At the beginning of the twentieth century, Sombart (1916) asserts that the appearance of double-entry bookkeeping is indispensable element of the emergence of capitalism to a large extent. This argument arouses a wide-ranging debate during that century. Some scholars who have interesting in Sobart’s writing (such as Weber, Bryer, Chiapello and so on) continue to deeply research the relationship between accounting history and evolution of capitalism. Although Chiapello (2007) states that the concept of capitalism originates from accounting concepts and it represents the situations which accounting impacts on economic problem or social realities, a number of scholars like Edwards and Arnold and McCartney admit and stress the development of capitalism also have lots of positive impacts on accounting history contrarily. To be more specific, it is the situation that with business activities developing gradually, capitalism tends to transform its types accordingly. Whilst, developments of business lead a number of accounting problems, which changes a wide range of detailed accounting practices. Moreover, it seems that the evolution of capitalism exerts significant effects on the history of accounting indirectly. In general, the development of accounting and successive stages of capitalism might have some correlation or interaction to each other.
2. A review of capitalism
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2.1 The concept of capitalism
The notion of capitalism appears in the 19th century. The definition is: “This sophism consists of perpetually confusing the usefulness of capital with what I shall call capitalism, in other words the appropriation of capital by some to the exclusion of others. Let everyone shout “Long live capital”. We shall applaud and our attack on capitalism, its deadly enemy, shall be all the stronger.” (Blanc, 1850, quoted by Deschepper, 1964, p. 153). Then, Proudhon gives another concept of it as “Economic and social regime in which capital as a source of income does not generally belong to those who implement it in their own work” (quoted by Braudel, 1979, p. 276).
In addition, Weber (1991, p. 297) defines it as: “The most universal condition for the existence of modern capitalism is, for all large lucrative businesses supplying our daily needs, the use of a rational capital account as standard”. He does not stress on how crucial the concept of accounting is in his definition of capitalism, instead, he just give the notion of capitalism by capital account. Then, Chiapello (2007) asserts that Weber’s viewpoint about ‘rational organisation of free labour’ becomes the central element of capitalism as some writers acknowledged.
Moreover, Sombart (1930, p.4) suggests that ‘Capitalism designates an economic system significantly characterized by the predominance of “capital”. And he admits Marx discovered this phenomenon before in fact. It is crucial that ‘economic system’ which comes from Sombart’s writing should be discussed seriously due to the notion of capitalism could be understood better. Eventually, according to Chiapello (2007) states, economic system consists of a spiritual attitude, an organisation mode and a technique, which is called ‘a mode of providing for material wants’ as Sombart defines.
In short, although capitalism has its definition, most of people do not mention this word in the 19th century. Marx used to employ the word of ‘capital system’ or ‘capital production’ instead of using capitalism. Afterwards, in the 20th century, capitalism becomes the opposite of socialism either on intellectual areas or political sections (Chiapello, 2007). And he also claims that after Sombart popularised the concept of capitalism in 1902, Marxist vocabulary absorbs the word to describe various economic steps. Although Sombart’s opinion is heavily influenced by Marx, he emphasises on analyse the essence of capitalism itself instead of class struggle (Chiapello, 2007). However, Sombart considers the concept of capitalism as an accounting problem, but his assertion is confined to Marx’s statement to a large extent.
2.2 The stages in capitalism development
Wilson (1995) classifies capitalism in Britain into two stages. Firstly, traditional capitalism is regarded as the first stage. Traditional form is a kind of personal management method which a business performance is decided by an individual or small group of partners to a large extent. For instance, as Mantoux (1928) claims, the first industrialists generation who appeared in late eighteenth century in Britain performed numeral management functions such as to be capitalist, manager and salesman at the same time.
Secondly, managerial capitalism is considered as the second stage of capitalism. Managerial form emphasises on the separation of ownership and control in the enterprise. In the beginning of this stage, functional management and the impact of outside institutions such as securities exchanges become increasingly important for business. However, managerial capitalism tends to split ownership and control completely eventually. It means that most of stockholders will not participate the daily operation of company, whilst, the corporation will be run by professionals from various angles of management like strategic, functional and operational.
