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.
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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.
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.
Many of these factors did exist in ancient times, but, until the Middle Ages, they were not found together in a form and strength necessary to push man to the innovation of double entry. Writing, for example, is as old as civilization itself, but arithmetic – the systematic manipulation of number symbols – was really not a tool possessed by the ancients. Rather, the persistent use of Roman numerals for financial transactions long after the introduction of Arabic numeration appears to have hindered the earlier creation of double-entry systems.
Nevertheless, the problems encountered by the ancients with record keeping, control and verification of financial transactions were not entirely different from our current ones. Governments, in particular, had strong incentives to keep careful records of receipts and disbursements – particularly concerning taxes. And in any society where individuals accumulated wealth, there was a desire by the rich to perform audits on the honesty and skill of slaves and employees entrusted with asset management.
But the lack of the above-listed antecedents to double entry bookkeeping made the job of an ancient accountant extraordinarily difficult. In societies where nearly all were illiterate, writing materials costly, numeration difficult and money systems inconsistent, a transaction had to be extremely important to justify keeping an accounting record.
Accounting In Mesopotamia, circa 3500 B.C.
Five thousand years before the appearance of double entry, the Assyrian, Chaldean-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 flooding 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 Nineveh 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.
After these impressions from the amulets were made, the scribe would dry the tablet in the sun or in a kiln for important transactions which needed a more permanent record. Sometimes a clay layer about as thick as a pie crust was fashioned and wrapped around the tablet like an envelope. For extra security, the whole transaction would be rewritten on this outer "crust," in effect making a carbon copy of the original.
Attempted alterations of the envelope could be detected by comparing it with its contents, and the original could not be altered without cracking off and destroying the outer shell.
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. These household expenses were important in Rome because citizens were required to submit regular statements of assets and liabilities, used as a basis for taxation and even determination of civil rights.
An elaborate system of checks and balances was maintained in Rome for governmental receipts and disbursements by the quaestors, who managed the treasury, paid the army and supervised governmental books. Public accounts were regularly examined by an audit staff, and quaestors were required to account to their successors and the Roman senate upon leaving office.
The transition from republic to empire was, at least in part, to control Roman fiscal operations and to raise more revenues for the ongoing wars of conquest. While the facade of republicanism was maintained, the empire concentrated real fiscal and political power in the emperor. Julius Caesar personally supervised the Roman treasury, and Augustus completely overhauled treasury operations during his reign.
Among Roman accounting innovations was the use of an annual budget, which attempted to coordinate the Empire's diverse financial enterprises, limited expenditures to the amount of estimated revenues and levied taxes in a manner which took into consideration its citizens' ability to pay.
Thousands of 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."
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.
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 Theodore Roosevelt 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.
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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.
Brown, Richard, ed. A History of Accounting and Accountants. Edinburgh: Jack, 1905.
Calhoun, George M. The Business Life of Ancient Athens. Chicago: University of Chicago Press, 1926.
Chiera, Edward. They Wrote on Clay. Chicago: University of Chicago Press, 1938.
Geijsbeek, John Bart. Ancient Double-Entry Bookkeeping: Lucas Pacioli's Treatise. Denver: University of Colorado, 1914.
Keister, Orville R. "Commercial Record-Keeping in Ancient Mesopotamia." Accounting Review 38 (April, 1963), 371-76.
Littleton, A. C. Accounting Evolution to 1900. New York: American Institute Publishing Co., 1933.
Peragallo, Edward. Origin and Evolution of Double Entry Bookkeeping, A Study of Italian Practice from the Fourteenth Century. New York: American Institute Publishing Co., 1938.
Weber, Charles. The Evolution of Direct Costing. Urbana: Center for International Education and Research in Accounting, 1966.
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