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Table of Contents 1. Introduction ....................................................................................................................................... 2

2. What is accounting? .................................................................................................................... 3

3. Early History of Accounting ........................................................................................................ 3

4. Double Entry Bookkeeping ......................................................................................................... 4

5. Chartered Accountant and the Industrial Revolution .......................................................... 6

6. The Present: Financial Accounting ........................................................................................... 6

7. Management Accounting ............................................................................................................ 8

8. Other forms of accounting .......................................................................................................... 9

9. Summary: The importance of Accountancy ............................................................................... 11

10. Reference ................................................................................................................................. 12

Bibliography ........................................................................................................................................ 12

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Abstract

Accountancy is a key language in the field of business as the benchmark of most

business begins with the figures such as its income statement, statement of financial

position and statement of cash flows. With the invention of accounting software used

in all industry, people tend to forget the roots of the discipline that existed before the

information age. As a result, it is necessary to revisit the past to understand the

reasons the origins of the accounting methods today. In this report, we will explore

the history of accounting through its stages of development.

1. Introduction

Purpose of Study

This report is an assignment we have to perform for our undergraduate program at

the Universiti Tunku Abdul Rahman from the unit Financial Accounting Framework I.

Our task is to explore the development of the accounting field in its history and to

understand the importance of accountancy.

Through this report, we hope to address the following issues:

a) What is accounting?

b) Why is accounting important?

c) Who invented the accounting and the double entry system?

d) What are the underlying assumptions that govern accounting?

e) Differentiate between financial accounting and management accounting?

f) Who needs financial and management accounting?

g) What is the purpose of financial and management accounting?

Another purpose of this study is to improve our report writing skills and other soft

skills competency. It is also necessary for us to understand the purpose of

accountancy as a field so that we could relate it the lectures we have taken in our

university.

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2. What is accounting?

One of the definitions of Accounting is the information science of collecting,

classifying and using financial data for organization and individual. In other words,

source documents such as invoices from financial transactions are collected and

stored in systematically in ledgers. In these ledgers, information is classified to

according to different accounts, whether it affects the assets, capital, liability,

revenue or the expenses accounts. Once it is classified, an income statement and

statement of financial position (a summary of all transactions) is created to be used

to assess a company’s financial situation by different users, be it internal or external

users. Without accounting, it is an impossibility to have a foundation on how short

term or long term financial decisions could be made.

3. Early History of Accounting

The most amazing thing about accounting is that it is never “invented” by anyone in

particular. At the very least, there is no historical proof that specifically states an

individual inventor. The only hint we have to its origins is from Ancient Egypt 5300

years ago (Wiley, 2013). Ancient Egyptian used bookkeeping (known as the

recording part of accounting) to make sure whether the inventory of goods in royal

stock houses are correct. It is interesting to note that the penalty for any mistakes is

severe during those times. Compared to today, we also have laws that govern

financial misrepresentation. These records are considered to be amazingly detailed

are they have the owners, amount and supplier of the goods inscribed into them. It is

not very much different from what we have in our ledgers today.

Apart from Ancient Egypt, accounting also traces back to Mesopotamia that kept

records using clay tablets. Ancient Greece was already using accounting as a

primitive banking system that loaned money and provide money transfer using

affiliate banks in other cities. In ancient Rome, government and banking accounts

were used by head of families.

Moving on to the 1st century, the Roman Empire used the accounting system

extensively by Emperor Augustus. The roman government needs detailed

accounting report to quantify public expenditure that contains distribution to the

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people, passing of lands and money to army veterans, religious facilities,

entertainment (gladiator games) and subsidies to the treasury. The inscription of the

deeds of Emperor Augustus actually has financial record up to 40 years (Wikipedia,

2014)! Records kept in such a manner are considered as accounting system that has

been practiced with great discipline during those times. Augustus’ method of using

accounting to make decision is basically financial accounting we are familiar with

today.

