Through the historical process, the primitive inconsistent and confusing system of keeping accounts has reached a disciplined system of accounting.
Accounting is going forward keeping pace with the technological advancement of the dynamic social system.
Modem accounting is not an overnight result of a sudden change in any event. It has reached the present stage through an evolutionary process of thousands of years.
Since the beginning of human civilization accounting practice had been going on and its forward march will continue.
For the necessity of its application Accounting has gradually been modified and further developed.
On the basis of the data received from the history of evolution and -the features of gradual development, history of Accounting can chronologically be classified into 4 stages, e.g.
- Emergent stage (from primitive age to 1494 AD),
- Preanalytic stage (1495 – 1799),
- Development i.e. analytic stage (1800-1950),
- Modem age (1951- onward).
The history of the gradual development of Accounting through these four stages is discussed below:
The Emergent Stage (Primitive to 1494)
This stage covers the period from the beginning of human civilization to 1494. Any reliable source regarding the exact starting of accounting practice is yet to be ascertained.
But it can roughly be said that Accounting practice started when the exchange of goods or services, was felt necessary.
But the Accounting system of that time was not at all developed and disciplined as of today.
The emergent stage of Accounting emerged keeping pace with the following chronological stages of the history of human civilization.
(a) Stone stage,
(b) Primitive stage,
(c) Barter stage, and
(d) Currency stage.
The gradual evolution of accounting through these four stages is discussed below in brief;
When people did not know how to build a house, they used to live in caves, mountains, and jungles and earned their livelihood by collecting fruits and hunting animals.
They kept accounts of their collected fruits, hunted animals and lent goods to others by marking ticks on the trees, on the walls of the caves of mountains and on stones, or making holes or symbols as per their need.
In this way, the accounting concept emerged.
This stage started just with the beginning of the social life of human beings. People of this stage, kept their accounting marking ticks on the walls and making rope-knots.
With the introduction of the barter system to meet the necessity of human beings the system of accounting also developed.
According to Prof. Littleton, from the feeling of the necessity of keeping systematic records in terms of money of personal increased properties arising out of agriculture the accounting system emerged.
Through the evolutionary process at one stage the use of money started. At this stage agriculture, industry and trade and commerce flourished.
According to Glautior and under down, in the age of feudalism, a supervisory accounting system was in practice.
The feudal lords assigned the responsibilities of supervision of their entire properties to a group of salaried employees.
These employees were relieved of their assigned responsibilities after they would submit the statement of income and expenditure and of properties.
Possibly the concept of debit and credit came into being from that time.
With the passage of time, the volume of business and quantity of transactions increased and the system of keeping accounts of every transaction under separate classified heads was introduced.
In fact, when and where the double entry system was introduced is yet to be ascertained.
But most of the people feel that the double entry system was introduced centering Rome – once the center of civilization and trade and commerce, which was situated as a link between Asia and Europe in consideration of geographical advantages.
In the middle age economic development helped the development of Accounting to a great extent.
According to Kenneth Most, Luca Pacioli is considered the father of Accounting because his famous book ‘Method of Venice’ had been a model of a textbook for long two hundred years.
He also explained the main principles and methods of double entry system in detail in his first book “Summa de Arithmetica Geometria, Proportionate Proportionality”.
This book is divided into five chapters.
- Arithmetic and Algebra,
- The application of Arithmetic and Algebra in trade and commerce,
- Money and Barter System, and
- Theoretical and Applied Geometry.
It is true that he was the first man who explained double entry system in detail in written form but he cannot claim to be the innovator of this system because the available evidence proves that this system was in a practice in a haphazard way at the beginning of the fourteenth century.
Yet, Pacioli is regarded as the father of Accounting as he had explained this system lucidly and systematically in his book which was the first printed book on Accounting.
Pre-analytic Stage (1495-1799)
The 3rd chapter of the famous book of Loca Pacioli i.e. accounting was reprinted in 1504 wherein he clearly discussed and explained the rules of determining debit and credit and preparation of journal, ledger and trial balance.
