Accounting: Origin and Historical Evolution

Unidad I: Origin and Historical Evolution of Accounting

• Historians trace the origin of accounting back 6,000 to 4,000 years before Christ
• Accounting's purpose from its remote origin was to preserve evidence of economic events
• 3 key determinants influenced humans to accumulate data about activities generally and in reference to economic events:
• Man forming a social unit (family or tribe), connecting them to others out of necessity
• Sufficient economic activities of enough importance which made it necessary to safely preserve information
• Community accepted method for preserving data about past events that could be recorded in numbers with a common denominator of value (currency)

Chronological Periods of Accounting Development

• Accounting researchers classify the historical evolution of accounting into chronological periods
• This is for analyzing the advancement of its development and grounding the discipline within the general framework of knowledge
• Chronological periods of accounting development include:
• Empirical period
• Restructuring period
• Technical administrative period
• Scientific-economic period

Empirical Period

• The period is the prehistory of accounting and dates back 4,000 years before Christ
• Extends to the end of the 13th century, or sometimes the 15th century
• Accounting records started as mere inscriptions on stone, clay tablets, and papyrus
• These detailed changes operated in estate assets and personal relationships so that the amounts corresponding to the debtors and creditors negotiating were known

Restructuring Period

• The double entry bookkeeping appears in this period
• It spans from the 10th century for some, and the 13th to 15th century for others
• The first published book on double entry bookkeeping allegedly appeared on November 10, 1494
• It was written by Italian monk Fray Luca Bartolomeo Pacioli
• Pacioli's book, Suma Arithmetica, Geometria, Proportioni e Proportionalita, is split into titles and each title has its own treatises
• Pacioli explains double entry bookkeeping method in the book, as well as "Memorials" and the Ledger
• Pacioli never claimed to be the inventor/expositor of double entry bookkeeping
• He was the first to publish an accounting book superior in precision/clarity to later publications, up until the end of the eighteenth century

Technical Administrative Period

• This period begins in the 18th and extends to the 19th century
• The Italian accounting literature of this period seeks the rationale and essence of accounting and profiles its scientific content

Scientific-Economic Period

• It spans from the mid-19th century to present day
• Italian authors that stand out in this stage, followed by central European countries
• Neocontist schools are advanced that develop the concept of economic value as a fundamental element of Accounting
• Fabio Besta gave a new orientation to accounting studies in 1872
• He was the leading representative of the Controlist or Materialist School
• He claimed that Accounting is the science of economic control of estates
• Besta is considered the creator of the science of accounting for Italian theorists

Unidad II: Economic Activity

• Economic activity: the effort by a man or entity to obtain scarce means and optimal use to fulfill certain goals

The Entities

• The dictionary of the Royal Spanish Academy of Language defines an entity as "that which is, exists, or may exist"
• It comes from Latin "ens, entis: ser"
• "Ente" is synonymous with person; the source of concepts of natural entities, physical persons, collective entities, ideal persons, and legal entities

The People

• People: all entities capable of acquiring rights and entering into obligations
• They are economic entities as represented by social economic entities that acquire, produce, and consume wealth

The Companies

• A company: an economic activity dedicated to producing goods and services, as well as a community of technique contributions, labor, and capital
• A company exist in diverse forms

Accounting

• This discipline studies patrimony in its static and dynamic aspects, both quantitative and qualitative
• It aims to understand the true situation of a company and its results at any moment
• It provides direction with precise information for making rational decisions historically and provisionally
• Accounting objectives includes:
• Establishing a system for registration
• Providing information to take decisions
• Providing the true patrimony of the entity
• Supplying true results of the company
• Establishing a control system that involves measuring and evaluating compliance with goals, targets, and organization plans
• Serve as proof and source of information in court as accounting records prove knowledge of rights and obligations of tradesmen to third parties
• Enables to make predictions on the future of the company by assessing the resources available in the coming periods

Functions of Accounting

• Identify relevant economic activities, transactions, and events for accounting
• Measure and present accounting information
• The info should be communicated regularly expressed in money
• Record trading transactions in accounting books, files, and modern storage media
• Classify accounting data to be adequate for assets, economic and financial data to a logical and useful conceptual framework
• Summarize and present registered and classified information to the users
• Interpret by presenting the information through financial accounting statements

