History Of Accounting

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Introduction The history of accounting I feel is important in the learning, understanding, and developing of my foundation for my accounting career. In this report you will learn about the development of accounting. You will learn about the people who influenced accounting the most throughout the years. You will learn how accounting came about and how it was used in the ancient times. You will learn about the invention of the double-entry bookkeeping processes. You will learn how things were done before the birth of the double-entry bookkeeping process. You will learn about Luca Pacioli and the Summa. You will also learn about modern accounting and ACAUS. In attempting to explain why double entry bookkeeping developed in fourteenth century Italy instead of ancient Greece or Rome, accounting scholar A.C. Littleton describes seven "key ingredients" which led to its creation. Those key ingredients consisting of private property, capital, commerce, credit, writing, money and arithmetic. Most of these did not exist in ancient times. This alone would not lead someone to create a complete and involved accounting system. 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. Fairly, the persistent use of roman numerals for financial transactions long after the introduction of Arabic numeration appears to have delayed the earlier creation of double-entry systems. However, the problems encountered by the ancients with record keeping, control and verification of financial transactions was not entirely different than our own today. Governments had strong incentives to keep careful records of receipts and disbursements - for the most part as concerns taxes. 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 antecedent 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 ancient Mesopotamia, Circa 3500 B.C. five thousand years before the appearance of the double entry system was done in a different manner . The Assyrian, Chaldaean-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. When farmers started to prosper, 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 time period (which lasted until 500 BC), Sumeria was a theocracy whose rulers held most land and animals in trust for their religious beliefs, giving drive to their record-keeping efforts. Furthermore, the legal codes, which emerged, penalized the failure to memorialize transactions. The renowned Code of Hammurabi, handed down during the first dynasty of Babylonia (2285 - 2242 BC), 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 . It is also believed that most transactions were recorded and subscribed by the parties during this period. The closest thing they had to an accountant in these times was a scribe. The scribes duties were writing up the transaction, he ensured that the agreements complied with the detailed code requirements for commercial transactions. The 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 buried with them at death. Often the seals included the owner's name and religious symbols, 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 clay layer about as thick as piecrust, was fashioned and wrapped around the tablet to protect it like an envelope. Sometimes 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 such as the picture and name of the gods worshipped by the owner. Accounting in ancient Egypt, Greece, and Rome on the other hand were similar in some aspects but different in others. Accounting in ancient Egypt developed in a fashion similar to the Mesopotamians. The use of papyrus over clay tablets allowed more detailed records to be made more easily. Also extensive records were kept, particularly for the network of royal storehouses within which the "in kind" tax payments were kept. Egyptian bookkeepers attached to each storehouse kept careful records, checked by a complex internal verification system. These early accountants had good reason to be honest and accurate, because irregularities disclosed by royal audits were punishable by fine, injury 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. Greece in the fifth century B.C. used "public accountants" to allow its public 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 ten 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, in which daily entry of household receipts and payments were kept in an adversaria or daybook and monthly postings 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 intricate system of checks and balances was maintained in Rome for governmental receipts and disbursements by the quaestors, which managed the treasury, paid the army and supervised governmental books. An audit staff regularly examined public accounts, 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 front wall 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 considered its citizens' ability to pay. The innovative Italians of the Renaissance 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. This brought about Luca Pacioli and the Summa. Frater Luca Bartolomes Pacioli was born about 1445 at Borgo San Sepulcro in Tuscany. He was a "Renaissance man" acquiring an incredible knowledge of diverse technical subjects - religion, business, military science, mathematics, medicine, art, music, law and language. Around 1482, after completing his third treatise on mathematics, Pacioli - like many of his time who sought preferment as a teacher - he became a Franciscan friar. He traveled throughout Italy, lecturing on mathematics, and in 1486 he completed his university education with the equivalent of a doctorate degree. Pacioli never claimed to have invented double entry bookkeeping. Thirty-six years before his monumental treatise on the subject, Benedetto Cotrugli wrote Delia Mercatura et del Mercante Perfetto (Of Trading and the Perfect Trader), which included a brief chapter which described many of the features of double entry. Although this work was not published for more than a century, Pacioli was familiar with the manuscript and credited Cotrugli with originating the double entry method. Pacioli was about 50 years old in 1494 - just two years after Columbus discovered America - when he returned to Venice for the publication of his fifth book, Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry and Proportion). It was written as a digest and guide to existing mathematical knowledge, and bookkeeping was only one of five topics covered. The Summa's 36 short chapters on bookkeeping, entitled De Computis et Scripturis (Of Reckonings and Writings) were added "in order that the subjects of the most gracious Duke of Urbino may have complete instructions in the conduct of business," and to "give the trader without delay information as to his assets and liabilities." (All quotes from the translation by J.B. Geijsbeek, Ancient Double Entry Bookkeeping: Lucas Pacioli's Treatise, 1914) De Computis begins with some basic instruction for commerce. The successful merchant, declares Pacioli, needs three things: sufficient cash or credit, good bookkeepers and an accounting system that allows him to view his finances at a glance. Before commencing business, one should prepare an inventory listing all business and personal assets and debts. This inventory must be completed within one day. Property also should be appraised at current market values and arranged according to mobility and value, with cash and other valuables listed first since they are most easily lost. The memorandum, or memorial, was Pacioli's equivalent of a daybook, for recordation in chronological order business transactions as they occurred. The transaction could be entered in any of the various monetary units then in use in the Italian city-states of the time, with conversion to a common currency for double entry left for later. The journal was the merchant's private account book. Entries consisted of a narrative debit, credit and explanation in one continuous paragraph. The journal had only one column, which was not totaled. There were no compound entries. Pacioli's ledger was, of his three books, the most like its modern equivalent. The money and date columns were almost identical to those in modern ledgers, with entries consisting of brief paragraphs, debits on the left side of a double page (deve dare) and credits on the right (deve avere). The bookkeeper posts Cash in Hand as a debit on page one of the ledgers, just as it was entered first in the journal. As ledger postings are made, two diagonal lines are drawn through each journal entry, one from left to right when the debit is posted and the other from right to left when the credit is posted. The first 16 chapters of De Computis describe this basic system of books and accounts, while the remaining 20 are devoted to specialized accounting issues of merchants. These include bank deposits and withdrawals, brokered purchases, drafts, barter transactions, joint venture trading, expense disbursements and closing and balancing books. The trial balance (summa summarium) is the end of Pacioli's accounting cycle. Debit amounts from the old ledger are listed on the left side of the balance sheet and credits on the right. The two totals equal, the old ledger is considered balanced . If not, says Pacioli, "that would indicate a mistake in your Ledger, which mistake you will have to look for diligently with the industry and intelligence God gave you." As the foundation was being laid for modern accounting everything was coming into focus. By the middle of the nineteenth 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 came 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 1850 show 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 soci

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