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Accounting history

Filed Under Accounting Financial Theory, Financial Theory, Accounting

By Bob Schneider

The name that looms largest in early accounting history is Luca Pacioli, who in 1494 first
described the system of double-entry bookkeeping used by Venetian merchants in his Summa de
Arithmetica, Geometria, Proportioni et Proportionalita. Of course, businesses and governments
had been recording business information long before the Venetians. But it was Pacioli who was
the first to describe the system of debits and credits in journals and ledgers that is still the basis
of today's accounting systems.

The industrial revolution spurred the need for more advanced cost accounting systems, and the
development of corporations created much larger classes of external capital providers -
shareowners and bondholders - who were not part of the firm's management but had a vital
interest in its results. The rising public status of accountants helped to transform accounting into
a profession, first in the United Kingdom and then in the United States. In 1887, thirty-one
accountants joined together to create the American Association of Public Accountants. The first
standardized test for accountants was given a decade later, and the first CPAs were licensed in

The Great Depression led to the creation of the Securities and Exchange Commission (SEC) in
1934. Henceforth all publicly-traded companies had to file periodic reports with the Commission
to be certified by members of the accounting profession. The American Institute of Certified
Public Accountants (AICPA) and its predecessors had responsibility for setting accounting
standards until 1973, when the Financial Accounting Standards Board (FASB) was established.
The industry thrived in the late 20th century, as the large accounting firms expanded their
services beyond the traditional auditing function to many forms of consulting.

The Enron scandals in 2001, however, had broad repercussions for the accounting industry. One
of the top firms, Arthur Andersen, went out of business and, under the Sarbanes-Oxley Act,
accountants faced tougher restrictions on their consulting engagements. One of the paradoxes of
the profession, however, is that accounting scandals generate more work for accountants, and
demand for their services continued to boom throughout the early part of the 21st century. (For
details on this and other scandals see, The Biggest Stock Scams Of All Time.)
By definition, accounting is a system of recording and summarizing business and financial
transactions. For as long as civilization has been engaging in trade, methods of record keeping,
accounting, and accounting tools have been invented. Marla Matzer Rose, author of Accounting
& Auditing History writes that the earliest known writing discovered by archaeologists has, when
translated, been found to be records of tax accounting. Such writings have been found on clay
tablets from Egypt and Mesopotamia from as early as 2000 to 3300 B.C., as humans formed
governments, accounting became a necessity.

Modern Acounting

According to Accounting a Virtual History, the innovative Italians of the Renaissance (fourteenth
through sixteenth century) are widely acknowledged to be the fathers of modern accounting.

In particular, Benedetto Cotrugli invented the "Double Entry" and Frater Luca Bartolomes
Pacioli invented Pacioli's System of memorandum, journal and ledger, and wrote many books on

Luca Pacioli

Pacioli wrote Summa de Arithmetica, Geometria, Proportioni et Proportionalita in 1494, which

included a twenty-seven page treatise on bookkeeping, Particularis de Computis et Scripturis
(Details of Calculation and Recording) on the subjects of record keeping and double-entry
accounting, that became the reference text and teaching tool on those subjects for the next
several hundred years. Summa was one of the first books published on the historical Gutenberg
press and the included treatise was the first known published work on the topic of double-entry

Chartered Accountants

The first professional organizations for accountants were established in Scotland in 1854, with
the Edinburgh Society of Accountants and the Glasgow Institute of Accountants and Actuaries.
The organizations were each granted a royal charter. Members of such organizations could call
themselves chartered accountants and there are now organizations for chartered accountants all
over the world.
By James deSantis


In the Summer of 1995 I enrolled in courses sponsored by both the Society of Management
Accountants of Saskatchewan and Athabasca University. In particular, I remember taking two
classes, the first was an introduction to financial accounting and the other course was in
microcomputer business applications. It was during this time that my father became by academic
mentor. My father introduced me to the management philosophy of the Learning Organization; I
remember his comments and laughs when in studying accounting we realized that even
professional accountants and authors would not provide the needed ethical guidance for young
business students(1) . I also remember that when studying the accounting component of the
microcomputer business applications course he mentioned that accounting and computerized
accounting should take a new direction altogether. He emphasized this new direction by pointing
out how the Quicken(2) financial package doesn't require the closing of accounts/categories for
reporting the financial statements. Later, he showed me how another accounting package, Pacioli
2000 for Windows(3) , would treat all the accounts, be balance sheet or income statement
accounts, as registers. These experiences and my appreciation for new technologies have
motivated the writing of this paper.