Characteristics of Accounting Information

• Opportunity: the characteristic that indicates that financial information must be available when needed so users can apply it to make decisions on time and achieve objectives
• Verifiability: it allows accounting information production that is revised after issuing
• Objectivity: it represents the economic reality of an entity as accounting records are created following established guidelines and rules that must be observed
• Reliability: a quality of accounting information indicating it is correct and factual

Usefulness

• Each user values accounting information with different purposes, but most is used for the financial standing of a company
• Information is presented generally through financial statements including balance sheets, income statements, changes in equity, and cash flow
• These are beneficial for people and entities are interested in learning the situation of the business
• These include the business management, shareholders, investors
• Uses and users of accounting information:
• Directors and Managers.
• Current and Potential Shareholders:
• Employees involved in associations or trade unions
• Financial Creditors are required to determine whether the loans granted to the company together with relative interests shall be charged if expired

The Accounting as a Profession

• A professional accountant occupies the same professional hierarchy scale as lawyers, engineers, architects, doctors, chemists, etc.
• This is due to the theoretical/practical training acquired from higher education and necessary experience for professional performance plus continued education
• Trading activities have increased and there are new business practices
• Industrial technology constantly studies and develops new manufacturing methods, products, etc.
• Tax laws increase complexities in activity and require new registration techniques, information, controls, audit services and administrative/fiscal advice
• Certified Public Accountants who present independent services are constantly needed
• Most key positions in the private sector as well as government are occupied by educated and experienced men and women in accounting
• Accountants are valuable and highly respected people in their community whose services and knowledge are needed

Independent Exercise

• Independent professional activities includes:
• Audit services
• Accounting consulting services
• Accounting registration services for small businesses
• Tax consulting services
• E-data processing consulting services
• Consulting services in the financial area
• Other Professional Services

Exercise in the Relation of Dependence

• Functions in administrative accounting area for private, public, or semi-public business
• Functions in accounting and control areas for the central administration of government
• Functions in the financial area of international financial institutions
• Exercise teaching at institutions on all levels of education

Unit II: The Account

• The account is the instrument used by the accounting technique to record quantitative and qualitative variations in assets, liabilities, and net equity
• Variation are due to transactions performed by the entity

Functions of the Accounts

• Classifying Function: assigning an account to each asset item, each function, or each set of similar transactions
• Historical Function: collecting each account, the accounting events relating to each asset are recorded to show occurances related to the company history
• Numerical Function: assigns each accounting event in the account to a numerical value
• Representation Function: shows how individual accounts depict the asset item under its name, while the accounts as a whole (Balance) provide an overall view of the economic unit's equity
• Forecasting Function: it can be logically based with the knowledge of current static situations

Structure or Form of the Account

• The account is divided into two essential sectors, which known as the DEBIT and CREDIT sides
• Traditionaly, the debit side is located on the left side and the credit on the right

Mathematical Elements of an Account

• Accumulation of additions
• Accumulation of subtractions
• Measurement of the asset item

Accounting Language in Relation to Accounts

Opening an Account

• Designating or heading an account and recording its classification for controlling certain patrimony elements of the company

To Charge, Debit Account

• Recording or annotating a numerical measurement with date and description of each Debit transaction

To Credit an Account

• Recording or annotating a numerical measurement with date and description of each Credit tranaction

Debit of an Account

• The total value of Debit charges

Credit of an Account

• The total value of Credit charges

Account Balance

• Calculating the difference between Debit and Credit, either a positive-Debit or negative-Credit Account balance

To Balance an Account

• Register the Account Balance at the side of the less total sum, either Debit or Credit side

To Close an Account

• Make an addition of Debit and Credit sides; registering the same total sum in the same side; tracing a double line below, and either mark and invalidate with a Key or cross line mark

Reopen an Account

• Adding and registering into the great total sums in each Debit or Credit side, and copying down, into the same side below (but at a brand starting folio of the book), the Account Balance value

Entries

• An entry in bookkeeping indicates every notation made to the Journal registry, at wich registry a transaction made up or debtor and lender data, is to be explained in brief

Categories and Class Types on Entries

• Categories of registration includes simple entries as "Incomes, Outcomes" etc
• Another category could be the account relation "Debit, Credit" etc