Compared with two stages of capitalism which identified by Wilson (1995), Sombart (1930) maintains there are three periods in the evolution of capitalism. They are early capitalism (from the 13th to the middle of the 18th century), full capitalism (from the middle of the 18th century to the ?rst World War) and late capitalism (since 1914) respectively.
3. A review of accounting
3.1 The concept of accounting
The American Institute of Certified Public Accountants(AICPA) defines the notion of accounting as ‘Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof’ (citied in Grady, 1965:2). In addition, Sanders, Hatfield and Moore (1938) claim that preparing statements to various parties who need useful information to make economic decisions is the function of accounting. Then, Parker (1994) gives the definition of accounting history: ‘The study of the evolution of accounting thought, practices and institutions in response to changes in the environment and the needs of society, and of the effect of this evolution on the environment’(Macmillan Dictionary of accounting, Macmillan Press, London, 1984, P.5).
As Edwards and Newell (1991) claim, accounting history is solely useful for making contribution to economic problems and business history. However, Miller et al (1991) state that it is vital to recognize accounting not only as an economic technique or a specific outcome but also as a media which changes socio-economic situations. Additionally, according to Hopwood (1983), various accounting modes are tightly connected with organisations and social realities. That is to say, before understanding what is organisation and society, it is necessary to know the notion of accounting. Generally, accounting includes the economic measurement skills which are determine by social realities and accurate calculation approaches (Bryer, 2005).
3.2 The stages in accounting development
Edwards (1989) points out the development of accounting can be divided into four stages. He claims these periods are the pre-capitalist period, the commercial capitalism stage, industrial capitalism period, and the financial capitalism stage.
Pre-capitalism period is regarded as the first stage of accounting development (Edwards, 1989). It witnesses a long period from Mesopotamian civilisation to the end of the ‘dark ages’ (4000 BC – 1000 AD). Original record keeping is viewed as a tool to document Mesopotamian trade into a form which tend to be understood by illiterate community appropriately. Records are displayed by vast number of forms such as knotted cord, clay tablets, papyrus and paper. The purpose of record keeping is to monitor the change of merchandise and cash in order to calculate rudimentary profit. At that time, individuals who are correlated with politics, religion and military affairs tend to accumulate wealth commonly. Numerous accounts which reflect records of stewardship are remnants from Greek and Roman times.
According to Edwards (1989), the second stage is commercial capitalism stage which lasts during the subsequent 760 years. Commercial capitalism, also called mercantile capitalism, is a business mode which invests the majority of capital in stock. To be more specific, it means that except shipping and mining industry, most entrepreneurs not tend to spend money on fixed assets or operating equipment instead of obtaining more inventories. Due to most of investment are short term investment, capital in business is viewed as ‘circulating capital’. Moreover, it is worthy to mention that during this period double entry bookkeeping is created approximately in 1300 and it becomes increasingly prevailing instead of using charge and discharge accounting.
Edwards (1989) claims that industrial capitalism is the third stage. British industrial revolution occurred between 1760 and 1830. Abraham Derby and his high quality iron ore is the pioneer of this revolution in the early eighteenth century. But, indeed, in the second half of nineteenth century, using machines in manufacturing industry indicates the start of industrial capitalism. Owing to the low infant mortality and the enclosure acts lead to the emergence of abundant labour resources, manufacturing is the major source of income finally during that period. Whilst, single entry accounting and double entry bookkeeping tends to be chosen by industrialists. Although charge and discharge accounting dominates for a long period until 1800 and the process of altering methods is slow, double entry accounting system become dominant in England eventually.
Financial capitalism stage which is dominant since 1830 is the fourth stage as Edwards (1989) stresses. In the industrial revolution period, to a large degree, financing does not rely heavily on fixed capital like it used to and whilst the requirements of public utilities become the original stress for capital. Along with the rapid growth of public utilities such as railway building and gradual maturity of business like promotion of mechanical inventions in the eighteenth century, accounting problems become increasingly serious, complicated and common in corporation daily operations. Ultimately, it seems that government modifies the regulation which is connected with business activity to adapt those changes. Moreover, demand of required financial data and procedures of financial reporting also changes, which leads managers can freely choose diverse methods to operate company accordingly.
