Accounting%20Theory

1
Accounting Theory

• Topic 1 Accounting History

2
Accounting History

• Early history of accounting
• Emergence of double entry bookkeeping
• Contribution of Luca Pacioli

3
Accounting History

• The history of accounting is as old as
  civilization, key to important phases of history,
  among the most important professions in economics
  and business. 

4
Accounting History

• A.C. Littleton in his Accounting Evolution to
  1900 contended that for double entry system to
  emerge , certain prerequisites or antecedents had
  to be present. He classified his antecedents into
  two
• Materials antecedents private property,
  capital, commerce and credit.
• Language antecedents writing, money and
  arithmetic.

5
Accounting History

• Littleton claimed that these antecedents ,
  although present, did not posses the proper
  intensity in the ancient civilization to cause
  double entry system to emerge. The ancient
  civilizations referred to are Egypt, Babylonia,
  Greece and Rome.

6
Alternate Explanation of Vernon Kam

• Littleton's antecedents need to be explained
  further to have a fuller understanding of the
  evolution of accounting from ancient time. He
  identified three factors that create and promote
  the growth of business entities

7
Three factors

• Capitalistic spirit
• Economic and political events
• Technological innovations
• These three factors (termed as social forces)
  are the reasons for the development of the
  business organization which in turn result the
  development of double entry system.

8
Capitalistic spirit

• Capitalistic spirit is the motivating force that
  drives people to form business entity for the
  sake of making a profit. Of course accounting is
  used by both profit and non profit organizations.
  The term Capitalistic spirit is used because
  historically it has been under Capitalism that
  accounting has flourished.

9
Capitalistic spiritin the ancient civilization

• A class of merchants existed in all the ancient.
  Evidence support that the desire for profit was
  present in ancient civilizations.
• But Littleton's view was that desire for profit
  did not existed in the ancient time.

10
Economic and political events

• Commerce an important variable to form and grow
  business entities. Interpretation of the extent
  of commerce in the ancient times is a matter of
  disagreement by the historians. there may have
  been a great deal of trade but a complex market
  system did not existed. There was no need for
  sophisticated book keeping tool vis. a vis.
  double entry system.

11
Economic and political events

• Complex market a complex market consisted aa
  variety of separate but interrelated activities.
• First there is market for consumer and producer
  goods.
• Then there are markets for factors of production
• In each of these market the forces of demand and
  supply should be considered.

12
Economic and political events

• The necessity for efficient accounting method
  depend on whether the supply side is complicated.
  
• Land was owned for the most part by govt and
  wealthy people. If they were engaged in business
  activities they posed no problem
• Labor was furnished by the family members and
  slaves, therefore keeping record of labor cost
  was not a significant matter.
• There was no capital market. Borrowing funds by
  merchants was normally a direct transactions with
  specific individuals.

13
Economic and political events

• So keeping track of costs and profit for the
  purpose of accountability to outside parties was
  not critical. Most part of the business was
  extension of the household.

14
Technological innovations

• Laggard technology ancients resisted the
  technology. There were lack of incentive to
  develop the technology, because of cheap labor,
  cultural attitudes.
• Writing and arithmetic Littleton mentioned
  writing, arithmetic and money as the language
  antecedents of the double entry book keeping.
  Writing is verified to be existed in ancient
  civilization. With respect to arithmetic
  Egyptians used a system of counting. Babylonians
  were skilled in arithmetic and astronomy.
  Littleton concluded that arithmetic in the
  ancient time was difficult to employ. It depends
  on ability training and experience.

15
Technological innovations

• Money the employment of money as a medium of
  exchange in the metal form of gold and silver was
  known to Egypt and Babylonia. Despite the fact
  that money was utilized medium of exchange , but
  markets remain simple because of uncomplicated
  nature of demand and supply functions.

16
Emergence of double entry book keeping

• The first record of double entry system is the
  Massari (treasurers) accounts in the city of
  Genoa in 1340. it is probable that double entry
  system made it appearance in the mid thirteenth
  century. why double entry system emerged in this
  time? The reasons are two fold

17
Emergence of double entry book keeping

• Firstly it was the natural outcome of the
  evolutionary process in response to the need of
  the time. As Littleton spoke of the evolution of
  the accounting. the notion implies that what took
  place in the preceding culture is believed to
  have some effect on the subsequent culture. Or
  civilization.