The early history of accounting proves that a valid monetary system must have

existed thousands of years ago. Civilization at that time must be using certain tokens

that have numerical values as to judge the value of different object. If early

civilization used the barter system to trade, then it must be mathematically

impossible to create an accounting system in the first place because barter system

could not precisely placed a fixed value on any object. Therefore, accounting system

must have been developed naturally though the courses of history along with a

monetary system, a writing system and mathematical skills.

4. Double Entry Bookkeeping

The greatest achievement in the history of accounting is without doubt the invention

of the Double entry bookkeeping system in the 14th century (700 years ago or

roughly 4600 years after Ancient Egypt). This system is known for having a

corresponding entry into an account for each entry in another account. The entries

are known in Latin as debit (the one who owes) and credit (the one who trust)

respectively.

The double entry system serves to accompany the golden rule of accounting which

is the following equation:

𝐴𝑠𝑠𝑒𝑡 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 + 𝑂𝑤𝑛𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

The beauty of this both the double entry and the accounting equation is whenever

the sum of debit and credit does not equal in value, it means an error must have

occurred somewhere during recording. However, this system is not error-proof as

wrongly credited or debited accounts as well as complete reversal of entries will not

show up in the trial balance.

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Although the meaning of debit and credit usually refer to debtor and creditor. The

only thing both of these term means is that debit belongs to the left side of the

transaction and credit belongs to the right side of the transaction (Epstein, 2014). All

this becomes clear when journal entries from source documents are recorded in a

ledger which usually has a T shaped format.

Example of a T format Ledger (Notice that Debit is named Dr on the left side and

Credit is named Cr on the right side) Source: www.accounting-basics-for-

students.com

In double entry, there is one person who can be specifically pinpointed as to the first

user of the double entry system. That person’s name is Benedikt Kotruljević. The first

recorded history of the description of double entry bookkeeping was done by

Benedikt in 1458 in his work: Book on the Art of Trade (Mariotti, 2013). However, the

credit has to be given to the merchants of Venice (alla viniziana) for the widespread

use of the method (Gleeson-White, 2013). This is because the person that

documented that rules of double entry was an Italian monk named Luca Pacioli, a

collaborator of Leonardo da Vinci. This also means that the double entry system was

a discovery of the Renaissance era.

What Luca Pacioli did was simply to record a full description of the rules of double

entry in his book named Summa de Arithmetica, Geometrica, Proportioni et

Proportionalita (Dumar, 2015). His contribution exposes the double entry system to

the world on large scale. For this very reason, he is called “The father of accounting”

although he does not take credit for being the inventor of it. Its importance is later

highlighted when accounting becomes necessary during the Industrial Revolution of

the 19th Century.

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5. Chartered Accountant and the Industrial

Revolution

Chartered accountants are pioneers of the professional accounting body. They were

first established in Britain, 1854 (Wikipedia, 2015). They were granted a royal charter

from Queen Victoria. In effect, the profession of accountancy is recognized as a

profession of great respectability.

During the Industrial Revolution, London became the financial centre of the world.

There was a surge in demand for accountants due to the increment of limited liability

companies, large scale manufacturing and logistics, high speed global transactions.

In additions calculations necessary for asset depreciation, inventory valuation and

legislation of Company laws makes accounting an integral part of the finance and

business world.

Around this time, there was a man called Josiah Wedgwood that pioneered cost

accountancy (University of South Australia, 2013). His clerk from pottery

manufacturing business had been embezzling funds from the company. After

replacing the clerk, he hired a new one that does weekly accounts review. From

those reviews, he was able to calculate detailed costs for materials and labour,

which are used to calculate overhead cost and economies of scale. This would later

be known as cost accounting in the modern industry, it will serve as the foundation

for management accounting.

6. The Present: Financial Accounting

In the present, accounting is recognized as a respectable career choice for aspiring

students across the world. The ACCA (Association of Chartered Certified

Accountants) is the largest and fastest growing global professional body in the world

with history of over 100 years. With presence in over 170 countries including

Malaysia, the ACCA is evidence that the holder has the necessary skills and

knowledge needed to work in sectors such as banking, auditing, consulting, taxation

and law (EY, n.d).