Origin of accounting and bookkeeping

In her notes compiled in 1979, Professor Linda Plunkett(4) of the College of Charleston S.C.,
calls accounting the "oldest profession"; in fact, since prehistoric times families had to account
for food and clothing to face the cold seasons. Later, as man began to trade, we established the
concept of value and developed a monetary system. Evidence of accounting records can be found
in the Babylonian Empire (4500 B.C.), in pharaohs' Egypt and in the Code of Hammurabi (2250
B.C.). Eventually, with the advent of taxation, record keeping became a necessity for
governments to sustain social orders.

The Italian Renaissance brought the artistic accomplishments of man to new heights. At this
time, Venice was the business cradle of Europe, and it was here among merchants that double
entry accounting was invented and practised. During this period Fra Luca Pacioli wrote his
"Summa" dealing with record keeping and double-entry accounting, one of the very first
published books of the time that would become the
accounting "textbook" for the next 500 years.


Fra Luca Pacioli(5) was born during 1445 in Sansepolcro,

Tuscany. He was a mathematician and friend of Leonardo
da Vinci. He wrote and taught in many fields including
mathematics, theology, architecture, games, military
strategy and commerce. In 1494, Pacioli published his
famous book "Summa de Arithmetica, Geometria, Proportioni et Proportionalita" (The Collected
Knowledge of Arithmetic, Geometry, Proportion and Proportionality(6) ). One section of this
book was dedicated to the description of double-entry accounting. The Summa was one of the
first books published on the Gutenberg press, became an instant success and was translated into
German, Russian, Dutch, and English. The Summa made Pacioli a celebrity and insured him a
place in history, as "The Father of Accounting."(7)

Fra Luca did not invent double-entry accounting, instead, he superbly described a method used
by merchants in Venice during the Italian Renaissance. His system included most of today's
accounting routines such as the use of memorandums, journals and ledgers. His ledger included
assets--receivables and inventories--liabilities, capital, income, and expense accounts. He
described the year-end closing entries and proposed that a trial balance be used to prove a
balanced ledger. In addition, his Summa made reference to the certification of books, ethics and
cost accounting.

There would be little modification to Pacioli's system for the next 500 years. The present day
trial balance sheet did not get its form until 1868 and the income statement was developed before
WWII(8). In the 1980s, statements of financial position were developed with the purpose to
provide relevant "information about the operating, financing, and investing activities of an
enterprise and the effects of those activities on cash resources" (CICA 1540).

The Information Age

The cost of today's products is mostly made up of R&D, intellectual assets and services(9).
Pacioli's accounting system has not changed practically for the last 500 years, and as long as our
wealth was physical and our costs included mostly material and labour, this system was
adequate. The double-entry accounting system relied on historical information and has
traditionally provided financial reports and statements two weeks after the month-end closing
period(10). Businesses today, require information not two weeks after month-end but
immediately; accounting information, activities and indices of performance must be available at
the push of a button/key. The trends in the information age is to conceptualize and implement
accounting as a data base information system gathering all the quantitative and qualitative events
of all the areas of a company. Oracle(11), PeopleSoft(12), and SAP(13) are world players in this re-
conceptualization of accounting as a data base information system, and they provide services to
large corporations There are also excellent accounting software packages which are available in
the market place. Examples of these packages are Pacioli 2000 for Windows, Peachtree
Complete Accounting(14), and Quickbooks Pro(15). The power of such software can be
appreciated by making reference to the web site listing the features of Pacioli 2000 for
Windows(16), and to my father's paper "Pacioli 2000 for Windows: An Accounting Software
Solution to Address the problems of Accountability of Saskatchewan District Health Boards"(17),
June 1996.


