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Thehistory of accounting or accountancy can be traced toancientcivilizations.[1][2][3]
The early development ofaccounting dates to ancientMesopotamia, and is closely related to developments inwriting,counting andmoney[1][4][5] and earlyauditing systems by the ancientEgyptians andBabylonians.[2] By the time of the Roman Empire, thegovernment had access to detailed financial information.[6]
Double-entry bookkeping is first known to appear in late 13th century Italy.[7] In 1494,Luca Pacioli, often recognized as the father of accounting and bookkeeping, published the earliest known work ondouble-entry bookkeeping,Summa de arithmetica, spreading the field throughout Italy.[8][9]
The modern profession of the chartered accountant originated in Scotland in the nineteenth century. Accountants often belonged to the same associations as solicitors, who often offered accounting services to their clients. Early modern accounting had similarities to today'sforensic accounting. Accounting began to transition into an organized profession in the nineteenth century,[10] with localprofessional bodies in England merging to form theInstitute of Chartered Accountants in England and Wales in 1880.[11]
Accounting records dating back more than 7,000 years have been found inMesopotamia,[12] and documents from ancient Mesopotamia show lists ofexpenditures, andgoods received and traded.[1] The development of accounting, along with that of money and numbers, may be related to the taxation and trading activities oftemples:
"another part of the explanation as to why accounting employs the numerical metaphor is [...] that money, numbers and accounting are interrelated and, perhaps, inseparable in their origins: all emerged in the context of controlling goods,stocks andtransactions in the temple economy of Mesopotamia."[1]
The early development of accounting was closely related to developments inwriting,counting, andmoney. In particular, there is evidence that a key step in the development of counting—the transition from concrete toabstract counting—was related to the early development of accounting and money and took place in Mesopotamia[1]
Other early accounting records were also found in the ruins of ancientBabylon,Assyria andSumer, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there was a natural season to farming and herding, it was easy to count and determine if asurplus had been gained after the crops had been harvested or the young animals weaned.[12]
Between the4th millennium BC and the 3rd millennium BC, the ruling leaders and priests in ancientIran had people oversee financial matters. InGodin Tepe (گدین تپه) andTepe Yahya (تپه يحيی), cylindricaltokens that were used for bookkeeping on clay scripts were found in buildings that had large rooms for storage of crops. In Godin Tepe's findings, the scripts only contained tables with figures, while in Tepe Yahya's findings, the scripts also contained graphical representations.[4] The invention of a form ofbookkeeping using clay tokens represented a hugecognitive leap for mankind.[5]
During the 2nd millennium BC,[13] the expansion of commerce and business expanded the role of the accountant. ThePhoenicians invented a phonetic alphabet "probably for bookkeeping purposes", based on theEgyptian hieratic script, and there is evidence that an individual inancient Egypt held the title "comptroller of the scribes". There is also evidence for an early form of accounting in theOld Testament; for example theBook of Exodus describesMoses engagingIthamar to account for the materials that had been contributed towards the building of thetabernacle.[2]
By about the 4th century BC, the ancient Egyptians and Babylonians had auditing systems for checking movement in and out of storehouses, including oral "audit reports", resulting in the term "auditor" (fromLatin:audire,to hear). The importance of taxation had created a need for the recording of payments, and theRosetta Stone also includes a description of atax revolt.[2]
By the reign of EmperorAugustus (27 BC - AD 14), theRoman government had access to detailed financial information, as evidenced by theRes Gestae Divi Augusti (Latin: "The Deeds of the Divine Augustus"). The inscription was an account to the Roman people of Augustus' stewardship, and listed and quantified his public expenditure, including distributions to the people, grants of land or money to army veterans, subsidies to theaerarium (treasury), building of temples, religious offerings, and expenditures on theatrical shows andgladiatorial games, covering a period of about forty years. The scope of the accounting information at the emperor's disposal suggests that its purpose encompassed planning and decision-making.[6]
The Roman historiansSuetonius andCassius Dio record that in 23 BC, Augustus prepared arationarium (account) which listed public revenues, and the amounts of cash in theaerarium (treasury), in the provincialfisci (tax officials), and in the hands of thepublicani (public contractors); and that it included the names of the freedmen and slaves from whom a detailed account could be obtained. The closeness of this information to the executive authority of the emperor is attested byTacitus' statement that it was written out by Augustus himself.[14]