Subsequently, this book was translated and published in Scottish, German, French, Russian and English.
The Accounting chapter is termed as – “Particulars de Computes at Scriphris” i.e. a comprehensive description regarding accounts recording. This chapter is mainly divided into two parts; 1st part regarding inventory and the 2nd one regarding disposition.
This book contains detailed discussion regarding rules for journalizing the business transactions with complete narration, transferring nominal accounts to profit and loss account giving the effect of them to capital account.
Accounting mainly depends on economic and social development. In fact, during this period very little change took place in this world and the same is true in case of economic development.
Naturally, no remarkable progress was marked in the concept and application of Accounting.
The changes and development that took place in accounting method and thought during the three hundred years period are discussed below in brief.
Enrichment of dual aspect concept or double entry system
During this period all heads of accounts irrespective of person, institution and materials have been considered as a personal account and the concept that the receiver of benefits is a debtor and the giver of benefit is a creditor was established.
Introduction of going concern concept
With the expansion of trade and commerce the going concern concept in place of short-term concept was introduced in many countries of the world and in the light of this concept revenue and capital nature of accounts was identified.
Introduction of the periodic concept
Due to the introduction of going concern concept, it is presumed that business concern will continue for an indefinite period. But the investor cannot wait for an indefinite period.
So the necessity of preparing periodic statements of accounts was felt. As a result, the concept of periodic accounting was introduced.
Introduction of money measurement concept
Accounting becomes very much logical if money is considered media of measurement.
The names of assets and liabilities are not at all enough to express the financial position of a concern until and unless these are expressed in terms of money.
That is why the money measurement concept was introduced.
Publication of explanatory books on the accounting method
Some distinguished professors of European countries enriched accounting concept to a great extent by writing books after Luca Pacioli.
Among them, Simon Stevin and Arthury Cayley-professors of Mathematics of Cambridge University are famous for their book – “The Principles of Double Entry Book Keeping.”
Publication of Critical Articles
During this period some mentionable critical articles strengthened the base of Accounting.
It is known from Edward Peargallo’s writings that many thinkers of that time were interested in writing about accounting system that was used by business concerns.
The scope of Accounting expanded to* a great extent with the publication of critical articles and the research work on it. This research work was considered the birthplace of accounting development.
Development or Explanatory Period (1800 – 1950)
About one hundred and fifty years ranging from 1800 to 1950 is regarded as Development or Explanatory Period.
As a result of industrial revolution and appearance of the Joint Stock company, large-scale production, multi-scale production, and wider competition, desire to earn a maximum profit and government control created new problems and various complexities in the field of the accounting system.
The necessity of accounting analysis process was felt to find out the solutions to these problems and complexities.
These research and analysis processes have played a vital role to help Accounting to a further step of advancement.
During this period many writers of different European countries formulated basic theories which made accounting system of the then period very much logical.
F. S. Hendriksen classified the events- of the period from 1800-1930 into seven categories which influenced the establishment and development of accounting system-e.g.
- Textbook publication on Accounting and development of newer methods of teaching accounting,
- Impact of the industrial revolution,
- Influence of railroad invention and growth,
- Government regulation of business,
- Taxation on business,
- Formation of the joint stock company and large corporation, and
- Influence of economic theory.
The above events are discussed below in brief;
Textbook publication on Accounting and development of newer methods of teaching accounting
Though some textbooks on Accounting were published before the nineteenth century, those were incomplete and imperfect to a great extent.
To meet the needs of the day those limitations and imperfections were removed and at the same time, the teaching methods of accounting were improved.
The impact of the Industrial Revolution
The industrial revolution brought a farsighted change in the economic structure of the European countries.
As a result of the industrial revolution, factory production started in place of a cottage industry. For this purpose, a big amount of capital was needed to set up factories and carry out the production process.
The emergence of joint stock companies and the creation of large corporations through the merger and amalgamation of many business concerns were important events.
The concept of depreciation and cost-accounting came into force as because the business concerns became long term.
Before the industrial revolution depreciation and costing, concepts were not considered very much important.