18
Emergence of double entry book keeping

• Second a second reason for the appearance of the
  double entry system at this time is that the
  particular setting in the Italian city state
  called it forth. Thee setting is discussed in
  terms of three major forces
• Capitalistic spirit
• Economic and political event
• Technological innovation

19
Emergence of double entry book keeping

• Capitalistic spiritin the middle ages , conduct
  was governed by the religious belief. Making a
  profit was almost immoral. After the thirteen
  century, position of the business improved
  greatly. The Italian city state realized this
  very early recognizing the legitimacy of making a
  profit as a means to support a family, or to have
  enough to give the poor or as reward for public
  service , Italian Church did not regard economic
  goals and spiritual motives as necessarily
  conflicting.

20
Economic and political event

• Demand By the end of the thirteen century the
  complexity of the market become evident. On the
  demand side the more customer goods were desired.
• Supply on the supply side ,labor market had
  improved, banking business flourished,

21
Economic and political event

• 3) Politics power and politics in Italy was also
  contributing factor. By the thirteenth century
  Italian cities was controlled by those who
  favored business interest. Therefore, commerce
  and insdustry flourished.

22
Technological innovation

• In contrast to the Greek and Roman period, the
  middle ages saw a great interest in the
  Technological innovation. The particular
  innovation that stimulated the development of
  book keeping were paper making, printing etc.

23
Contribution of Luca Pacioli

• Luca Paciolis bok in 1494 was the first book on
  the double entry system . However the first
  person to write on double entry system was
  probably Benedetto Cotrugli whose book was
  completed in 1458 but published in 1573

24

• The first printed piece of bookkeeping in the
  world is the Summa de Arithmetica, Geometria,
  Proportioni et Proportionalita written by Luca
  Pacioli.
• The treatise was published in Venice in 1494, and
  was reprinted in 1523. This work is one of the
  most important books on mathematics and has had
  an enormous impact on the field of accounting
  ever since.

25

• The first accounting book actually was one of
  five sections in Pacioli's mathematics book
  titled "Everything about Arithmetic, Geometry,
  and Proportions." This section on accounting
  served as the world's only accounting textbook
  until well into the 16th century.

26
Contribution of Luca Pacioli

• The term we employ today debit and credit were
  mentioned by Pacioli debito(Owed to) and
  Credito(Owed by). In explaining the double entry
  system Pacioli said all entries have to be double
  entries ie if you make one creditors you must
  make some on a debtor.

27
Contribution of Luca Pacioli

• First activity a person must undertake when
  starting a business ,V said, is to prepare an
  inventory. This inventory is to be record in the
  journal at current values. For sales price he
  advised.

28
Contribution of Luca Pacioli

• Day book in his book each entry is stated in
  paragraph form.
• From the journal entries, entries are to be
  posted ot the accounts of the ledger.
• But Pacioli made no mention of accruing and
  deferring of revenue and expenses.

29
Contribution of Luca Pacioli

• The determination of profit or loss was different
  from eh procedure we used today. Each venture was
  seen as a unit , when the venture closed, the
  account represent it was closed and profit and
  loss ascertained. Example of the salt.

30

• The bookkeeping method of Luca Pacioli has
  several distinct characteristics
• 1.Pacioli wrote that there are three things
  needed by one who wished to carry on business
  diligently. The most important of these is cash
  or any other substantial power (altra faculta
  substantiale). The second is a good accountant
  (buon ragioneri) and a sharp bookkeeper. The
  third is good order in order to arrange all
  business to debit (debito) and credit (credito).
• 2.Pacioli explained the opening inventory
  (inventario), but he did not describe the closing
  inventory.
• 3.Pacioli's account book system is three account
  books-that is, a day book. The day book is the
  first book, the journal is the second book and
  the ledger is the third book. Pacioli thought of
  the day book as the formal account book, because
  he wrote that the day book must be presented to a
  certain mercantile office (certo officio de
  mercatâti).
• 4.All things pertaining to a transaction must be
  written in the day book, without omission.
  Pacioli wrote that no point must be omitted in
  the day book.
• 5.Pacioli described debit and credit--that is,
  "per" and "A" in the journal, and "die dare" and
  "die havere" in the ledger.