Join us on a fascinating trip through time to learn about the amazing story of accounting in “Charting the Unparalleled Journey of the History of Accounting.” Discover how accounting has changed over the years and why it’s so important today.
Significance of Accounting’s History
Savary and Napoleonic Commercial Code
Industrial Revolution, Corporate Organization, Railroads, United States Steel
Schmalenbach and The Model Chart of Accounts
Imposition of Income Tax and Conflicts with Financial Accounting
Association of Southeast Asian Nations
Four Pillars of ASEAN Economic Community
ASEAN Framework Agreement on Services
ASEAN Qualifications Reference Framework (AQRF)
Accounting is the practice of methodically recording, organizing, and analyzing financial transactions in a meaningful way, and then interpreting their outcomes. This definition was articulated by the American Institute of Certified Public Accountants in 1953.
Significance of Accounting’s History
Understanding the history of accounting is crucial for its teaching, policy-making, and application. It provides insights into our present circumstances and aids in predicting future developments. This history delves into the progression of accounting principles, methods, and organizations as they adapted to societal changes and requirements. Furthermore, it assesses the influence these shifts have had on society and its environment.
Beginnings of Accounting
Throughout time, humans have felt the need to count and maintain records. The inception of accounting can be tracked to around 8500 B.C., as evident from specific clay tokens discovered in Mesopotamia (present-day Iraq). These tokens symbolized items such as sheep, oil, bread, or apparel and were used for record-keeping purposes in the Middle Eastern regions. Later, these tokens evolved into symbols on clay tablets, marking the onset of written language.
Various ancient cultures like China, Babylonia, Greece, and Egypt maintained records of their commercial pursuits. For instance, during Babylonia’s 1st dynasty, the Code of Hammurabi necessitated merchants to provide a detailed memorandum of a transaction to ensure its enforceability. This record, made by the Scribe (an early version of today’s accountant), was inscribed on clay which, once dried, preserved the transaction details.
By around 3600 B.C., Babylonian clay tablets noted wage payments. Ancient leaders relied on accounting to monitor the expenses related to projects, such as the Egyptian pharaohs overseeing the construction of pyramids.
From its inception, accounting has been a fundamental skill, with the earliest legible writings documenting the quantity of grain entering royal storages. This also showed who contributed the grain and the amount taken by the monarch. Tax collection, even in ancient times, was intrinsically linked to accounting.
The adoption of bookkeeping in ancient times can be attributed to several factors, including the development of writing, the introduction of Arabic numbers, the decimal system, algebra knowledge, affordable writing materials, rising literacy rates, and a standardized exchange medium. A. C. Littleton highlighted seven essential prerequisites for systematic bookkeeping in his work, “Accounting Evolution to 1900”: writing, arithmetic, private property, money, credit, commerce, and capital.
Writing is an art, as bookkeeping primarily documents records; Arithmetic is essential since the foundation of bookkeeping involves basic calculations; Private Property is at the core since bookkeeping tracks details of property and its rights; Money, within the economic realm, is pivotal as bookkeeping largely functions to standardize all property transactions to this measure; Credit, representing pending transactions, is crucial because without it there’s little reason to record instantaneous exchanges; Commerce plays a role, as only widespread trade could drive the need for a comprehensive system; and Capital is indispensable because without it, trade would be minimal and the concept of credit unimaginable.
Middle Ages
As a result of the Crusades between the 11th and 13th centuries, literacy in Northern Italy became widespread. Additionally, the trade with the Near East introduced Arabic numerals, enabling the addition and subtraction of numbers using columns. This led to the prevalence of credit usage and the emergence of a functional international banking system. On the other hand, the Inca Empire, which existed along the west coast of South America from the 11th to the 14th centuries, employed a system of knotted cords called quipu to maintain accounting records. The development of more formal methods for keeping accounts during the 13th to 15th centuries is credited to the merchants and bankers of Florence, Venice, and Genoa.
Double-entry bookkeeping did not arise through scientific discovery; rather, it emerged as a response to evolving trade requirements. Oswald Spengler, a German philosopher, asserted in his book The Decline of the West (1928) that the introduction of double-entry bookkeeping was the pivotal moment in European economic history.
The Florentine Approach
The Renaissance Florentine markets were a fascinating combination of two elements. On one hand, there was a sense of formality through the use of account books and double-entry bookkeeping. On the other hand, there existed informal social networks that were constructed based on the rules of Florentine sociality. These markets integrated the concept of business and everyday life seamlessly. Business transactions were carried out with a foundation of friendship, but at the same time, friendship was also seen as a practical means to an end, in addition to being emotionally valued. Rather than being contradictory, account books served to streamline and formalize social exchanges. This was particularly crucial due to the booming commercial credit of the time, which necessitated a proper system of record-keeping.
