Evolution of Accounting, U1.pdf

First Year B. Com. (Honours) 2024-25 Semester I Indian Knowledge System (IKS) HISTORY AND DEVELOPMENT IN ACCOUNTING Unit-I 1. INTRODUCTION Evolution of accounting is...

First Year B. Com. (Honours) 2024-25 Semester I Indian Knowledge System (IKS) HISTORY AND DEVELOPMENT IN ACCOUNTING Unit-I 1. INTRODUCTION Evolution of accounting is related to development of civilisation where the accounting practices developed to meet the needs of each civilisation. Accounting is a system of recording and summarizing business and financial transactions. For as long as civilizations have been engaging in trade or organized systems of government, methods of record keeping, accounting, and accounting tools have been in use. The history of accounting is a journey through time, reflecting the evolving needs of societies and economies. From clay tokens to double-entry bookkeeping, accounting has adapted and thrived, shaping the world of finance as we know it today. The history of accounting is a study of the evolution in accounting thoughts, practices and institutions in response to the changes in the environmental and social needs. History of accounting history helps in understanding our past and provides insight into present issues and practices. For instance, the late nineteenth-century commercial setting is sometimes seen as the origin of the accountant’s conservative approach to asset valuation. Some people (Accountants in particular) have a specific interest in researching the history of accounting in order to resolve any conflicts that may arise while carrying out their professional responsibilities. The study of accounting history, can yield insights that can be used to resolve accounting issues that exist in the present and assist one to anticipate future challenges. The review of the evolution of accounting can be classified into ancient accounting system, accounting in Prehistoric Egypt, Greece, China, Rome, European and Accounting System in the Medieval Era. Concerning the chronicles of the ancient accounting history, it was gathered that 5000 years before the advent of the double-entry accounting system, the Chaldaean, Babylonian, Assyrian and Sumerian societies were thriving in the Mesopotamian Valley, which produces some of the primogenital records of commerce. Between the Euphrates Rivers and Tigris, now known as the border of Iraq, intermittent flooding made the valley rich for agricultural purposes. As farmers prospered, both the small industries and service businesses became developed in the Mesopotamian Valley and its environs. Hence, the cities of Nineyah and Babylon became the center for country trading and commerce while the Babylonian became the business language all over the Near East. During this epoch, the rulers of Sumerian societies held most animals and land in belief for their ancestors, giving spur to the ancient record-keeping system. 1 of 6 It is believed that most business transactions were subscribed and recorded by the parties during this period. The scribe was the Mesopotamian corresponding of today's accountant. Though, his duties and responsibilities were similar, but more extensive. In addition to transaction write-up, he certified the agreements conformed with the code requirements details for the commercial transactions. During this era, private firms, palaces and temples, employed the service of an associate of scribes. Thus, it was acknowledged as a prestigious profession. The humid soil was molded into different adequate sizes and shapes to comprehend the agreement terms and conditions. With the usage of a timber rod with a triangular end, the scribe documented the particulars of the contracting parties, money and items exchanged and any other set of promises and agreements made. After which, the parties signed their names by pressing their respective seals on the tablet. During the ages of mass illiteracy, individuals carried their signatures inform of engraved stone amulets with wearer's mark around their necks. Habitually, the seals comprised the owner's full name and religious symbols. After the imprint, the scribe would dry the tablet in the sun for crucial transactions which needed an eternal record. 2. EVOLUTION OF ACCOUNTING 2.1 Arabian Civilisation Arabian Civilization introduced Arabic numeration which assisted them and other kingdoms in record keeping. Arabic numerals were used in place of Roman numerals. 2.2. Egyptian Civilization Egyptian bookkeepers associated with each storehouse kept meticulous records which were checked by an elaborate internal verification system. Accountants were supposed to be honest and accurate as irregularities disclosed by royal audits were punishable by fine, mutilation or death. Egyptian treated gold and silver not as units of fungible value but merely as articles of exchange. Because of illiteracy, lack of coined money, inability to describe all goods in terms of single valuation measure, Egyptians accounting did not progress beyond simple list making during their years of existence. The Scribe (similar to an accountant in earlier times) maintained record on papyrus (feathered quill) as the writing instrument. Numerous such documents have been found showing exactly how much was received, from whom and when it came in and the details of how it was used. 2.3 Greek Civilization Introduction of coined money was the most important contribution of Greek civilization to accountancy about 600 B.C. As compared to other civilizations, Banking was more developed in Greece. Bankers kept account books, changed and loaned money, and arranged cash transfers for citizens through affiliate banks in distant cities. Greek civilization possessed a sophisticated system of public administration with accounting and auditing functions. Banking and other commercial activities were conducted in 2 of 6 ancient Greece and accounting