History of Accounting Thought

1. History of Accounting Thought

2. Accounting is a function of the society and environment (Principles, procedures, concepts etc. are governed) E.g. Industrial revolution, Hike of oil prices, corporate social responsibility • No much contribution from countries like India, Sri Lanka (Development stage, academic research ?) • The importance of knowing history: to understand the; • Present condition & • What will happen in future

3. The Development • Early forms of measurement record keeping • Before even 4000 B.C. Clay Tablets were used in Mesopotamia for recording purposes • In 600 B.C. – Advent of Coinage changed the form of record keeping methods. But had a very limited influence due to very slow adoption • Earliest written documents in Accounting • Accounting records are found in Babylonia, Egypt, China and India • Most of the records are in physical quantities • Greeks and Romans expressed both in money and goods

4. Purposes of these records • To keep track • Exercise control over (the wealth entrusted) • The Stewardship Function • The statement prepared is the ‘Charge and Discharge Statement’ for one year • The Charge Section: Cash and goods held at the beginning + collected during the year by the steward • The Discharge Section: Cash and goods expensed by the steward on behalf the owner

5. The Practice of the Double Entry System • Not known when and where originated • Was described by Luca Pacioli • Without any change still it is in practice • The Industrial Revolution: • Had a profound effect on Accounting • Invention of powered machinery, factories, large scale production required changes in accounting. The main change is from domestic system to factory system • Under domestic system: records had to be kept to ensure they are not used for their own use

6. The Industrial Revolution: (Contd..) • Factory System + Railways lead to depreciation accounting, cost accounting techniques (Fixed Cost Vs Variable Cost, Overhead Allocation & Absorption) etc.

7. Development from Pacioli to Present Day The development is divided in to 5 arbitrary stages for convenience; • 1494 – 1775 • Period of stagnation • Society changed very little • Social and economic development was very low • Predominant form of business was sole proprietorships • 1775 – 1850 • Also a period of stagnation • Business form: sole traders, but some partnerships may have existed

8. Development from Pacioli to Present Day • 1850 – 1900 • Post industrial revolutionary period • Businesses were in corporate form • The entity concept was emphasized • The P& L got more prominence than B/S • The Audit function was important • 1900 - 1950 • Emphasis changed from stewardship function to decision accounting • Cost accounting methods were improved • In UK the P&L become mandatory along with the B/S

9. Development from Pacioli to Present Day • 1900 – present day • Has grown very rapidly • New concepts such as green accounting, environmental accounting, human resources accounting, forensic accounting has emerged • Has stepped in to a knowledge paradigm

10. Theories of Accounting • The proprietary theory: • According to this theory the content and measurement principles underlying the FS is focused on placing the owner at the centre. All observations are done on his (owners) view point • E.g. Assets are things owned, liabilities are debts owed. • Acc Equation: A – L = Equity • Applicable more on sole proprietorships and partnerships • More Balance Sheet oriented

11. Theories of Accounting • The Entity Theory: • Net income doesn't belong to the proprietors, but to the entity, which is separate from the owners • Now the centre is the business organization • A = L + E (resources are owned by the company) • More P&L oriented • Suitable for corporations

12. Theories of Accounting • The Residual Equity Theory: • Much related to proprietary theory • But the main difference is that it excludes the PS capital from proprietary group (E.g. EPS) • Assets - Specific Equity = Residual Equity • Specific Equity = Claims to all creditors + PS holders • Ordinary shareholders are bearers of residual risk + residual awards • Prime objective is to provide better information to Ordinary Share Holders for investment decision making (based on future dividends)

13. Theories of Accounting • The Enterprise Theory: • Emphasizes the social responsibility of an entity (the impact through its activities) • The concentration is not only on SHs • Hence, it is an extension of entity theory as it covers more stakeholders (employees, customers, community, government, society etc.) • Broad concept of Income: Value added (Mkt price of the output – price of the goods acquired) Salaries, Dividends, Interest, Taxes etc.

14. Theories of Accounting • The Fund Theory: • The entity is viewed as a fund • Neither the owner nor the entity is used as the basis of accounting • The activity oriented unit (the Fund) is used as the basis of accounting • The Accounting unit consists of economic resources (fund) and related obligations and restrictions to use of resources • Assets = Restriction of Assets • More asset centered • The fund statement gets the prominence • More suitable for govt. and non profit organizations