The earliest evidence of business bookkeeping in Florence, France can be traced back to the bank ledger fragments of 1211. Pietro Santini transcribed these fragments in 1887, shedding light on the development of accounting in Tuscany, Italy during the 13th century. During this time, account-books or extracts were used, following a narrative or paragraph format known as “a sezioni sovrapposte.” This format may have been derived from the “charge and discharge” method used in public accounts. However, this system was quite basic, as accounts were not interconnected in a specific manner and lacked balance. The introduction of double entry bookkeeping can be seen in the ledgers of Renieri (or Rinieri) Fini & Brothers (1296-1305) and Giovanni Farolfi & Company (1299-1300).
The Giovanni Farolfi & Company, according to the “ledger”, was a group of merchants from Florence who operated their main office in Nimes, situated in the region of Languedoc within the kingdom of France. However, the information recorded in the ledger pertains exclusively to the branch of the company located in Salon, a town located in the independent county of Provence. It is worth noting that Amatino Manucci was one of the partners involved with Giovanni Farolfi & Company, a merchant partnership headquartered in Florence.
The financial records for the branch of Giovanni Farolfi & Company in Salon, Provence have survived from 1299-1300. Though these records are not complete, they provide enough detail to be recognized as utilizing double-entry bookkeeping. These details encompass the use of debits and credits, as well as the duality of entries, making them the oldest known examples of the double-entry system. While it was previously believed that Amatino Manucci invented double-entry bookkeeping, it was actually Giovanni Farolfi who managed to establish a comprehensive and fully articulated set of double-entry records. Farolfi implemented a regular balancing procedure upon closure of the General Ledger, further enhancing the accuracy of the system.
He implemented a system consisting of five primary books, including general ledgers, two merchandise ledgers, an expenses ledger, and a cash book. The structure of these books closely resembles that of a true double-entry system. Additionally, there were at least two subsidiary books in place. One notable aspect he emphasized was financial control. The books were logically divided, ensuring the separation of cash and goods accounts from the main ledger. Furthermore, there was a perpetual inventory maintained for each line of agricultural produce and each grade of cloth or yarn involved. Detailed records were kept for debtors, creditors, expenses, profits, interest, partners’ drawings, as well as the overall account status with the head office in Nimes. Additionally, an estimate was made (at a rate of 15% per annum) regarding the projected return on the capital employed.
The Method of Venice
Luca Pacioli, a widely respected mathematician, and Franciscan friar is often credited with introducing double-entry bookkeeping. In 1494, he published a book called “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” or “Everything about Arithmetic, Geometry, Proportions and Proportionality.” A section of this book, known as “Particularis de Computis et Scripturis” or “Details of Calculation and Recording,” specifically discusses double-entry bookkeeping. Pacioli’s work was influenced by the accounting practices prevalent in Venice during that era, which ultimately became known as the Method of Venice or the Italian method. Thus, it is important to note that Pacioli did not invent double-entry bookkeeping, but rather documented and described the established accounting practices that were commonly used at the time.
While Pacioli did not claim to have invented bookkeeping, he is widely recognized as the father of double-entry accounting. He emphasized that the purpose of bookkeeping was to promptly provide traders with information about their assets and liabilities. Pacioli also advised the calculation of periodic profits and the closure of the books, stating that “It is always good to close the books each year, especially if you have partners. Regular accounting fosters enduring friendships.” The double-entry method, which originated in fourteenth-century Italy, thrived alongside the growth of commercial republics in the region. Renowned German poet and dramatist Goethe referred to double-entry bookkeeping as “one of the finest discoveries of human intellect.” Additionally, prominent economist-sociologist Werner Sombart believed that “double-entry bookkeeping is born out of the same spirit as the systems of Galileo and Newton.”
Savary and Napoleonic Commercial Code
The development of systematic accounting regulation in continental Europe can be traced back to 1673, starting in France. The government implemented a requirement for businesses to submit an annual fair value statement of their financial position. This measure was put in place to safeguard the economy against bankruptcies. The introduction of this legal obligation for businesses to maintain accounting records was initially established in the Ordonnance de Commerce of 1673 under the authority of Jean-Baptiste Colbert during the reign of Louis XIV. Subsequently, the bookkeeping provisions of commercial law were influenced by the Napoleonic Commercial Code of 1807, extending their impact beyond continental Europe to Francophone Africa and other regions.