Simple Entry

• In this class are:
• One single debit account plus One Credit account
• Two or more debit accounts plus One Credit account
• One debit account, plus Two or more Credit accounts

Chart of Accounts

• A chart of accounts defines all active accounts for a entity, systemically ordered, so that to explain each account function into a determined system of accounting to be applied

Targets on Charts of Accounts

• Chart targets: must reach general accounting targets; and allow data registration correctly with no mistake or doubt when classifying transactions
• Charts must also include correct naming to avoid misundertandings

Manuals with Chart of Accounts

• Are documents in which accounting are to follow in all registration tasks, including each account and its due meaning, plus the way to act facing usual or unusual transactions.
• Manuals must state chart listings, and account listings to name them in each transaction

Account Listings, Account Meaning

• Account listings: Assets/Liabilities/Equity as to list, should be included, so that registrations take the same basic criteria
• Account meanings are included (as a foot note), as to be used in each registry, and avoid misapplication of them

Current vs Non Currents

• Transactions are to separate "Common-Usuals" registrires
• "Not current" or more complex registry entries are also registered

Unit III: Equity

• Equity: the set of riches belonging to a natural or legal person (asset), upon which a series of obligations (liabilities) and whose difference results in effective capital (net assets) impinges
• It is the set of assets, rights and obligations, duly valued in relation to the purpose to which they are intended, existing at a given time and belonging to a natural or legal person

Division of Equity

Asset

• Includes the set of assets and rights in favor of a person or company

Liability

• Represents all obligations or debts owed by a person or company
• It can also be defined as the contribution or participation of third parties in the financing of a company

Net Equity

• The arithmetic difference between the values of assets and liabilities that constitute the liability
• Net Equity represents the initial contribution of the owner to finance business

The Equity Equation

• Assets = Liabilities + Equity

Elements of Equity

• Goods, rights and obligations
• Cash, current drafts
• Items for sale
• Deposito on bank account
• Deposit in savings Banks
• Fixed term deposit
• Promissory notes to the order of the merchant
• Credits not documented in favor of the merchant
• Unrecorded debts to the merchant
• Movable, property business use
• Vehicles, property business
• Local property business (land buildings)
• Showcases, electrical installations, etc.
• Proprietary contribution
• Social Capital
• Contribution of non-profit entities

Patrimonial Masses

• Grouping patrimonial elements with similar characteristics
• For example, all equity elements that have absolute liquidity such as Cash, Bank, Savings Bank will be grouped under the title of Availability
• Items for purchase and sale are grouped under the account Merchandise under the heading of Current Assets
• The main sources of resources or funds of a company tend to be:
• Aportaciones de capital
• Benefits of previous periods
• Benefit of the analyzed period

Accounting Facts

• All economic events - administrative that affect patrimony of company are susceptible of be captured, represented and measured by Accounting

Classes of Accounting Facts

• Permutative
• Modificativos
• Mixed

Permutative Accounting Facts

• Facts that altered Assets, Liabilities either Capital but without modify the amount of Equity.
• Classes:
• Permutative Assets
• Permutative Liabilities

Unit IV: Accounting Facts

• Records in accounting in order to present commercial and trading data, that support such books and files, are linked to such entries
• Such is in order of to make all entries transparent and supported into the accounting facts
• For long, a lack of data entries will put every accounting fact into a suspected unprooven truth

Legal Books of Trading

• A legal book of trading must be filed before court, and be checked by court secretary or attourney
• This will give trust and support to that book and any data it says
• Books are: Journal Book, Inventories and Balance Books
• Others are: Mayor (optional), Payroll registries, VAT Registries
• Any file should be printed (or previously wrote), with no ink over writing, no blank spaces, everything duly signed by trader / accountancer etc.

Documentation

• Documents (either Trading type) will have legal support to data being registered, so that data be trustable at time of checking such registries: invoices etc
• Those should be carefully registered / filing in order to keep trace of any kind of financial movement
• Errors when registry, should be said in a next registry, by saying "wrong entry" and "new correction", so that to express any mistake

Unit V: Merchandise

• Merchandise: "what can be sold or bought"
• "Merchandise" Account: in the asset side or Active Balance, to keep in control all data relatives to existences
• Active Circulating items are also counted as "Merchandise"

Trading Operations-Buy and Sell Merchandise

• Commercilization enterprises obtain Revenue from products, either called Inventories of Merchandise or simply Inventories
• Inventories include every kind of Merchandise owned by such enterprise, that will sell in short time, either if it purchase, sell or manifactures

Valuation System

• Main targets and important functions to keep in count
• The cost of the existences includes every cost as result to give all conditions needed; either aquire or transform-it into such state of being sold

Aquisition Cost

• Includes:
• Price to Purchase
• Import Duties taxes
• Shipping Costs and/or Freight and Handing
• Storage and every atribuable expenses it is required until arrive to sold it.