Father of Scientific Management F. W. Taylor laid emphasis on efficiency increase in the field of production.
For increasing production efficiency the management and engineers laid emphasis on the appointment of cost accountants.
For this reason, standard costing-system was introduced as an effective means of cost control rather than cost determination.
This was considered to be a further step towards the development of the accounting process.
Influence of railway invention and growth
A huge amount of capital was needed for permanent investment in the railway sector as a result of its rapid growth and development in Europe and America in the nineteenth century.
Most of the capital was collected from general people and it became necessary to inform the people of the investment of this capital in fixed and current assets.
For this reason, the balance sheet was presented in two parts;
- Capital Account, and
- General Balance Sheet.
This new system of Accounting is called double accounts system. This system is used in the large type of social welfare organizations like Electricity, Gas, WASA, Railway etc.
Government regulations of business
Due to the promulgation of government regulations regarding business concerns the necessity of keeping uniformity in accounting thoughts for facilitating comparison of the total position of business to business was felt as a result of which sound accounting system was introduced.
Taxation on business
Tax imposition system started right after the imposition of government control system over business concerns.
Accounting system was improved to a great extent with the application of income tax rules and regulations.
Tax assessment system influenced keeping accounts, charging depreciation on fixed assets and inventory valuation.
Formation of joint stock companies and large corporations
After promulgation of British Company Act 1844, the joint-stock companies and large corporations through merger and amalgamation of business concerns came into being.
These business concerns were compelled to prepare annual statements to exhibit true and fair financial position to the public owners who invested the huge amount of capital.
Thereby the system of paying dividends was introduced.
Influence of economic theories
In the nineteenth century, the influence of various economic theories reflected in Accounting.
Economists were interested in cost determination and allocation – problems.
Economic theories and writings of economists helped in forming a specific opinion regarding cost-determination, assets valuation, and income determination etc.
Besides Hendricksen’s above mentioned seven elements the following influencing events also played some important role in the development of the accounting process;
- Environmental factors: In the first half of twentieth-century socio-economic conditions and legal aspects of various countries influenced greatly the structure, nature of business concerns and development of accounting methods. The concepts and principles of accounting were influenced to a great extent by these conditions.
- Formation of different professional institutes: Uniformity in accounting principles and public audit of accounts were felt necessary in order to verify financial information of a company as the management and owners tense got separate entity in the limited company. As a result, the accountants of different countries formed associations among themselves in order to maintain uniformity and relevance in keeping accounts so that various reliable information could be provided to directors, shareholders, loan givers, investors and so on and these associations were recognized by the countries concerned as per law of the land. In 1854 the Accountants Association of Edinburgh and Glasgow were recognized as Royal Charter. In 1867 Accountants Association of Eberdin attained Royal charter. In 1880 registered associations of Liverpool, London and Manchester formed together with a registered Association. The Institute of Charted Accountants of England and Wales. In 1877 the American Association of Public Accountants was formed. Through gradual changes, the American Institute of Certified Public Accountants (AICPA) was formed in 1957. In 1919 the Institute of Cost and Works Accountants of England and Wales was formed. This institute played a vital role in writing and teaching cost accounting methods and making relations between financial accounting and cost accounting. Within a few decades, many other accounting institutes emerged.
Mainly remarkable progress in accounting principles was marked after 1930. The American Institute of Certified Public Accountants published an accounting principle in 1936 and the American Accounting Association (AAA) published a statement of another accounting principle of same nature in 1940.
A committee on accounting procedure being approved by AICPA was going on publishing research-books for the development of accounting principles.
Though some types of keeping accounts and audit of accounts were found from the early ancient stage, before the promulgation of Companies Act – 1913 no professional associations were in view.
These-professional institutes helped in the development of accounting thoughts and practices, e.g. to examine and to verify following accounting concepts and principles and to carry out research application methods and inform member countries of the world of this association the results of these research works.
The period of gradual development of accounting system after 1950 to date has been termed as modem period.
After the 2nd world war production system changed to a great extent due to the remarkable advancement of science and technology.
