Double Entry Bookkeeping System

• Accounting has a long history that can be traced back to the double-entry bookkeeping system.

Double Entry Bookkeeping System

• Luca Paciolo, an Italian monk and mathematician, provided the first complete description of the double-entry bookkeeping system in 1494.
• Paciolo did not invent it, as it had developed over time.
• Early segments included the collection of accounts receivable, which had an obvious "both sides" due to the physical/legal existence of cash and accounts receivable.
• The recording of transactions like sales and expenses took longer to develop as profit had no physical or legal form.
• Abstract concepts of income and capital were created which led to a complete double-entry system similar to what is used today.
• Mathematicians were drawn to the abstract nature of the system which included capital accumulation of income, and income as the rate of change of capital.
• Paciolo’s system became known as the "method of Venice" and was often included in mathematics texts.

Developments After 1494

• After 1494, the double-entry system spread throughout Europe, leading to further accounting advancements.
• The Dutch East India Company, established in 1602, was the first to issue shares with limited liability.
• These shares were transferable and traded on the Amsterdam Stock Exchange, also established in 1602.
• The joint stock company that included permanent existence, limited liability, and shares traded on a stock exchange then became more important.
• Investors needed financial information about companies whose shares they traded.
• Financial accounting transitioned from controlling merchant operations to informing investors.
• Trustworthy financial information was needed to serve the joint interests of firms and investors.
• This need led to the development of auditing and government regulation of financial reporting.

English Joint Stock Companies Act of 1844

• The English Joint Stock Companies Act of 1844 introduced the concept of providing an audited balance sheet to shareholders into law.
• This requirement was later dropped and reinstated in the early 1900s.
• Companies commonly provided information voluntarily, but the lack of accounting principles hindered its effectiveness.
• An accounting principle example, a controversy arose over whether amortization of capital assets must be deducted in determining income available for dividends.
  • The English courts ruled that it need not.

20th Century Developments

• In the twentieth century, major developments in financial accounting shifted to the United States due to its rapid economic growth.
• The introduction of corporate income tax in the U.S. in 1909 provided a major impetus to income measurement.
• This was influential in persuading business managers to accept amortization as a deduction.