Within these sectors accounting could be divided in several forms as follow:

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a) Financial accounting

b) Management accounting

c) Auditing

d) Tax Accounting

e) Forensic Accounting

Financial accounting is the accounting that uses money to measure economic

performance. It contains a system to measure the inflow and outflow of cash and

naturally, being derived from the double entry system, it measures the changes in

the organizations assets, liabilities and equity. Financial accounting is mainly used to

summarize financial data in a method where it is easier to understand so that

relevant users can analyse the well beings of an organization. The organization’s

performance is reflected in the income statement, statement of financial position and

the statement of cash flows.

The number of users for financial accounting is large and that makes it the most

important form of accounting in the history of accountancy. After all, it is the original

reason why accountancy was created in the first place, to provide information on

how an organization fares compared to others. Internally, or the users of financial

accounting in the organization are managers, shareholders and employees.

Managers need to review financial reports to track of their financial position so they

can decide on their strategy for the future. Shareholders need to see whether the

management are running the business well or not. Employees use financial reports

to gauge whether the company can provide them financial safety.

Externally, the government, creditors, customers, and potential investors are users of

financial accounting as well. The government needs financial data to see whether

taxation is according to law or not. Creditors need to make sure they can trust

debtors to repay their short term debt. Customers would like to see whether their

supply of goods would be disrupted or not while potential investors need to

understand the company’s past performance to justify their investment.

Due to the number of users that rely on financial accounting, financial reports have to

follow a certain guidelines known as generally accepted accounting principles

(GAAP). This is because there is a need for organizations to have a certain level of

consistency in their reports so as to not mislead investors to making the wrong

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decision. Although that is being said, but there are still many rooms for unscrupulous

accountants to distort figures (Investopedia, n.d.). Therefore, investors still have to

be careful when reading accounting figures.

The 4 underlying assumptions when using the GAAP are business entity, going

concern, monetary unit principle and time period principle. Business entity assumes

to separate the owners’ personal expenses from the business expenses. This is the

reason why Drawings are recorded in a separate ledger instead of the expenses

ledger. Going concern is to assume that the business will last forever. So, assets are

usually carried at a value above liquidation value as long as the asset is being used

efficiently. The monetary unit principle assumes only transactions that can be

expressed in terms of a currency can be recorded in the books. The time period

principle divides the company financial records into standard time periods such as

monthly, quarterly or annually to compare data within the same time period.

Besides assumptions, there are also certain principles to have to be followed in the

guidelines namely the historical cost principle, revenue recognition principle,

matching principle and full disclosure principle. Historical cost is to record assets

based on book value rather than market value. Revenue recognition is to practice

conservatism by recording revenue only when it is recognizable and when it is

earned. Matching is to correspond expenses with their respective revenue. For

example, cost of goods sold is charged at revenue but administrative expenses are

charge at gross profit. Lastly, full disclosure states that information should be

sufficient to make judgement from financial statements.

All of financial accounting contrasts with management accounting, especially in three

aspects concerning the users, its function and its relation with GAAP.

7. Management Accounting

Unlike financial accounting that has a history that goes way back to the Renaissance

era, management accounting emerged from the Industrial Revolution roughly 150

years ago (Caplan, 2007). Industrial engineers needed a standard to control cost of

productions in terms of input of materials, labour and machine time. This eventually

lead to the development of cost accounting, and then finally to management

accounting.

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In management accounting, the figures helps manager to understand how much

their products cost, how their company make its profits, and how to plan for the

profits and growth. This planning involves the future through budgeting processes

(Holtzman, 2013).

Apart from managing productions, inventory management is part of management

accounting as well. Companies prefer to keep low inventories on hand to reduce

write down of redundant inventories. A good reason for this is when natural disaster

strikes, the amount of losses incurred could be reduced.