4. The relationship between capitalism and accounting especially in Britain
As Wilson (1995) states, along with business history developing gradually, the history of the transition to capitalism has been offering a dynamic insight from it. Moreover, Bryer (2000) complements that it is crucial for individuals to pay attention to evolution of capitalism as well as to accounting history. And he also stresses that to explore the history of accounting, historians should preferential consider the part which is closely connected with the transition of capitalism. Chiapello (2007) suggests that the notion of accounting deeply affects the concept of capitalism. He also claims that the notion of capitalism is tightly connected with performance of economic life which is impacted by the view of accounting. Arnold and McCartney (2008) state that as an external form of accounting, financial reporting is created and influenced by the evolution of capitalism especially in the industrial revolution period. Moreover, they stress that accounting calculations is a visible segment to witness the transition from feudalism to capitalism. However, the opinion that notion of accounting is the central part in the capitalism concept is not explained by Weber (1991), instead, he just uses the capital account to make definition of capitalism.
4.1 Double-entry Bookkeeping (DEB)
Double-entry bookkeeping is the essential part for Sombart’s writing to analyse the correlation between accounting and capitalism. According to Edwards (1989), the single entry is the elementary account-keeping system which is in use in the 11th century. It works well when it is selected by small company. On the contrary, it meets some problems when firm have an expand tendency of their transactions. Generally, it seems that due to increasing transactions leads to disorder in management, unsystematic records impose restrictions on the development of business size apparently. Consequently, double entry method is produced to create accounting innovation in 1300 approximately. Moreover, he also states that with the number and frequency of trade increasing quickly, using double entry method becomes prevailing during the seventeenth century.
Indeed, the treatise which is published by brother Luca Pacioli in 1494, is regarded as “the first scientific system for DEB in which all previous empirical discoveries were theorized into a coherent, comprehensive representation” (Sombart, 1992, p. 21). Then, according to Chiapello (2007), 1608, which is the publish date of Simon Stevin’s textbook, is considered as the first presentation of the concept of closing annual accounts and establishing a balance sheet in the DEB period.
As Sombart (1992) stresses, DEB is a system that each entry tends to include two accounts. That is to say, one account should be represented as a debit and another should be shown as credit. He also claims that if company can apply DEB, their accounts should inseparably and tightly interconnected. There are three main merits of double entry bookkeeping as Edwards (1989) suggests. Firstly, it requires the accounts and information to be more careful and accurate from clerical work. In addition, it is more difficult for individual to tamper with account books for the sake of covering deceit or stealing. Thirdly, it supplies the arithmetic check which calculates from balancing the account books termly. On the whole, it is essential for DEB to trace, quantify and record every individual account and every transaction in the whole company development process (Sombart, 1992). According to Edwards et al (2009), DEB is not only a calculative method to assess capital return, but also can provide available information to performance valuation and decision making. As Winjum (1971) complements, DEB is the fairest and suitable method to select.
4.2 Canal industry and railways in Britain Industrial Revolution
Bryer (2005) admits that Britain Industrial Revolution (BIR) in the late-eighteenth century is a capitalist revolution such as ‘a revolution in the dominant social relations and calculative mentality’ as Marx’s asserted in his theory before. Moreover, he also claims that owing to realize the implications of changes of economic and social issue, Marxist accounting history of the BIR is trying to find the position of accounting in historical situations which consists of social accountability and variations quickly.