Records ofcash,commodities, and transactions were kept scrupulously by military personnel of theRoman army. An account of small cash sums received over a few days at thefort ofVindolanda circa AD 110 shows that the fort could computerevenues in cash on a daily basis, perhaps from sales of surplus supplies or goods manufactured in the camp, items dispensed to slaves such ascervesa (beer) andclavi caligares (nails for boots), as well as commodities bought by individual soldiers. The basic needs of the fort were met by a mixture of directproduction,purchase and requisition; in one letter, a request for money to buy 5,000modii (measures) ofbraces (a cereal used in brewing) shows that the fort bought provisions for a considerable number of people.[15]
TheHeroninos Archive is the name given to a huge collection ofpapyrus documents, mostly letters, but also including a fair number of accounts, which come fromRoman Egypt in the 3rd century AD. The bulk of the documents relate to the running of a large, privateestate.[16] It is named after Heroninos because he wasphrontistes (Koine Greek:manager) of the estate, which had a complex and standardised system of accounting which was followed by all its local farm managers.[17] Each administrator on each sub-division of the estate drew up his own little accounts, for the day-to-day running of the estate, payment of the workforce, production of crops, the sale of produce, the use of animals, and general expenditure on the staff. This information was then summarized on pieces of papyrusscroll into one big yearly account for each particular sub-division of the estate. Entries were arranged by sector, with cash expenses and gains extrapolated[extracted?] from all the different sectors. Accounts of this kind gave the owner the opportunity to take bettereconomic decisions because the information was purposefully selected and arranged.[18]
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In eighth century Persia, scholars were confronted with the Qur’an's requirement that Muslims keep records of their indebtedness as a part of their obligation to account to God on all matters of their life. This became particularly difficult when it came to inheritance, which demanded detailed accounting for the estate after death of an individual. The assets remaining after the payment of funeral expenses and debts were allocated to every member of the family in fixed shares, and included wives, children, fathers and mothers. This required extensive use of ratios, multiplication and division that depended on the mathematics ofHindu-Arabic numerals.
The inheritance mathematics were solved by a system developed by the medieval Islamic mathematicianMuhammad ibn Musa al-Khwarizmi (known in Europe as Algorithmi from which we derive "algorithm"). Al-Khwarizmi's opus “The Compendious Book on Calculation by Completion and Balancing” established the mathematics of algebra, with the last chapter devoted to the double-entry bookkeeping required for solution to the Islamic inheritance allocations.[19] Al Khwarizmi's work was widely circulated, at a time that there was substantial active discourse and trade between Arabic, Jewish and European scholars. It was taught in the learning centers of Al-Andalus in Iberia, and from the tenth century forward, slowly found its way into European banking, which began slipping Hindo-Arabic numerals into accounting books, despite their prohibition as sinful by the medieval church. Bankers in Cairo, for example, used a double-entry bookkeeping system which predated the known usage of such a form in Italy, and whose records remain from the 11th century AD, found amongst theCairo Geniza.[20]Fibonacci included double-entry and Hindo-Arabic numerals in hisLiber Abaci which was widely read in Italy and Europe.
Al-Khwarizmı's book introduced al-jabr meaning "restoration” (which European translated as "algebra") to its inheritance accounting, leading to three fundamental accounting - algebreic concepts:
Algebra balances and restores formulas on the left and right of an equal sign. Double-entry bookkeeping similarly balances and restores debit and credit totals around an equal sign. Accounting is the balancing and restoration of algebra applied to wealth accounting.[21]
In 756, the Abbasid caliphAl-Mansur sent scholars, merchants and mercenaries to support theTang dynasty's Dukes of Li to thwart theAn Shi Rebellion. The Abbasids and Tangs established an alliance, where the Abbasids were known as the Black-robed Arabs. The Tang dynasty's extensive conquests and polyglot court required new mathematics to manage a complex bureaucratic system of tithes, corvee labor and taxes. Abbasid scholars implemented their algebraic double-entry bookkeeping into operations of many of the Tang ministries. The Tang dynasty expanded their maritime presence across the Indian Ocean, Persian Gulf, and Red Sea, and up the Euphrates River.[22] On land they conquered much of what is today's China.
The Tangs invented paper currency, with roots in merchant receipts of deposit as merchants and wholesalers. The Tang's money certificates, colloquially called “flying cash” because of its tendency to blow away, demanded much more extensive accounting for transactions. A fiat currency only drives value from its history of transactions, starting with government issue, unlike gold and specie. Paper money was much more portable than heavy metallic specie, and the Tang assured its universal usage under threat of penalties and possibly execution for using anything else.