The Code Napoléon, also known as the Napoleonic Code, was established on March 21, 1804, as the French civil code under the rule of Napoléon Bonaparte. In 1807, the Commercial Code was adopted in addition to the civil code. Jacques Savary, the elder (1622-1690), mentioned in an early accounting text that if the value of merchandise starts to decline, goes out of style, or can be obtained from manufacturers or wholesalers at a 5% lower price, it should be reduced to that price. This statement is considered the earliest known formulation of the lower-of-cost-or-market principle. While earlier accounting texts recommended valuing inventory at current cost instead of historical cost, where the market valuation was lower, the Code of Commerce in France (1673), Prussia (1794), and the German Commercial Code (1884) required the valuation of inventory at the lower-of-cost-or-market. The French Commercial Code of 1673, authored primarily by Savary, was also referred to as the Code Savary. In the 17th century, Nicolas Petri was the first to group similar transactions in a separate record and record monthly totals in the journal, rather than recording each transaction sequentially. In 1769, Benjamin Workman published “The American Accountant,” which is considered the earliest-known accounting textbook in America.
Industrial Revolution, Corporate Organization, Railroads, United States Steel
Accounting practice really dates from antiquity, but the formation of an accounting profession was closely tied to the rise of a modern industrial society in Britain during the late 18th century. The need for accounting services emerged slowly, but by the early decades of the 19th century a flurry of textbooks and handbooks on accounting had appeared, reflecting the impact of the Industrial Revolution.
The advent of the Industrial Revolution in England during the 18th to 19th century brought about a transformative shift in the production of commercial goods, transitioning from a handicraft-based approach to the more efficient factory system. This shift necessitated a new approach to cost management due to the increased volume of products being produced. The specialized field of cost accounting emerged to address this need by providing analysis and assessment of various costs involved.
As business operations expanded during the Industrial Revolution, significant amounts of capital were required to establish factories and acquire machinery. This led to the development of the corporate form of organization, where ownership of the business was separate from its managerial control. As a result, managers had to devise accounting systems to report the outcomes of their stewardship to the shareholders, who were the owners of the corporation. This situation also created a demand for independent reports to provide assurance that the financial information presented by management was reliable and accurate.
As late as the 1830s, the field of accountancy in Britain lacked clear definition and boundaries. Those practicing accounting during this time not only handled simple accounts but also took on additional roles such as auctioneers, appraisers, agents, and debt collectors due to financial necessity. The development and shaping of the accountancy profession were heavily influenced by legislation.
Accountancy made its way to the United States of America as a natural consequence of the investments made by British entrepreneurs in the land of opportunities. The emergence of railroads played a significant role in the introduction of accountancy practices. As railroads heavily relied on debt financing in the late 1800s, they began issuing balance sheets to creditors who were absent from the day-to-day operations. By 1880, the US railroad system had amassed investments valued at approximately $4.6 billion, which accounted for around 40% of the annual output of the American economy.
The concept of depreciation became increasingly important within the railroad industry. Unlike previously established enterprises, railroads possessed high-value and long-lived equipment, including locomotives, rail cars, and tracks. As the equipment gradually lost its productive capacity over time, it needed to be replaced. However, pinpointing the exact point of wear and tear presented a challenge in financial reporting. Additionally, there was the issue of matching revenues with expenses, as it was difficult to determine when the wear and tear occurred exactly.
The significance of depreciation was largely disregarded until the introduction of the 1909 US corporate income tax law, which allowed for the deduction of depreciation charges when calculating taxable income. In the early 20th century, some managers began utilizing depreciation to even out reported earnings. A 1912 editorial in the Journal of Accountancy expressed dissatisfaction with how depreciation had become a tool employed by management to counteract fluctuations in profits. During prosperous years, substantial depreciation charges were recorded, while in challenging times, little to no provision or insufficient charges were made.
On March 12, 1903, United States Steel released consolidated financial statements as of December 31, 1902, accompanied by an audit and confirmation of accuracy by Price Waterhouse & Company (PW). United States Steel was formed through the amalgamation of multiple steel producers during that period and became the first billion-dollar corporation. It dominated 75% of the US steel industry. The relationship between United States Steel and its numerous subsidiaries was intricate, prompting PW Managing Partner Arthur Lowes Dickinson to believe that stockholders could only be adequately informed about the company’s financial status through a consolidation of accounts. United States Steel’s consolidated financial statements quickly became a milestone in the history of accounting, heralding the dawn of modern financial accounting practices. An article in Scientific American hailed it as “the most comprehensive and detailed report ever issued by any major American corporation,” highlighting the company’s total assets of over $1.50 billion, which far surpassed the $50 million allocated by Congress for the Spanish-American War several years earlier.