The knowledge economy along with the ongoing information technology changes are affecting
the way we are doing business. We are becoming customers of each other, and the economic
value chain is integrating our businesses with our suppliers, customers, and governments. As
accounting is concerned, these peculiar changes are being reflected in the present trends of
shifting our attention from an obsolete quantitative approach to a qualitative obsession where
quality, customer satisfaction, and innovation become the most important components.

Types of accounting information

Financial accounting deals with recording and analysis of financial results of transactions as a
means of arriving at a measure of organization's success and financial soundness. Financial
accounting information (e.g. balance sheet, income statement, cash flow statement, notes to the
accounts, bank reconciliation, etc) relates to the past period and is essentially monetary in nature.
However, its decision-usefulness is limited. Management accounting is concerned with the
activity of providing information (financial and non-financial) to enable management to take
decisions about operations of business. Management accounting draws all financial information
from financial accounting. Besides, it develops other information (quantitative and qualitative,
financial and non-financial), which is futuristic in character and relevant for decision-making in
the organization. Thus, it includes estimates, forecasts of sales, cash flows, purchase
requirements, manpower needs, pollution data, health and safety data about employees, product
and plants. Further, financial accounting information serves the stewardship function while
management accounting aids in internal decision-making by management.

Just as there are many types of economic decisions, there are also many types of accounting
information. The terms financial accounting, management accounting often are used in
describing three of accounting information that are widely used in the business community.

Financial Accounting refers to information describing the financial resources, obligations, and
activities of an economic entity (either an organization or an individual). Accountants use the
term financial position to describe an entitys financial resources and obligations at a point in
time and the term results of operations to describe its financial activities during the year.

Financial accounting information is designed primarily to assist investors and creditors in

deciding where to place their scarce investment resources. Such decisions are important to
society, because they determine which companies and industries will receive the financial
resources necessary for growth..
Financial accounting information also is used by managers and in income tax returns. In fact,
financial accounting information is used for so many different purposes that it often is called
general-purpose accounting information.

Management Accounting involves the development and interpretation of accounting information

intended specifically to assist management in operating the business. Managers use this
information in setting the companys overall goals, evaluating the performance of departments
and individuals, deciding whether to introduce a new line of products, and making virtually all
types of managerial decisions.

A companys managers and employees constantly need information to run and control daily
business operations. For example, they need to know the amount of money in the companys
bank accounts; the types, quantities, and dollar amounts of merchandise in the companys
warehouse; and the amounts owed to specific creditors. Much management accounting
information is financial in nature but is organized in a manner relating directly to the decision at
Forms of Business Organization

(provided by the Missouri Small Business and Technology Development Centers)

One of the first decisions that you will have to make as a business owner is how the business
should be structured. All businesses must adopt some legal configuration that defines the rights
and liabilities of participants in the businesss ownership, control, personal liability, life span,
and financial structure. This decision will have long-term implications, so you may want to
consult with an accountant and attorney to help you select the form of ownership that is right for
you. In making a choice, you will want to take into account the following:

Your vision regarding the size and nature of your business.

The level of control you wish to have.
The level of structure you are willing to deal with.
The businesss vulnerability to lawsuits.
Tax implications of the different organizational structures.
Expected profit (or loss) of the business.
Whether or not you need to re-invest earnings into the business.
Your need for access to cash out of the business for yourself.
An overview of the four basic legal forms of organization: Sole Proprietorship; Partnerships;
Corporations and Limited Liability Company follows.

Sole Proprietorship

The vast majority of small businesses start out as sole proprietorships. These firms are owned by
one person, usually the individual who has day-to-day responsibility for running the business.
Sole proprietorships own all the assets of the business and the profits generated by it. They also
assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the
public, you are one in the same with the business.

Advantages of a Sole Proprietorship

Easiest and least expensive form of ownership to organize.

Sole proprietors are in complete control, and within the parameters of the law, may make
decisions as they see fit.
Profits from the business flow-through directly to the owners personal tax return.
The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

Sole proprietors have unlimited liability and are legally responsible for all debts against the
business. Their business and personal assets are at risk.
May be at a disadvantage in raising funds and are often limited to using funds from personal
savings or consumer loans.
May have a hard time attracting high-caliber employees, or those that are motivated by the
opportunity to own a part of the business.
Some employee benefits such as owners medical insurance premiums are not directly
deductible from business income (only partially as an adjustment to income).