The Tangs were great innovators in the widespread use of paper for accounting books, and transaction documents. They developed the 8th-century Chinese printing techniques involving chiseling an entire page of text into a wood block backwards, applying ink, and printing pages by inventing early movable type, including characters chiseled in wood and the creation of ceramic print blocks. Tang science, culture, manners and clothing were widely imitated across Asia. Japan's traditional dress, as well as customs like sitting on the floor for meals, were borrowed from the Tangs. Imperial ministries adopted the Tang's double-entry bookkeeping for administration of taxes and expenditures. The Goryeo kingdom (the modern name "Korea" derives from Goryeo) donned the imperial yellow clothing of the Tangs, used theThree Departments and Six Ministries imperial system of the Tang dynasty and had its own "microtributary system" that included the Jurchen tribes of north China. The Tang's double-entry bookkeeping was essential to managing the complex bureaucracies surrounding Goryeo tribute and taxation.[23]
Later dispersion of knowledge of double-entry can be attributed to the rise of Genghis Khan and later his grandson Kublai Khan who were deeply influenced by the bureaucracy of the Tang dynasty. The accountants were the first to enter a city conquered by Mongols, tallying up the total wealth of the city, from which the Mongols took 10%, to be allocated between the troops. Cities were conquered, then encouraged to remain going-concerns. Double entry bookkeeping played an important role in assuring the Mongols were fully informed about taxes and expenditure.[23]
Ratios, division and multiplication were difficult with Roman numerals, and were achieved through a method called "doubling."[23] Similarly, addition and subtraction involved an error-prone rearranging of Roman numerals. None of this lent itself to double-entry bookkeeping, an as a result, medieval Europe lagged Eastern and Central Asia in adopting double-entry bookkeeping. Beginning in 1202, the spread ofFibonacci’s bookLiber Abaci disseminated knowledge about double-entry andHindu-Arabic numerals widely to merchants and bankers, but because editions were hand copied, only a small group of people actually had access to its knowledge, primarily Italians. The earliest extant evidence of full double-entry bookkeeping appears in the Farolfi ledger of 1299–1300.[8] Giovanno Farolfi & Company, a firm ofFlorentine merchants headquartered inNîmes, acted asmoneylenders to theArchbishop of Arles, their most important customer.[24] The oldest discovered record of a complete double-entry system is theMessari (Italian:Treasurer's) accounts of the city ofGenoa in 1340. TheMessari accounts contain debits and credits journalised in abilateral form and carry forward balances from the preceding year, and therefore enjoy general recognition as a double-entry system.[25]
The Vatican, and the Italian banking centers of Genoa, Florence and Venice grew wealthy in the 14th century. Their operations recorded transactions, made loans, issued receipts and other modern banking activities. Fibbonaci ’sLiber Abaci was widely read in Italy, and the ItalianGiovanni di Bicci de’ Medici introduced double-entry bookkeeping for the Medici bank in the 14th century. By the end of the 15th century, merchant ventures in Venice used this system widely. The Vatican was an early customer for German printing technology, which they used to churn out indulgences. Printing reached a wider audience with widely available reading glasses from Venetian glassmakers (medieval Europeans tended to be far-sighted, which made reading difficult before spectacles). Italy became a center for European printing, particularly with the rise of Aldine Press editions of classics in Greek and Latin.[23]
It was in this environment that a close friend ofLeonardo da Vinci, the itinerant tutor,Luca Pacioli published a book not in Greek or Latin, but in a language that merchants understood well -- Italian vernacular. Pacioli received an abbaco education, i.e., education in the vernacular rather than Latin and focused on the knowledge required of merchants. His pragmatic orientation, widespread promotion by his friend da Vinci, and use of vernacular Italian assured that his 1494 publication,Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry and Proportion) would become wildly popular. Pacioli's book explained theHindu-Arabic numerals, new developments in mathematics, and the system of double-entry was popular with the increasingly influential merchant class. In contrast to scholarly abstracts in Latin, Pacioli's vernacular text was accessible to the common man, and addressed the needs of businessmen and merchants.[23] His book remained in print for nearly 400 years.