Immense advancement was made in industry and commerce and these influenced the economic and social life tremendously.
Traditional accounting system could only supply information to the owners and directors for taking decisions of day-to-day activities.
Under the changed circumstances this traditional system of accounting failed to meet the demands of various interested parties of the society.
Various classes of people of the society became interested parties of business organizations directly or indirectly with the change of nature, size, and number of business concerns.
For this reason, attempts were made to update the accounting system criticizing the existing traditional system of accounting.
An attempt in bringing uniformity in the meaning of accounts
National and international professional organizations together introduced some accounting principles which are known as Generally Accepted Accounting Principles (GAAP) in order to make the accounting principles equally meaningful to processors and users of accounting information.
The financial statements of an organization are to be prepared in accordance with the accounting principles so that this exhibit a true and fair picture of the organization.
In this regard cost concept, money measurement concept, going concern concept and periodic concept etc. is to be followed obviously by accounting principles.
Accounting Standards are formulated on the national and international level.
The Financial Accounting Standard Board of U.S.A. and Accounting Standard Committee of the U.K. are the authorities in formulating accounting standards of the respective countries.
These types of accounting standard committee or organizations are also functioning in other countries of the world.
The International Accounting Standard Committee has been formed with the purpose of coordinating activities between different accounting standard organizations of different countries of the world.
This committee has formulated forty-one accounting standards so far and its efforts are in progress.
For example, IAS is related to the disclosure of accounting policies and ISA-II regarding valuation and presentation of inventories in the context of historical cost system etc.
The evolution of various branches of accounting
Because of economic, social and technological changes different branches of Accounting have emerged.
Mechanized Accounting and Auditing
Mechanized Accounting system has been introduced as a result of technological advancement.
The computer has made it possible and easier in keeping and processing a huge number of accounting data in a small CPU.
It has reduced to a great extent the complexities and labor in keeping accounts. Mechanized auditing is used following the nature of accounts as it is used in accounting.
The lion share of the money spent on the welfare of the people of the country by the government comes through tax imposition.
There are accounting systems for income tax, sales ta£, VAT, property tax etc. These systems of accounting are important for both taxpayers and receivers.
The inflation that started after the 2nd World War has nowadays become intense.
Statements of accounts prepared on the basis of historical cost do not exhibit the true and fair results and financial position of a concern in the pretext of money inflation.
The inflation accounting has been evolved to remove this problem. Various accounting systems have been introduced in many countries across the globe through research to face the situation caused by monetary inflation.
Of them the following are notable;
a) Current Cost Accounting
b) Current Purchasing Power Accounting.
c) Real Replacement Cost Accounting.
d) Current Perpetual Accounting.
Human resources accounting
Human resource is an important component like other components of production.
Since it cannot be measured in terms of money the true picture of an organization is not reflected in the statements of accounts.
In the present social context considering the importance of the human resource, the accountants have taken initiatives for maintaining accounts of human resource.
The American Accounting Association has formed a human resources accounting committee to find out devices for application in order to make statements of accounts more reliable, acceptable and informative.
This committee has defined human resources accounting as – “Human Resources Accounting is the process of identifying and measuring data about human resources and communicating, this information to interested parties.
Collecting, measuring the information regarding activities concerned, revenue and expenditure of government sectors and sending them to users making them usable are known as government accounting.
The government, government employees, and general mass are benefited by government accounting.
Social or National accounting
National accounting is as useful as government accounting. National accounting verifies economic structure and financial activities collectively.
In the present day world, national accounting plays an important role in the field of economic development of the country as a whole.
Budgetary control and standard accounting can measure whether the employees of an organization are discharging their responsibility properly or not; responsibility accounting has emerged with a view to determining the responsibilities of responsible persons.
In fine it is marked that tendencies have been developed among the professional accountants to form well thought and planned accounting organizations.
It is natural that the accountants will be enthusiastic to develop new ideas and concepts and will keep pace with new economic, scientific and social situations as accounting is nothing but a dynamic applied subject.