok and he promised to give me 5 chickens in next week.
- Tuesday, February 19: Richard Daiman agreed to make a new room for the store for a year worth of eggs. These eggs are to delivered daily after the room is finished.
These transactions were kept in individual ledgers which is proof of a certain transaction. These ledgers have to keep a long time because the transactions happened in that era takes a longer period to complete like the second example.
Currency & Ledger
When currency becomes the intermediate method of selling and buying, all merchants and tradesmen began to move with currency. This will change the early bookkeeping techniques. After the currency become active, business success in changed to numbers. There were situations where the owner has no knowledge in these numbering techniques, so they hired a separate person for bookkeeping. This can be considered as the starting of the accountant role in business. The bookkeeper keeps track on business assets such as what they owed and who owed them.
Until the late 1400s, the business transactions keep as early ledger system like a narrative style. This book has 3 columns date, details and amount. All the credit and debit transactions were written in the same column. This system is called as Single-Entry Bookkeeping and this method is similar to the way we used to track chequebooks books.
This is an example of Single-Entry system record.
The main disadvantage of this system is bookkeeper should read the description of each entry to decide whether the record is credit transaction or debit transaction. This is an unnecessary work which uses a lot of time for even a simple task like profit calculation.
Double Entry System
The innovative Italians are widely acknowledged to be the fathers of modern accounting due their remarkable contribution to the development of accounting. They developed trade and commerce to new level and introduce new methods of calculating profits. While Arabic numbers in use, they became the first to use them for track business accounts regularly.
Italian monk Luca Pacioli revamped the old bookkeeping structure and introduced double-entry system for accounting in 1494. Double-Entry means creating a balance sheet with sperate debit and credit transactions. (Beattie, 2018) The double entry system makes a revolutionary change in accounting systems. This system credits an account which debiting another account which makes accounting more detailed and clearer picture of the company strength.
This is a simple example of Double-Entry Balance sheet.
Pacioli never said that he invented the double entry bookkeeping. Before publishing Pacioli’s book, Benedetto Cotrugli wrote Delia Mercatura et del Mercante Perfetto (Of Trading and the Perfect Trader), a book which included a brief chapter describing lots of the features of double entry and it’s advantages over conventional bookkeeping. This was kept unpublished more than a century but Pacioli was aware about the manuscript and credited Cortugli for origination the double entry method.
Pacioli published his Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry and Proportion) in 1494 which is the first source of double entry bookkepping. This has thirty six shord chapters on bookkeeping entitled “De Computis et Scripturis” (“Of Reckonings and Writings”), were added, “in order that the subjects of the most gracious Duke of Urbino may have complete instructions in the conduct of business,” and to, “give the trader without delay information as to his assets and liabilities.” (All quotes from the translation by J.B. Geijsbeek, “Ancient Double Entry Bookkeeping: Lucas Pacioli’s Treatise,” 1914). (Geijsbeek, 1914)
In Pacioli’s book he also mentioned the three major books of account which are the basis of this system.
The memorandum, or memorial, was a book which records daily business transactions in chronological order. This record can be made in any currency and any time-zone basement which is converted to common base and currency in double entry later.
The journal is the private accounting book of business owner. This consists of narrative entries of credit and debit with an explanation. This has only one column and journal not totaled at the end. Also there is no compound entries.
Ledger is a book with a double page to enter records. This is almost same as the ledger used in modern days. This has date and transaction description column and credit transaction were written in on right side while credit transactions were written in left side. Bookkeeper start the journal with cash-in-hand record at the top. When ledger records are made, a diagonal lines are made through each record from left to right when a debit is added and right to left when credit is added.
Also this book mentioned about,
- Bank Withdrawals
- Brokered Purchases
- Barter Transactions
- Joint Venture Trading
- Expense Disbursements
- Closing Balance Books
Pacioli’s system has methods to record transactions from various currencies. This was a significant advantage in that era because western countries were moving forward with money based economy. Auditing the accounting books were started in the meantime to ensure the entries in the books are correct. The trial balance is the final step of Pacioli’s accounting cycle. Both credit and debit sides are sum up and compare the total. If the total of both sides are equal, it indicates that the ledger is 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.” (Geijsbeek, 1914)
Modern Development of Accounting
Bookkeeping introduced to America by British with their colonization. When it is introducing, they had a system to record accounts but it is not developed as double entry system. With the appearance of corporation companies in USA and railroad appearance increase the development of accounting significantly. Since railroad is a distributed large system, the accounting became more complex with cost estimations, financial statements, production reports etc. The railroad opened a new aspect of accounting which is investment. People were willing to invest so the companies need to show their progress and profits to attract potential investors.
Accountants were essential for attracting investors, so this became an essential requirement for any business if they want to attract investors. This leads to become accounting as a profession. In 1896 with the law stating the title of Certified Public Accountant (CPA) would only be given to the people who passed the required estate examinations with three years of experience in field.
In the middle of the 19th century, England was in the midst of prosperous times brought on by the Industrial Revolution. This increase the demand of accountants because some companies are growing while others failed due to competition. This time there were some associations of accountants speeded over the country. In 1880, Institute of Charted Accountants in England formed, and this bought all the small associations to one control body. Due to the rapid development in US industries, British and Scottish accountants travelled to America for audit the British Investments and some of them stayed there and started practising. This leads to the start of American Association of Public Accountants, predecessor to the American Institute of Certified Public Accountants which is the first national accounting society in 1887.
Accounting in 20th Centuray
With the rapid development of technology and digital marketing, now the bookkeeping is computerised and written accounting books are very less in usage. New software and accounting firms introduced, and they manage accounts of multinational companies which are doing billion worth transactions per day. Computers make accountants job easier and also add a bit of risk also. With this trend now accountants move to auditing and valuation which can’t computerised totally. Technology changing daily and accounting also developing with the technology. We can’t clearly give a direction to accountants but the role of accountant will keep remain all the time.