Management accounting is concerned with providing information solely to the

managers that runs an organization. Because of this, there are usually highly

detailed in respect to the cost, individual product details, raw materials and the

number of production lines. Meanwhile, financial accounting is highly summarized for

external users as they do not need to be too detailed information relative to the

manufacturing process of a specific company. The information revealed in financial

accounting is profit by market segments but never to each and every product sold by

the company.

Financial Accounting caters mostly to external user, but management accounting is

only used internally. Management accounting is to be kept a secret to maintain

competitive advantages for the organization as it reveals the cost of manufacturing a

product. Management accounting must also be forward looking as managers need to

plan a budget to decide for future productions. Financial accounting only relies on

past figures to make decisions.

Due to the fact that it does not have to be presented to external users, management

accounting does not have to follow the guidelines presented in GAAP. It does not

even have an existing general guideline to follow for any organization. Thus, most

large corporation develop their own unique rules and measurements that efficiently

and effectively minimizes their production costs.

8. Other Forms of Accounting

Besides the 2 main fields of accounting today, students could also pursue auditing.

Auditing is simply an unbiased examination on the state of the organization. As

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exploiting financial information has much personal gains for certain individuals,

auditing exists to validate the authenticity of the information published by

accountants. There are two types of auditor, external and internal.

Internal audit are employee that belong to the organization. They advise senior

management on various aspects of the business by performing audits on both

financial and non-financial risks. This means that they not only audit financial

statements but also the company’s operations. These auditors provide better value

to the organization by improving how the company runs.

External auditors are independent bodies that focus solely on financial reports as

appointed by company shareholders. They are not part of the management. Their

primary job is to perform annual audit of financial statements as required by law to

see whether they reflect the true value of the company’s financial position. Therefore,

they should not have any financial interest with their clients.

Examples for external auditors are the big four well known firms of Deloitte Touche

Tohmatsu Limited, PricewaterhouseCoopers, Ernst & Young, and KPMG.

On the other sides, there are two very specialized field of accounting known as tax

accounting and forensic accounting.

Tax accounting exists by focusing on methods to file tax returns and planning for

future tax liabilities. Because tax laws are different from each country, there are

some people who would like to focus on doing tax accounting as their main

occupation.

The most interesting of all forms of accounting is the forensic accounting. Forensic

points to being suitable to be used for law purposes. These accountants investigate

frauds and provide testimonies in the court trails. They are trained to look beyond

numbers and face the realities in real world business situation.

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9. Summary: The Importance of

Accountancy

Imagine a world without the knowledge of accountancy, a world which is not

bounded by figures, it will be chaotic because entrepreneurs could not make

decisions, profits and losses will be unclear, and people are able provide wrong or

inaccurate information to attract more investors.

In the business world, all economic decisions or top management decisions are

depend on financial statements provided by accountant. Goals and objectives of an

organisation will be clear and achievable by having a proper financial statements.

The information and consultation provided by accountants will affect users’ decisions.

Hence, the information and consultation of accountants must be genuine and

trustable.

Next, accounting is the most effective way of data recording. All data are integrated

together and it is organized, analysed, interpreted and communicated to the end

users. End users such as investors use this informative platform to make economic

decisions to invest in respective company then government uses these records of

companies to make fiscal and monetary policies.

In conclusion, accountancies are said to be an important part in the wold economies.

The economy in the world are full of data, numbers, figures and the most important

item: money. By having accountancy, financial data could be analysed in easier way

which helps out people around the world. In addition, accounting also determines the

efficiency of businesses. All the descriptions above show that accounting is

important.

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10. Reference

Bibliography

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TECHNIQUES. Retrieved February 19, 2015, from Oregon State University:

College of Business: http://classes.bus.oregonstate.edu/spring-

07/ba422/Management%20Accounting%20Chapter%202.htm

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February 15, 2015, from Accounting Degree Online:

http://www.accountingdegreeonline.net/resources/the-father-of-accounting-luca-

pacioli/

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Mariotti, S. (2013, November 11). So, Who Invented Double Entry Bookkeeping?

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