Accounting Theory
Topic 1: Accounting History
1
Accounting History
Early history of accounting
Emergence of double entry
bookkeeping
Contribution of Luca Pacioli
2
Accounting History
The history of accounting is as old as
civilization, key to important phases
of history, among the most important
professions
in
economics
and
business.
3
Accounting History
A.C. Littleton in his “Accounting Evolution
to 1900” contended that for double entry
system to emerge , certain prerequisites
or antecedents had to be present. He
classified his antecedents into two:
1) Materials antecedents : private property,
capital, commerce and credit.
2) Language antecedents : writing, money
and arithmetic.
4
Accounting History
Littleton
claimed
that
these
antecedents , although present, did
not posses the proper intensity in the
ancient civilization to cause double
entry system to emerge. The ancient
civilizations referred to are; Egypt,
Babylonia, Greece and Rome.
5
Alternate Explanation of Vernon
Kam
Littleton's antecedents need to be
explained further to have a fuller
understanding of the evolution of
accounting from ancient time. He
identified three factors that create
and promote the growth of business
entities:
6
Three factors
1) Capitalistic spirit
2) Economic and political events
3) Technological innovations
These three factors (termed as
social forces) are the reasons for
the development of the business
organization which in turn result
the development of double entry
system.
7
Capitalistic spirit
Capitalistic spirit is the motivating
force that drives people to form
business entity for the sake of
making
a
profit.
Of
course
accounting is used by both profit
and non profit organizations. The
term Capitalistic spirit is used
because historically it has been
under Capitalism that accounting
has flourished.
8
Capitalistic spirit
in the ancient civilization
A class of merchants existed in all
the ancient. Evidence support that
the desire for profit was present in
ancient civilizations.
But Littleton's view was that desire
for profit did not existed in the
ancient time.
9
Economic and political events
Commerce: an important variable to form
and grow business entities. Interpretation
of the extent of commerce in the ancient
times is a matter of disagreement by the
historians. there may have been a great
deal of trade but a complex market
system did not existed. There was no
need for sophisticated book keeping tool
vis. a vis. double entry system.
10
Economic and political events
Complex market: a complex market
consisted aa variety of separate but
interrelated activities.
First: there is market for consumer and
producer goods.
Then there are markets for factors of
production
In each of these market the forces of
demand and supply should be considered.
11
Economic and political events
The necessity for efficient accounting method
depend on whether the supply side is
complicated.
Land was owned for the most part by govt and
wealthy people. If they were engaged in business
activities they posed no problem
Labor was furnished by the family members and
slaves, therefore keeping record of labor cost was
not a significant matter.
There was no capital market. Borrowing funds by
merchants was normally a direct transactions
with specific individuals.
12
Economic and political events
So keeping track of costs and profit
for the purpose of accountability to
outside parties was not critical. Most
part of the business was extension of
the household.
13
Technological innovations
Laggard technology: ancients resisted the
technology. There were lack of incentive to
develop the technology, because of cheap labor,
cultural attitudes.
Writing and arithmetic: Littleton mentioned
writing, arithmetic and money as the language
antecedents of the double entry book keeping.
Writing is verified to be existed in ancient
civilization. With respect to arithmetic Egyptians
used a system of counting. Babylonians were
skilled in arithmetic and astronomy. Littleton
concluded that arithmetic in the ancient time was
difficult to employ. It depends on ability training
and experience.
14
Technological innovations
Money: the employment of money as
a medium of exchange in the metal
form of gold and silver was known to
Egypt and Babylonia. Despite the
fact that money was utilized medium
of exchange , but markets remain
simple because of uncomplicated
nature of demand and supply
functions.
15
Emergence of double entry book
keeping
The first record of double entry
system is the Massari (treasurers)
accounts in the city of Genoa in
1340. it is probable that double entry
system made it appearance in the
mid thirteenth century. why double
entry system emerged in this time?
The reasons are two fold:
16
Emergence of double entry book
keeping
Firstly : it was the natural outcome
of the evolutionary process in
response to the need of the time. As
Littleton spoke of the evolution of the
accounting. the notion implies that
what took place in the preceding
culture is believed to have some
effect on the subsequent culture. Or
civilization.