How to extract surplus value from labour is the biggest difference of production between feudal and capitalist mode and their accounting methods accord with various modes accordingly as Bryer (2000) asserts. Bryer (2005) states that use of factories, machines and accounts stands for starting of industrial revolution. He also asserts the form of balance sheets and profit and loss accounts is crucial to employ because the capitalist extracts residual value which is made by wage labour to obtain return on capital employed. However, other writers like Watts (1977) argue that financial statements is required by outside investor to decide their economic decision which originates from agency theory. It is remarkable to two specific periods in BIR, which can provide a better analysis of the relationship between accounting and capitalism. Two periods are presented as follow:
4.2.1 Canal industry
As Bagwell and Lyth (2002) states the first canals were built in the late eighteenth centuries and the recent civil engineering was shown by canals building. According to Arnold and McCartney (2008), canal age in Britain starts at 1755, in order to make Sankey Brook which is a tributary of the Mersey navigable, Liverpool company gains an Act and tries to transfer coal from the St Helens area to Liverpool by water. And this action promotes the Bridgewater canal which from Manchester to Worsley. As Bagwell and Lyth (2002) point out, after the canal opened in July 1761, the coal cost declines dramatically. Afterwards, this success leads a better alternative of Manchester Runcorn Canal to be applied in 1767, and the carriage levies also obtains a sharply decline (Arnold and McCartney, 2008). They also argue that new canals are not only a freight tool but also can be considered as a chargeable transportation form for individuals. Hadfield (1981) stresses that inland navigation system in England and Wales builds canals 1,482 miles in 1760, and the navigation length in 1830 increases significantly to 3,969 miles. The period is normally regarded as industrial revolution period coincidently.
After south sea company bubble, “Bubble Act” proposes some constraint to joint stock firms (Arnold and McCartney, 2008). But, costs of building canals not tend to be afforded by individual firm, family or local group. Consequently, the first corporation, also named as “The Company of Proprietors of the River Dun” , as Arnold and McCartney (2008) suggests, is built in 1733 under circumstance of Navigation Act and raises ?17250 by shares. That means the company of proprietors of the river dun and succeeding canal corporations are first “statutory companies, for trading purposes” and some companies are limited liability (Harris, 2000, pp.98-9). Generally, Bagwell and Lyth (2002, pp.12) states that canal companies make a tremendous contribution to future industrial development “by popularising the sale of equity shares, bonds and debentures”
From accounting perspectives, although those canal companies have some financial data like cost of construction and paid dividends, they still search some financial documents like periodic accounts and financial reports to know company’s profitability instead of just providing company books to shareholders (Arnold and McCartney, 2008). Then, the directors of Kennet and Avon maintain construction costs should be recorded as “a true and particular Account” after Rochdale and Lancaster canal directors claimed they need “proper Books of Accounts” (Kennet and Avon Canal Act, 1794, sec.114). They stress that it should “cause a true, exact and particular Account [of income and expenses] to be kept and annually made up and balanced”. Subsequently, the data set of the Birmingham, Kennet and Avon and Oxford canal companies includes ledgers and journals records, and whilst they use DEB method. In short, Arnold and McCartney (2008) maintain that it is apparent that Kennet and Avon’s “General Account” is primary form of the General Balance Sheet, even though it does not mention accrual depreciation asset, acquisitions record either in capital account or in operating statement as expense and it is single periodic operating statement which is based on cash or near-cash accounts.
Bryer (1999) claims that railway which is the central industry of economy in the 19th century exerts noteworthy impacts on financial reporting and accounting practices. As Arnold & McCartney (2008) suggest, the opening event of Liverpool and Manchester railway in Britain in 1830 is the symbol of the emergence of financial capitalism. And it also is the original model for limited liability enterprise. Afterwards, it leads the appearance of “arms-legth” investment, limited liability firm, the separation between ownership and control and following accounting adjustments as Arnold and McCartney (2008) stress. Edwards (1989) agrees with that, and he states that London Stock Exchange proofs the contribution of railways to the growth of capital market in the financial capitalism period.
According to Edwards (1989), at that time, owing to railway building needs lots of money involved, it is impossible to start a part of program with insufficient cash and then wait for reinvesting from retained profits. That is to say, it is necessary to ready all the resources before commence activity. Consequently, it is crucial that financial data is required urgently to ensure whether or not the project is workable, to observe all the cost which happened in construction, and to conclude and report detailed accounts in the whole process. Indeed, these requirements in reality lead numerous accounting problems should be pay attention. Edward (1989, p.13) mentions those problems are: ‘the separation of capital expenditure from revenue expenditure; the valuation of fixed assets; the calculation of periodic profit; and the appropriate form and content of financial statements published for absentee owners’.
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