played an important role in them. As evident in Zenon Papyri, Management Accounting was used in business. Papyrology refers to study of some of the most ancient documents that have been preserved from the ancient Mediterranean. Mostly they are written in Greek but also in numerous other languages such as demotic Egyptian, Latin, Coptic, Hebrew and Arabic. The system employed with Zenon Papyri with respect to data generation, recording and analysis were sufficient to detect error, fraud and inefficiency in the system. The Zenon Papyri approach had little concern for decision making, efficiency, or profitability. Accounting system, at that time, avoided financial reporting to outsiders or determination of income or tax due to government and allied agencies. In the 5th Century B.C., Greece used Public Accountants to allow its citizenry to maintain real authority and control over their government finances. Members of the Athens Popular Assembly legislated on financial matters and controlled receipts and expenditure of public monies. 2.4 Roman Civilization Roman Civilization, extended from about 700 B.C. to 400 A.D. No accounting records have survived the fall of Roman Civilization because of use of wax tablets which was a most perishable material. Also, remaining physical record were destroyed due to attacks by Goths and Visigoths. From the legal codes of Gaius and Justinian, in the oration of Cicero and other literary sources, it can be surmised that the Romans used the bilateral account form and even that the double entry system was known fifteen hundred years before Pacioli. They developed Calculus as a tool of accounting and provided principles of arithmetic and numerical manipulation which undergird our present-day computers. Zenon system was developed in 5 th Century B.C. and later modified by Romans as the Memorandum book (adversaria in Greek) and the monthly transfer of entries to the ledgers (codex tabule in Greek) from which today’s ledger has derived its name “codex”. 2.5 Chinese Civilization China used accounting mainly as a means of evaluating the efficiency of governmental programs and civil servants who administered them. Under Chou dynasty (1122- 1256), accounting system, accounting system were used by feudal expansionist for merchants and estates in China. Officials were needed to collect taxes in the form of goods for use by the imperial government. The surplus products were collected for exports outside China. There was a provision for stringent penalty for non-compliance by defaulters. The funds accounting system exists in the form of general reserve fund and special reserve fund. The sources of goods, the purpose for which they were used, the frequencies of taxes being levied and each tax ceiling were the bases of accounting system. 3 of 6 China used money as a means of exchange much before it appeared in Europe, in a way, they were originators of the practice. Evidences show existence of sophisticated forms of government accounting, including both historical accounting and budgetary control in China as early as 2000 B.C., accompanied by an audit function performed by a high and independent public official. 2.6 Accounting in Mesopotamia, Circa 3500 B.C. Five thousand years before the appearance of double entry, 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. During this era (which lasted until 500 B.C.). Sumeria was a theocracy whose rulers held most land and animals in trust for their gods, giving impetus to their record- keeping efforts. Moreover, the legal codes that evolved penalized the failure to memorialize transactions. The code of Hammurabi consists of 282 laws and covered the subjects of: religion, military service, trade, slavery, duties of workers, code of conduct and law. Which was handed down during the first dynasty of Babylonia (2285 - 2242 B.C.). The Mesopotamian equivalent of today's accountant was the scribe. His duties were similar, but even more extensive. In addition to writing up the transaction, he ensured that the agreements complied with the detailed code requirements for commercial transactions. Temples, palaces and private firms employed hundreds of scribes, and it was considered a prestigious profession. Moreover, the legal codes that evolved penalized the failure to memorialize transactions. The renowned Code of Hammurabi, handed down during the first dynasty of Babylonia (2285 - 2242 B.C.), 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 (Previts, Parker and Coffman, 1990). Thus, it is believed that most transactions were recorded and subscribed by the parties during this period. When writing emerged in the fertile Mesopotamian valleys it did so in the form of commercial records. The famous Code of Hammurabi (circa 2285-2242 BC) contained several rules pertaining to accounting, for instance:  If the merchant has given to the agent corn, wool, oil, or any sort of goods to traffic with, the agent shall write down the price and hand over to the merchant; the agent shall take a sealed memorandum of the price which he shall give to the merchant.  If an agent has forgotten and has not taken a sealed memorandum of the money he has given to the merchant, money that is not sealed for, he shall not put in his accounts. A large number of Babylonian accounting records survive to this day. They refer to such activities as selling, leasing, hiring, lending, and joint venturing. Dating from circa 4 of 6 2600 BC, the records are cast in clay which, when moistened, would readily accept the impressions of a stylus. Permanence was then obtained by baking or sun-drying the tablets. Although accounting was better appreciated as a discipline during the Pacioli era and the Renaissance period, its ancient history provided the bases for its evolvement and the general development of human civilization. 