Schmalenbach and The Model Chart of Accounts
Eugen Schmalenbach, a German academic and economist born in Halver in 1873, studied at the Leipzig College of Commerce starting in 1898. He later became a professor at the University of Cologne and contributed to German-language journals focusing on economics, business management, and financial accounting. In the early 1920s, Professor Schmalenbach experienced ongoing frustration when attempting to effectively compare the financial data provided by different companies. This led him to conduct research on the issue and subsequently publish his book, “The Model Chart of Accounts.”
Schmalenbach’s book served as the cornerstone for all subsequent advancements in standardized accounting practices in Germany. It also influenced similar endeavors in other European countries. Schmalenbach argued that valuable insights could be extracted from a company’s accounts. He emphasized that the financial results of a firm should reflect cash flows more meaningfully than mere balances. To achieve this, he introduced the concept of “Dynamic Balances.” These balances were to be regularly prepared and presented in a timely manner, enabling the evaluation of both external changes and internal efficiencies. Additionally, Schmalenbach sought to facilitate inter-firm comparisons through his proposed accounting approach.
Imposition of Income Tax and Conflicts with Financial Accounting
In 10 CE, Emperor Wang Mang of the Xin Dynasty introduced the income tax, which was an unprecedented tax imposed at a “rate of 10% of profits, specifically targeting professionals and skilled laborers.” Similarly, in December 1798, William Pitt the Younger of Britain implemented an income tax to generate revenue for the procurement of weapons and equipment in preparation for the Napoleonic wars. During the Civil War, the Union Government established the Bureau of Internal Revenue in 1862 to evaluate and collect personal and corporate income taxes for funding purposes. In 1943, the US Congress passed legislation on income tax withholding as the sole method of collecting taxes at high rates to finance World War II. The Philippines’ Bureau of Internal Revenue (BIR) was created through the enactment of Reorganization Act No. 1189 on July 2, 1904. The BIR was subsequently organized and operationalized under the Secretary of Finance on August 1, 1904.
Financial accounting has a conservative approach, focusing on aligning efforts and results. On the other hand, tax accounting aims to optimize the amount and timing of tax collections. It is crucial to acknowledge that taxes serve as the lifeblood of the government, and their prompt and reliable availability is of utmost importance (Commissioner vs. Pineda, 21 SCRA 105). These divergent perspectives often lead to conflicts. It is important to note that all tax returns must be prepared in accordance with the provisions stipulated in the Tax Code. In the event of any discrepancies with generally accepted accounting principles (GAAP), the Tax Code takes precedence in the final assessment.
Information Age
Dan Brinklin and Bob Frankston were the creators of VisiCalc, the first electronic spreadsheet designed for the Apple II. This groundbreaking innovation became the most critical business application for personal computers. In recent years, the field of accounting has undergone tremendous transformations due to significant advancements in information technology. Cumbersome tasks that were once done manually can now be completed swiftly, consistently, accurately, and reliably with the aid of computers.
The availability of a wide range of accounting applications and modules has catered to the diverse needs of businesses. The widespread use of netbooks and smartphones, alongside the vast array of available applications, is poised to bring about substantial changes in how business is conducted. These changes will inevitably have an impact on the accounting industry. As the famous saying goes, information technology is the key to survival. Businesses must embrace technological advancements or risk being left behind.
Association of Southeast Asian Nations
Establishment and Member States
The creation of the Association of Southeast Asian Nations (ASEAN) took place on August 8, 1967, in Bangkok, Thailand. This significant event was marked by the signing of the ASEAN Declaration, also known as the Bangkok Declaration, by the Founding Fathers of ASEAN: Indonesia, Malaysia, Philippines, Singapore, and Thailand. Over time, additional countries joined ASEAN, with Brunei Darussalam becoming a member on January 7, 1984, followed by Viet Nam on July 28, 1995, Lao PDR and Myanmar on July 23, 1997, and Cambodia on April 30, 1999. Consequently, ASEAN now consists of ten Member States.
Vision
ASEAN, in essence, strives for a stable, prosperous, and highly competitive ASEAN Economic Region. The vision encompasses a vision of an environment where goods, services, investment, and capital flow freely, promoting equitable economic development, reducing poverty, and minimizing socio-economic disparities.