17
Emergence of double entry book
keeping
Second: a second reason for the
appearance of the double entry system
at this time is that the particular setting
in the Italian city state called it forth.
Thee setting is discussed in terms of
three major forces:
a) Capitalistic spirit
b) Economic and political event
c) Technological innovation
18
Emergence of double entry book
keeping
Capitalistic spirit:in the middle ages ,
conduct was governed by the religious
belief. Making a profit was almost
immoral. After the thirteen century,
position of the business improved greatly.
The Italian city state realized this very
early recognizing the legitimacy of making
a profit as a means to support a family, or
to have enough to give the poor or as
reward for public service , Italian Church
did not regard economic goals and
spiritual motives as necessarily conflicting.
19
Economic and political event
1) Demand: By the end of the thirteen
century the complexity of the
market become evident. On the
demand side the more customer
goods were desired.
2) Supply: on the supply side ,labor
market had improved, banking
business flourished,
20
Economic and political event
3) Politics: power and politics in Italy
was also contributing factor. By the
thirteenth century Italian cities was
controlled by those who favored
business interest. Therefore,
commerce and insdustry flourished.
21
Technological innovation
In contrast to the Greek and Roman
period, the middle ages saw a great
interest in the Technological
innovation. The particular innovation
that stimulated the development of
book keeping were paper making,
printing etc.
22
Contribution of Luca Pacioli
Luca Pacioli’s bok in 1494 was the
first book on the double entry
system . However the first person to
write on double entry system was
probably Benedetto Cotrugli whose
book was completed in 1458 but
published in 1573
23
The first printed piece of
bookkeeping in the world
is the Summa de
Arithmetica, Geometria,
Proportioni et
Proportionalita written by
Luca Pacioli.
The treatise was published
in Venice in 1494, and was
reprinted in 1523. This
work is one of the most
important books on
mathematics and has had
an enormous impact on
the field of accounting
ever since.
24
The first accounting book
actually was one of five sections
in Pacioli's mathematics book
titled "Everything about
Arithmetic, Geometry, and
Proportions." This section on
accounting served as the world's
only accounting textbook until
well into the 16th century.
25
Contribution of Luca Pacioli
The term we employ today debit and
credit were mentioned by Pacioli
debito(Owed to) and Credito(Owed
by). In explaining the double entry
system Pacioli said all entries have to
be double entries ie if you make one
creditors you must make some on a
debtor.
26
Contribution of Luca Pacioli
First activity a person must
undertake when starting a business
,V said, is to prepare an inventory.
This inventory is to be record in the
journal at current values. For sales
price he advised………….
27
Contribution of Luca Pacioli
Day book in his book each entry is
stated in paragraph form.
From the journal entries, entries are to
be posted ot the accounts of the
ledger.
But Pacioli made no mention of
accruing and deferring of revenue
and expenses.
28
Contribution of Luca Pacioli
The determination of profit or loss
was different from eh procedure we
used today. Each venture was seen
as a unit , when the venture closed,
the account represent it was closed
and profit and loss ascertained.
Example of the salt….
29
The bookkeeping method of Luca Pacioli has several distinct
characteristics:
1.Pacioli wrote that there are three things needed by one who wished
to carry on business diligently. The most important of these is cash
or any other substantial power (altra faculta substantiale). The
second is a good accountant (buon ragioneri) and a sharp
bookkeeper. The third is good order in order to arrange all business
to debit (debito) and credit (credito).
2.Pacioli explained the opening inventory (inventario), but he did not
describe the closing inventory.
3.Pacioli's account book system is three account books-that is, a day
book. The day book is the first book, the journal is the second book
and the ledger is the third book. Pacioli thought of the day book as
the formal account book, because he wrote that the day book must
be presented to a certain mercantile office (certo officio de
mercatâti).
4.All things pertaining to a transaction must be written in the day
book, without omission. Pacioli wrote that no point must be omitted
in the day book.
5.Pacioli described debit and credit--that is, "per" and "A" in the
journal, and "die dare" and "die havere" in the ledger.
30