In a Partnership, two or more people share ownership of a single business. Like proprietorships,
the law does not distinguish between the business and its owners. The Partners should have a
legal agreement that sets forth how decisions will be made, profits will be shared, disputes will
be resolved, how future partners will be admitted to the partnership, how partners can be bought
out, or what steps will be taken to dissolve the partnership when needed; Yes, its hard to think
about a break-up when the business is just getting started, but many partnerships split up at
crisis times and unless there is a defined process, there will be even greater problems. They also
must decide up front how much time and capital each will contribute, etc.

Advantages of a Partnership

Partnerships are relatively easy to establish; however time should be invested in developing the
partnership agreement.
With more than one owner, the ability to raise funds may be increased.
The profits from the business flow directly through to the partners personal tax return.
Prospective employees may be attracted to the business if given the incentive to become a
The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership

Partners are jointly and individually liable for the actions of the other partners.
Profits must be shared with others.
Since decisions are shared, disagreements can occur.
Some employee benefits are not deductible from business income on tax returns.
The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships that should be considered:

1. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss
according to their internal agreement. Equal shares are assumed unless there is a written
agreement that states differently.

2. Limited Partnership and Partnership with limited liability

Limited means that most of the partners have limited liability (to the extent of their
investment) as well as limited input regarding management decision, which generally encourages
investors for short term projects, or for investing in capital assets. This form of ownership is not
often used for operating retail or service businesses. Forming a limited partnership is more
complex and formal than that of a general partnership.
3. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If
the partners in a joint venture repeat the activity, they will be recognized as an ongoing
partnership and will have to file as such, and distribute accumulated partnership assets upon
dissolution of the entity.


A Corporation, chartered by the state in which it is headquartered, is considered by law to be a

unique entity, separate and apart from those who own it. A Corporation can be taxed; it can be
sued; it can enter into contractual agreements. The owners of a corporation are its shareholders.
The shareholders elect a board of directors to oversee the major policies and decisions. The
corporation has a life of its own and does not dissolve when ownership changes.

Advantages of a Corporation

Shareholders have limited liability for the corporations debts or judgments against the
Generally, shareholders can only be held accountable for their investment in stock of the
company. (Note however, that officers can be held personally liable for their actions, such as the
failure to withhold and pay employment taxes.
Corporations can raise additional funds through the sale of stock.
A Corporation may deduct the cost of benefits it provides to officers and employees.
Can elect S Corporation status if certain requirements are met. This election enables company
to be taxed similar to a partnership.

Disadvantages of a Corporation

The process of incorporation requires more time and money than other forms of organization.
Corporations are monitored by federal, state and some local agencies, and as a result may have
more paperwork to comply with regulations.
Incorporating may result in higher overall taxes. Dividends paid to shareholders are not
deductible from business income; thus this income can be taxed twice.

Subchapter S Corporation

A tax election only; this election enables the shareholder to treat the earnings and profits as
distributions, and have them pass through directly to their personal tax return. The catch here is
that the shareholder, if working for the company, and if there is a profit, must pay his/herself
wages, and it must meet standards of reasonable compensation. This can vary by geographical
region as well as occupation, but the basic rule is to pay yourself what you would have to pay
someone to do your job, as long as there is enough profit. If you do not do this, the IRS can
reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll
taxes on the total amount.
Limited Liability Company (LLC)

The LLC is a relatively new type of hybrid business structure that is now permissible in most
states. It is designed to provide limited liability features of a corporation and the tax efficiencies
and operational flexibility of a partnership. Formation is more complex and formal than that of a
general partnership.

The owners are members, and the duration of the LLC is usually determined when the
organization papers are filed. The time limit can be continued if desired by a vote of the
members at the time of expiration. LLCs must not have more than two of the four
characteristics that define corporations: Limited liability to the extent of assets; continuity of
life; centralization of management; and free transferability of ownership interests.

Federal Tax Forms for LLC

Taxed as a partnership in most cases; corporation forms must be used if there are more than 2 of
the 4 corporate characteristics, as described above.

In summary, deciding the form of ownership that best suits your business venture should be
given careful consideration. Use your key advisors to assist you in the process.

Source: Kenner & Speck, LC