What Are the Origins of Accounting?
Accounting is more than just the act of keeping a list of debits and credits. It is the language of business and, by extension, the language of all things financial. Our senses collect information from our surroundings that our brains then interpret; accountants translate the complexities of finance into information that the public can understand. In this article, we will follow accounting from its roots in ancient times to its modern equivalent.
- Bookkeepers emerged when societies used the barter system and needed to record the agreements they were making regarding goods or service transactions.
- Later accounting ledgers were completed by hand and used either a single-entry or double-entry system.
- Luca Pacioli, a monk, laid the groundwork for modern accounting creating independent records that provided a clearer picture of an entity's financial activities—the financial statements.
- The railroads and the emergence of corporations were the stimulus for the establishment of accounting professionals.
Accounting is a language that dates back thousands of years and one that has been used in many parts of the world. The earliest evidence of this language comes from Mesopotamian civilizations. The Mesopotamians kept the earliest records of goods traded and received, and these activities are related to the early record-keeping of the ancient Egyptians and Babylonians. The Mesopotamians used primitive accounting methods, keeping records that detailed transactions involving animals, livestock, and crops. In India, philosopher and economist Chanakya wrote "Arthashasthra" during the Mauryan Empire around the second century B.C. The book contained advice and details on how to maintain record books for accounts.
Bookkeepers most likely emerged while society was still using the barter system to trade (pre-2000 B.C.) rather than a cash and commerce economy. Ledgers from these times read like narratives with dates and descriptions of trades made or terms for services rendered.
Below are two examples of what these ledger entries may have looked like:
- Monday, May 12: In exchange for three chickens, which I provided today, William Smallwood (laborer) promised a satchel of seed when the harvest is completed in the fall.
- Wednesday, May 14: Samuel Thomson (craftsman) agreed to make one chest of drawers in exchange for a year's worth of eggs. The eggs are to be delivered daily once the chest is finished.
All of these transactions were kept in individual ledgers. If a dispute arose, they provided proof when matters were brought before magistrates. Although tiresome, this system of detailing every agreement was ideal because long periods could pass before transactions were completed.
New and Improved Ledgers
As currencies became available and tradesmen and merchants began to build material wealth, bookkeeping evolved. Then, as now, business sense and ability with numbers were not always found in one person, so math-phobic merchants would employ bookkeepers to maintain a record of what they owed and who owed debts to them.
Until the late 1400s, this information was arranged in a narrative style with all the numbers in a single column, whether an amount was paid, owed, or otherwise. This is called single-entry bookkeeping.
Here's a sample of a bookkeeper's single-entry system. You can see how the entries are laid out with a date, description, and whether it was owed or received by the symbols in the amount column.
|Monday, May 12||Bought one sack of seeds||-$48.00|
|Monday, May 12||Sold three chickens||+$48.00|
|Wednesday, May 14||Bought a chest of drawers||-$900.00|
|Wednesday, May 14||Sold one year's worth of eggs||+$900.00|
The bookkeeper had to read the description of each entry to decide whether to deduct or add the amount when calculating something as simple as monthly profit or loss. This was a time-consuming and inefficient tallying method.
The Mathematical Monk
As part of the tradition of learned monks conducting high-level scientific and philosophical research in the 15th century, Italian monk Luca Pacioli revamped the common bookkeeping structure and laid the groundwork for modern accounting. Pacioli, who is commonly known as the father of accounting, published a textbook called "Summa de Arithmetica, Geometria, Proportioni et Proportionalita" in 1494, which showed the benefits of a double-entry system for bookkeeping. The idea was to list an entity's resources separately from any claims on those resources by other entities. In the simplest form, this meant creating a balance sheet with separate debits and credits. This innovation made bookkeeping more efficient and provided a clearer picture of a company's overall strength. This record, however, was only for the owner who hired the bookkeeper. The general public had no access to such records—at least not yet.
Here is what the double-entry system may have looked like. You can see the two separate columns for debits and credits, along with the description of each transaction and how it was paid—cash or commodities. In this case, it was chickens, seeds, eggs, and furniture.
|Sold Chickens||Debit Cash||$48.00||-|
|Sold Chickens||Credit Chickens||-||$48.00|
|Bought Seeds||Debit Seeds||$48.00||-|
|Bought Seeds||Credit Cash||-||$48.00|
|Sold Eggs||Debit Cash||$900.00||-|
|Sold Eggs||Credit Eggs||-||$900.00|
|Bought Chest of Drawers||Debit Furniture||$900.00||-|
|Bought Chest of Drawers||Credit Cash||-||$900.00|
Coming to America
Bookkeeping migrated to America with European colonization. Although it was sometimes referred to as accounting, bookkeepers were still doing basic data entry and calculations for business owners. However, the businesses in question were small enough that the owners were personally involved and aware of the financial health of their companies. Business owners did not need professional accountants to create complex financial statements or cost-benefit analyses.
The American Railroad
The appearance of corporations in the United States and the creation of the railroad were the catalysts that transformed bookkeeping into the practice of accounting. Of the two factors, the railroad was by far the most powerful. For goods and people to reach their destinations, you need distribution networks, shipping schedules, fare collection, competitive rates, and some way to evaluate whether all of this is being done in the most efficient way possible. Enter accounting with its cost estimates, financial statements, operating ratios, production reports, and a multitude of other metrics to give businesses the data they needed to make informed decisions.
The railroads also allowed information to be passed from city to city at great speed. Business transactions could be settled in a matter of days rather than months. Even time was uneven across the country before the railroad. Previously, each township decided when the day began and ended by general consensus. This was changed to a uniform system because it was necessary to have goods delivered and unloaded at certain stations at predictable times.
The shrinking of the country thanks to the railroads and the introduction of uniformity encouraged investment, which, in turn, put more focus on accounting. Up to the 1800s, investing had been either a game of knowledge or luck. People acquired issues of stock in companies with which they were familiar through industry knowledge or acquaintanceships with the owners. Others blindly invested according to the encouragement of relatives and friends. There were no financials to check if you wanted to invest in a corporation or business; thus, the risks involved ensured that investing was only for the wealthy—a rich man's sport tantamount to gambling. This image persists today.
Early Financial Statements
To attract investors, corporations began to publish their financials in the form of a balance sheet, income statement, and cash flow statement. These documents were proof of a company's profit-making abilities. Although investment capital stimulated operations and profits for most corporations, it also increased the pressure on management to please their new bosses—the shareholders. For their part, the shareholders did not completely trust management, which exposed the need for independent financial reviews of a company's operations.
Birth of a Profession
Accountants were already essential for attracting investors, and they quickly became essential for maintaining investor confidence. The accounting profession was recognized in 1896 with the establishment of the professional title of certified public accountant (CPA). The title is awarded to those who pass state examinations and have three years of experience in the field. The creation of professional accountants came at an opportune time. Less than 20 years later, the demand for CPAs skyrocketed as the U.S. government, in need of money to fight a war, began charging income tax.
Technology has changed accounting today. Bookkeeping is now automated. Since the first records were kept in America, bookkeepers have used a number of tools. The adding machine in 1890 helped early accountants calculate receipts and quickly reconcile their books. When IBM released the first computer in 1952, accountants were among the first to use them. Today, technology has brought accounting software such as Quickbooks. These new advancements are much more intuitive, helping accountants do their job quicker, more accurately, and with more ease.