Conversion Cost

• Are every items to add, at every piece, in all production
• Are calculated as follows and include:
• Manpower Salary-Payed Taxes and every social tax and fee added to total. Total direct man power.
• Indirect costs: power services, machine or local maintainces if there is production plant, indirect manpower if any, indirect machines involved in production, all taxes by law except Income Tax.

Storage Services in the Building

• Storage inside the building, must consider the part of the local used in square meters to storage products
• Such portion, at every m2 value has to be added
• Storage outside the building if the case, it can be contracted to others, and each cost is added as such

Inventory Value

• There should be a system to determine each inventory item:
• Identifying, at every items, each single part so that to know all data since purchase to sell
• PEPS (first entry, first exit)
• First items will be costated in sale; as been long at the company it should be sell, and value
• UEPS (last entry, first Exit)
• The last item at price market are being sold, to consider current prices

Unit VI: Year Settlement

• Liquidation Documents, plus Controls to each registrires facts, to show transparence
• These documents are a copy to others (Customers, others suppliers)
• These Documents will grant transparencies, and security that money were deposited / Pay outs were correct
• Humans, as to keep all data right and trustable, should check every paper in order to avoid confussion at balance closure.

Accounting Basics

• Accounting facts through differet papers or files must be check, as man are subjected to mistakes
• Reports should be so valued in case there is transparency, or they will have no value
• The data, can be compare and contrast against every single form of registry
• Most used method, are making a list and point one to each in both, so that to see everything registered correctly

Agreements on Modifications

• If there exists a missing registry of data, or there are many registry mistakes, it should be add information to the register
• If there exists patrimonial mistakes like "equipments are listed at wrong value", also adjust is required so that registry reflect real numbers
• Either if exists values like tax documents previously paid, the situation is the similar
• These previous facts are added so that to show a fair registry of accounting

Balance General and Adjustments

• Some values can be adjusted as:
• To cash registry, add all values on checks, cash add any kind of item, to show the real cash
• Adjust on merchandise

Unit VII: The Accounting Period

• The accounting cycle or the process of accounting includes a series of orderly and systematic recording of accounting documents
• It includes all kind of checks
• It also covers making the books, and doing the financial statements

Steps in an Accounting Period

• The starts of a period
• The registry to activity
• The measure of result and closure of a financial year

Unit VIII: Trader Laws

• This is a law set to control trades, and activities as so to force taxes to people whom is involved in such situations
• It controls rights/obligations, legal competence to make trading, documentations and contracts to be agreed by traders
• If legal procedures do not cover on the trade, civil code laws are applied
• Customs are taken for granted, as long is not againts laws

A Trader or Commercial person

• The commerce it self it will have its own economical aspect, with freedom and been safe to operate
• By this trades will pay sales, buy sell so to transform products in market
• This law states taxes to both of people being involved in contract
• As article 71, this indicates several forms of commerce, being trade or service
• All items should be pay at Value Added Tax IVA, which is for the services offered, rentals, sell or buy.

About Legal Enterprises

• These are a type of business, and a subject by law to be controlled, and has to be considered legally
• They has to be founded over some capital, some responsability to their associates, and will be formed by a contract or in a book
• Contracts or books are then presented to the law authorities

Cooperatives

• The law is to boost social and economical aspect of their associates
• Which means that cooperativies offers best loan and investment and savings to a group of subscribed people

Regarding Social Security IPS

• Social Security benefits for traders are paid by the trader, and for workers both of the employer and staff
• They are a fixed ammount that should be always put at the payroll so that people can have certain medical and legal help if needed

Explore the historical roots of accounting, tracing its origins back to 6,000-4,000 BC. Discover the key determinants that led to the accumulation of economic data. Learn about the chronological periods of accounting development and how they shaped the discipline.