Luca's book popularized the words “credre” means “to entrust” and “debere” means “to owe”—the origin of the use of the words "debit" and "credit" in accounting, but goes back to the days of single-entry bookkeeping, which had as its chief objective keeping track of amounts owed by customers (debtors) and amounts owed tocreditors.Debit inLatin means "he owes" andcredit in Latin means "he trusts".[26]
Ragusan economistBenedetto Cotrugli's 1458[27] treatiseDella mercatura e del mercante perfetto contained the earliest known[28] manuscript of a double-entry bookkeeping system. But his manuscript was not published until 1573.[29]
Luca Pacioli'sSumma de Arithmetica, Geometria, Proportioni et Proportionalità (early Italian: "Review ofArithmetic,Geometry,Ratio and Proportion") was first printed and published inVenice in 1494. It included a 27-page treatise on bookkeeping,"Particularis de Computis et Scripturis" (Latin: "Details of Calculation and Recording"). Pacioli wrote primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from themathematical puzzles it contained, and to aid the education of their sons. His work represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. InSumma de arithmetica, Pacioli introduced symbols forplus and minus for the first time in a printed book, symbols which became standard notation in Italian Renaissance mathematics.Summa de arithmetica was also the first known book printed in Italy to containalgebra.[30]
So although Cotrugli was first, Pacioli was first to publication. Indeed, at the time of writing his work in 1494, Pacioli was aware of Cotrugli's efforts and credited Cortrugli with the origination of the double entry book keeping system.[31][32]
So although Luca Pacioli did not invent double-entry bookkeeping,[33] his 27-pagetreatise on bookkeeping is a seminal work because of its wide circulation and the fact that it was printed in thevernacularItalian language.[34]
Pacioli saw accounting as anad-hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books of account are at the direct basis of this system:
The ledger classes as the central document and is accompanied by an alphabeticalindex.[35]
Pacioli's treatise gave instructions on recording barter transactions and transactions in a variety of currencies – both of which were far more common than today. It also enabled merchants to audit their own books and to ensure that the entries in the accounting records made by their bookkeepers complied with the method he described. Without such a system, all merchants who did not maintain their own records were at greater risk of theft by their employees and agents: it is not by accident that the first and last items described in his treatise concern maintenance of an accurateinventory.[36]
Accounting as it developed in Renaissance Europe also had moral and religious connotations, recalling the judgment of souls and the audit of sin.[37]
The development ofjoint-stock companies (especially from about 1600) built wider audiences for accounting information, as investors without first-hand knowledge of their operations relied on accounts to provide the requisite information.[38] This development resulted in a split of accounting systems for internal (i.e.management accounting) and external (i.e.financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts byauditors.[9]
Modern Accounting is a product of centuries of thought, custom, habit, action, and convention. Two concepts have formed the current state of the accountancy profession. Firstly, the development of the double-entry book-keeping system in the fourteenth and fifteenth century and secondly, accountancy professionalization which was created in the nineteenth and twentieth centuries.[39] The modern profession of the chartered accountant originated inScotland in the nineteenth century. During this time, accountants often belonged to the same associations assolicitors, and the latter solicitors sometimes offered accounting services to their clients. Early modern accounting had similarities to today'sforensic accounting:[40]
In July 1854 the Institute of Accountants in Glasgow petitionedQueen Victoria for aroyal charter. The petition, signed by 49 Glasgow accountants, argued that the profession of accountancy had long existed in Scotland as a distinct profession of great respectability, and that although the number of practitioners had been originally few, the number had been rapidly increasing. The petition also pointed out that accountancy required a varied group of skills; as well as mathematical skills for calculation, the accountant had to have an acquaintance with the general principles of thelegal system as they were frequently employed by the courts to give evidence on financial matters. The Edinburgh Society of accountants adopted the name "Chartered Accountant" for members.[41]
By the middle of the 19th century, Britain'sIndustrial Revolution was in full swing, andLondon was the financial centre of the world. With the growth of thelimited liability company and large scale manufacturing and logistics, demand surged for more technically proficient accountants capable of handling the increasingly complex world of high speed global transactions, able to calculate figures like asset depreciation and inventory valuation and cognizant of the latest changes in legislation such asthe new Company law, then being introduced. As companies proliferated, the demand for reliable accountancy shot up, and the profession rapidly became an integral part of the business and financial system.
To improve their status and combat criticism of low standards, localprofessional bodies in England amalgamated to form theInstitute of Chartered Accountants in England and Wales, established byroyal charter in 1880.[11] Initially with just under 600 members, the newly formed institute expanded rapidly; it soon drew up standards of conduct andexaminations for admission and members were authorised to use the professional designations "FCA" (Fellow Chartered Accountant), for a firm partner and "ACA" (Associate Chartered Accountant) for a qualified member of an accountant's staff.
In theUnited States theAmerican Institute of Certified Public Accountants was established in 1887.
InCanada, theCanadian Institute of Chartered Accountants was incorporated in 1902,[42][43] theCertified General Accountants Association of Canada was founded in 1908 and theCertified Management Accountants of Canada was incorporated in 1920. These three separate Canadian accounting bodies unified as theChartered Professional Accountants of Canada (CPA) in 2013.
Double-entry accounting made it possible to calculate profit and capital and for managers, investors, and authorities to verify books. But at the time, it also had a moral implication. Keeping one's books balanced wasn't simply a matter of law, but an imitation of God, who kept moral accounts of humanity and tallied them in the Books of Life and Death. [...] Accounting was closely tied to the notion of human audits and spiritual reckonings.
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