2.7 Accounting in Medieval Period (1130AD-1485) The study of accounting became stagnant after the fall of the Roman Empire. During this time that the administration and conservatism doctrines were firmly established in accounting. The focus was on certain feudal organizations and medieval reports. The economic, political, and social structure of the feudal system was intrinsic. The Domesday book, an accounting text from this era that lists all real estate and taxes owed on it, has survived. Annual lease descriptions, fines, and taxes paid on behalf of the King of England were included in these texts, which were written on papyrus and coiled in tubular shape. William the Conqueror seized all the wealth for the King when he invaded England. According to Bishop Robert of Hereford, the King's people searched throughout England in 1086 to find each English mannae's (feudalist) immovable property, including their land, dwellings, captive and free populations, horses, and other animals. 2.8 The Renaissance (The Double Entry Accounting System, 1494) Renaissance is a French word for ‘Cultural Rebirth’. It is in this period that people started relearning the teachings of scholars from Ancient Greece, Rome and other ancient societies. It is often considered as start of the modern age. As we move to the period of the Renaissance (1300-1600 AD), significant impetus to accounting hailed from the Italian peninsula. Synthesizing the art of accounting to his time and adding his own unique genius, a mathematician named Frater Luca Bartolomes Pacioli published his famous treatise on accounting on November 10, 1494. It bore the awesome title of Summa de Arithmetica, Geometria, Proportioni et Proportionalita, which means ‘Everything About Arithmetic, Geometry and Proportion’. The double-entry system of accounting, devised by Pacioli who was a true renaissance man, with knowledge of literature, art, mathematics, business and the sciences, at a time when few could even read. Frater Luca Bartolomes Pacioli acquired an amazing knowledge of diverse technical subjects – religion, business, military science, mathematics, medicine, art, music, law and language. He accepted the popular belief in the inter-relatedness of these widely varying disciplines and in the special importance of those, such as mathematics and accounting, which exhibit harmony and balance remains intact to this time, surviving the onslaught of computerized accounting systems. Simply stated, the concept behind double-entry is that every accounting action has a cause-and-effect relationship. The worldwide use of double entry owes to the work of an Italian monk, in 1494, to Luca Pacioli. It was developed to ensure that every 5 of 6 transaction has equal and opposite effect. His book introduced concepts such as debits and credits, assets, liabilities, and owner's equity, which form the foundation of modern accounting. One chapter of his book, ‘Particularis de Computis et Scripturis" ("Details of Calculation and Recording’), on the topic of record keeping and double-entry accounting, became the reference text and teaching tool on those subjects for the next several hundred years. The chapter educated readers about the use of journals and ledgers; accounting for assets, receivables, inventories, liabilities, capital, income and expenses; and keeping a balance sheet and an income statement. However, Pacioli did not claim that he was the inventor of double entry book-keeping but spread the knowledge of it. It shows that he probably relied on then–current bookkeeping manuals as the basis for his masterpiece. In his book, he used the present-day popular terms of accounting Debit (Dr.) and Credit (Cr.). These were the concepts used in Italian terminology. Debit comes from the Italian debito which comes from the Latin debita and debeo which means owed to the proprietor. Credit comes from the Italian credito which comes from the Latin ‘credo’ which means trust or belief in the proprietor or owed by the proprietor. In explaining double entry system, Pacioli wrote that ‘All entries… have to be double entries, that is if you make one creditor, you must make some debtor’. He also stated that a merchants responsibility includes to give glory to God in their enterprises, to be ethical in all business activities and to earn a profit. He discussed the details of memorandum, journal, ledger and specialised accounting procedures. 2.9 Western European (Latin Italy, 1495) The conventional understanding suggested that historical accounting could be categorised into distinct periods: pre-1495, 1495-1800, which placed important emphasis on double-entry bookkeeping, and a period of evolution. In 1581, the establishment of the inaugural accounting institution took place in Boudqua City. The Messari accounts of the Republic of Genoa in 1801 represent the earliest known instance of a comprehensive double-entry system. The Messari account is commonly recognized as a dual-entry system due to its inclusion of journalized debits and credits in a bilateral format, alongside carried-over balances from the preceding year. Towards the conclusion of the 15th century, the aforementioned system, which entailed the bestowal of exclusive rights over a particular area, was extensively embraced by the financiers and traders of Florence, Genoa, Venice, and Lubeck. The British East India Company, which was established between 1801 and 1995, is broadly regarded as the most prominent and recognisable example. Queen Elizabeth II gave exclusive authority to engage in commerce with all nations located east of the Cape of Good Hope. During this time period, enterprises would function as the government's representative in foreign countries, earning revenue. Consequently, the enterprise became increasingly intertwined with British military and colonial tactics, similar to the dependence of most British companies on the British Navy's ability to control commercial pathways. 6 of 6