Opportunities
What opportunities does ASEAN present? With a combined population of 625 million people in 2013, the region offers significant potential. ASEAN is characterized by an emerging affluent class, a youthful population, and a combined gross domestic product (GDP) of $2,399 billion at current prices. In terms of GDP per capita, the figure stands at $3,839. Additionally, ASEAN has experienced a growth rate of 5.1%. These factors contribute to numerous opportunities for economic and social development within the region.
Four Pillars of ASEAN Economic Community
The ASEAN Community is composed of three fundamental pillars: the ASEAN Political-Security Community, the ASEAN Economic Community, and the ASEAN Socio-Cultural Community. The ASEAN Economic Community (AEC), in particular, operates based on a blueprint consisting of four pillars. These pillars encompass the establishment of a single market and production base, the cultivation of a competitive economic region, the promotion of equitable economic development, and integration into the global economy.
The first pillar focuses on ensuring the free flow of goods, services, investment, capital, skilled labor, and priority integration sectors. The aim is to create a seamless marketplace. The second pillar involves implementing actions related to competition policy, consumer protection, intellectual property rights, infrastructure development, taxation, and e-commerce to establish a competitive economic region. The third pillar centers around fostering equitable economic development through initiatives targeted at SME development and promoting inclusion through the Initiative for ASEAN Integration. Lastly, the fourth pillar emphasizes the need for a cohesive approach to external economic relations and enhanced participation in global supply networks.
Within the ASEAN Economic Community, priority integration sectors have been identified in both goods and services. The goods sector includes agro-based goods, automotive products, electronics/electrical items, fisheries, rubber-based goods, textiles/clothing, and wood-based products. In the services sector, priority integration sectors encompass air transport, e-ASEAN, healthcare services, logistics, and tourism.
These sectors represent areas where substantial efforts are being made to achieve integration and development within the ASEAN Economic Community.
ASEAN Framework Agreement on Services
Mutual Recognition Arrangements and ASEAN Chartered Professional Accountant
Mutual Recognition Arrangements (MRAS) are agreements established in 1995 under the General Agreement on Trade in Services. These contracts allow professional service providers from participating countries to be recognized equally in other participating countries. Currently, there are existing MRAS in place for various services, including engineering, nursing, architecture, medicine, dentistry, accountancy, and surveying.
For accountants who wish to become an ASEAN Chartered Professional Accountant (ACPA), they can apply through the Monitoring Committee of their country of origin. The application process is subject to specific qualifications outlined in Article 4 of the ASEAN MRAS on Accountancy Services signed on November 13, 2014. The Monitoring Committee will assess the accountant based on the criteria and procedures provided in Appendix II of the MRAS, and prepare an Assessment Statement accordingly. The application will then be submitted to the ASEAN Chartered Professional Accountant Coordinating Committee (ACPACC), which has the authority to confer or withdraw the ACPA title.
To practice in a host country, an ACPA must apply to become a Registered Foreign Professional Accountant (RFPA). If approved, the ACPA can work as an RFPA in collaboration with designated Professional Accountants in the host country, within their approved area of competency. However, they cannot engage in independent practice. The regulations set by the host country’s National Accountancy Body (such as the Philippine Institute of CPAs) and/or the Professional Regulation Commission and Board of Accountancy (PRA) will apply to the RFPA.
ASEAN Qualifications Reference Framework (AQRF)
The AQRF, which stands for ASEAN Qualifications Reference Framework, serves as a tool for comparing skilled labor qualifications across ASEAN Member States. It functions to support the recognition of qualifications, promote educational quality, facilitate labor mobility, and encompasses all types of education and training, including formal, non-formal, and informal learning.
Considering the varying levels of development among ASEAN Member States, each country is expected to voluntarily comply with the AQRF within their own capacity. The referencing process should commence by 2016 and be completed no later than 2018.
The development of the AQRF aligns with the goals laid out in the ASEAN Economic Community Blueprint, aiming to facilitate the free flow of services through the recognition of professional qualifications. It also aligns with the ASEAN Socio-Cultural Community Blueprint, which focuses on establishing national skills frameworks as a step towards an ASEAN-wide skills recognition framework.
According to former PRC Chair Teresita R. Manzala, the ASEAN Member States have agreed that by 2018, their national qualification frameworks should be referenced with the ASEAN Qualifications Reference Framework. This framework will enable comparisons of qualifications and ensure a “best fit” between qualifications from different countries.
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