Accounting from history perspective

How humans invented this thing called Accounting

(A brief history)

The concept of currency

Somewhere between 10,000 and 15,000 years ago, human communities learnt to cooperate with one another in a way that gave them access to a wider range of resources.

Trade was no longer limited to those who had goods that were valuable to each other, allowing people to benefit from the fruits of many other types of labor.  For this to work, they needed something to symbolize the exchange of resources; something offering a common measure of value. Early money came in a variety of formats, from feathers and vodka, to cow dung and grains. Coins didn’t emerge until between 500 and 700 BC.

Abstract counting

Both currency and accounting began through ‘concrete counting’, which means counting being object-specific. So five boats would be represented by a different word or object than five apples.

It was only when objects, words and symbols began to be used to represent abstract numbers, such as in Mesopotamia around 3,000 BC, that more complex forms of accounting could be developed.

 This also allowed the birth of arithmetic. With concrete counting, representations didn’t extend past a certain number of units, and different amounts could not be added together. Abstract counting introduced the kinds of mathematical flexibility needed for systems like double entry bookkeeping.

 The origins of accounting

Accounting arguably began before the use of abstract counting. Around 7,500 BC, the Mesopotamians were using small clay objects as counters for keeping account of goods. Each object represented particular quantities of different types of commodities, such as food, clothing, and even labor.

 They became increasingly complex over centuries, bearing intricate markings, and eventually, imprints of these markings onto parchment replaced the counters themselves. According to many scholars, accounting and writing evolved side-by-side in this way.

The need to keep a record of both goods and currency was accelerated by a number of factors. One was the ability to accumulate personal wealth. Affluent members of society wanted to record what they had, what they owed, and what was owed to them. More than 5,000 years ago, Egyptian bookkeepers were keeping detailed records of the royal inventory, using bone labels attached to goods like oil and linen to keep track of things such as owners, suppliers, and amounts.

Another factor was the rise of ruling entities such as royal families and governments. A particular concern for these sections of society was finding more consistent ways to record and demand tax.

The growth of global trade meant commerce was happening on a much larger scale. Trading with vastly different societies for diverse resources meant that traders could easily lose track of their activity without detailed records.

 Double entry bookkeeping

Early forms of double entry bookkeeping arose in various locations at different times, such as the ‘four-element bookkeeping system’ in Korea in the 11th century.

 However, the double entry bookkeeping system we’re familiar with today was first properly described by Luca Pacioli in 1494. Referred to as ‘the father of bookkeeping and accounting’, he defined much modern day thinking about debits, credits, journals, and ledgers.

He set out a comprehensive accounting cycle, which described a clear process for those involved with accounts to follow. Among other things, he introduced ledgers based on assets receivables and inventories, liabilities, capital, expenditure, and income accounts.

For double entry to flourish, a number of factors needed to be established and combined. This included private property, capital, large-scale commerce, credit, systematized writing, money, and arithmetic. In 15th century Europe, these things we coming together in just the right ways to set the scene for huge advances in accounting.

 Any How

Some of the first accountants were employed around 300 BC in Iran, where tokens and bookkeeping scripts were discovered. Around the first millennium the Phoenicians invented an alphabetic system for bookkeeping, while the ancient Egyptians may have even assigned someone the role of comptroller.

Italian roots

But the father of modern accounting is Italian Luca Pacioli, who in 1494 first described the system of double-entry bookkeeping used by Venetian merchants in his Summa de Arithmetica, Geometria, Proportioniet Proportionalita. While he was not the inventor of accounting, Pacioli was the first to describe the system of debits and credits in journals and ledgers that is still the basis of today's accounting systems.

With the onset of the industrial revolution in 1760, there was a proliferation of companies and the need for more advanced accounting systems. The development of corporations also created larger groups of investors, and more complex structures of ownership, all requiring accounting systems to adapt.

Scotland modernizes accounting

The modern profession also has its roots in Scotland in the mid-1800s when the Institute of Accountants in Glasgow petitioned Queen Victoria for a Royal Charter, so accountants could distinguish themselves from solicitors, as for a long time accountants had belonged to associations of solicitors, which would offer accounting in addition to a firm’s legal services. In 1854 the institute adopted ‘chartered accountant’ for its members, a term and demarcation that still carries legal weight globally today.

 The petition was signed by 49 Glaswegian accountants, and it argued that the accounting profession had long existed in Scotland as a distinct profession of great respectability and that the small number of practitioners had been rapidly increasing. The petition further highlighted the varied skills required to be a professional accountant – in addition to mathematical skills, an accountant needed to be acquainted with general legal principles, as they were often employed by the courts to give evidence on financial matters – as they still are today.

Industrial revolution

By the mid-1800s, the industrial revolution in Britain was well underway and London was the financial center of the world. With the growth of the limited liability company and large-scale manufacturing and logistics, demand surged for more technically proficient accountants capable of handling the growingly complex world of global transactions.

The increasing importance of accountants helped to transform accounting into a profession, first in the UK and then in the US. In 1904 eight people formed the London Association of Accountants to open the profession to a wider audience of people than was available through the UK’s older associations. After several name changes the London Association of Accountants adopted the name the Association of Chartered Certified Accountants (ACCA) in 1996.

The modern accountant

With industrialization came a need for more advanced accounting methods. The large corporations of the industrial revolution required cost accounting systems that addressed external sources of finance like shareowners, and needed to be able to calculate and predict profits accurately, basing their operations on real financial data.

All of this called for dedicated accounting professionals who had highly specialized knowledge, and could be trusted with great financial responsibility. Accountants also needed to be more aware of legislative changes than ever before.

The concept of the chartered accountant came about in mid-19th century Scotland, after a group of accountants petitioned Queen Victoria for a Royal Charter. It was time for formal recognition of the respectability of the profession, and of the varied expertise of those working within it.

Importance of ethics

It’s not all been plain-sailing for the accountancy profession. The 21st century has seen some dubious actions by accountants causing large-scale scandals. The Enron scandals in 2001 shook the accounting industry, for example. Arthur Andersen, one of the world’s largest accounting firms at the time, went out of business. Subsequently, under the newly introduced Sarbanes-Oxley Act, accountants now face harsher restrictions on their consulting engagements. Yet ironically, since Enron and the financial crisis in 2008, accountants have been greatly in demand, as corporate regulations have increased and more expertise is required to fulfil reporting requirements.