1

Development of Accounting

� Accounting has existed since the 3000 BC

where some record of accounting has been

found in:

1. Chaldean Babylonian, Assyirian and

Sumerian Egyption civilizationbiz records, treasury role

2. Chinese Civilizationgovt acc

3. Roman civilization tax system

2

History and Development of

Accounting and Financial Reporting

LEARNING OBJECTIVESLEARNING OBJECTIVES

� Importance & uses of accounting history

� Early history & dev of accounting

� Dev of accounting in Islam

� Financial reporting from Islamic view

� Historical dev of accounting in Malaysia

� Financial reporting & reporting role of an

accountant; external vs internal

3

History and Development of

Accounting and Financial

Reporting

� Accounting history is defined as ‘the study

of the evolution in accounting thoughts,

practices and institutions in response to

changes in the environment and social

needs. It also considers the effect that this

evolution has worked on the environment’

(Belkoui, 1983).

4

Double Entry System

� Luca Pacioli (1445-1510) published a book in 1494 tittle ‘Summa Arithmetica, Geometrica, Proportioni et Proportionalita’

� He describe the practices of double entry system that is debit and credit which is being used by the Italians.

� Pacioli indicate that ‘all entries must be double entries… if u make one creditor you must make someone debtor’

� He also indicate that the purpose of book –keeping is to give trader without delay information as to his assets and liabilities.

5

� Pacioli suggested that not only the name of

the buyer and seller should be recorded but

also the description of goods sold (weight,

size, measurement, price and term of

payment.

� He also indicate the need having periodic

recording and closing of books.

6

Development of Double Entry System

� 16th century – specific journals for different type of transactions.

� 16th to 17th centuries – practice of periodic financial statement and application of double entry system were expanded to other type of organizations.

� 17th century – separate inventory account for different type of goods and the incorporation of East India Company where auditing, cost accounting and reliance on concepts of continuality, periodicity and accruals are needed.

7

� 18th century – methods of treating fixed assets evolved (assets are carried forward at original cost, assets account are closed at the balance sheet date and revaluation of fixed assets.

� 19th century – depreciation of property, cost accounting and development of techniques of accounting for prepayments and accruals.

� 19th – 20th centuries – development of funds statements

� 20th century – complex issues such as EPF, accounting for business computations, inflations, long term leases and others.

8

Contributive Factors in the Evolution of Accounting

� Evolution of accounting is related to the development of

civilizations where the accounting practices developed to

meet the needs of each civilization.

� Professor Littleton’s ( 1900) identified seven pre-requisites to

double entry book keeping which are classified into two

categories, namely, material and language.

� Materials – private property, commerce, capital and credit.

� Private property relates to property and property rights.

� Commerce – a significant volume of trade required systematic

recording system.

� Capital and credit are also essential in commercial activities

and hence further enhanced the need for proper and

systematic record keeping.

9

LanguageLanguage

� Includes writing, money and arithmetic.

� The art of writing is important, as it is the basis of

recording.

� Money is important as a common denominator to record

transaction.

� In double-entry, arithmetic involves a sequence of simple

computations.

� Book keeping is widely used in the 13th Century onwards

due to the formation and growth of business entities in a

complex market environment – capitalistic spirit,

economic-political events and technological innovations.

(refer to Figure 2.2)

10

� Economic-political events - The Industrial Revolution in

the 18th Century created a demand for capital investment

which could not be fulfilled by one or a few investors. An

extensive growth of the corporate form of business

organization resulted.

� Technological innovation – Impact of current information

technology in meeting materialistic accomplishment has

significantly influenced the contemporary development of

accounting practices. For e.g., the development of e-

commerce and corporate governance.

� Capitalistic spirit – self-interest to earn a profit. Self-

interest need not be confined to wealth pursuit but could be

at higher goals which at the same time fulfilling public and

social interest.

11

Capitalism and Accounting

� According to Sombart(1915) the dev.of capitalism is parallel and closely connected to double entry.

� Double entry is an important device that propelled the dev. of capitalism.

� Double entry bookkeeping helped in the construction of concepts which explain the nature of financial reporting in the capitalistic economy. Transactions that affect the entity are recorded, therefore, permits analysis of business and formulations of business plans for orderly improvement.

� Investors and creditors confidence improved with proper accounting records.

� Economic info is enhanced with the production of financial statements, which facilitated efficient allocation of resources.

� Double entry bookkeeping was useful for business decisions.

12

Uses of Accounting History

� Recreational – fact finding in the

development of accounting.

� Explanatory – when/why adopted and

abandoned a certain practices.

� Problem solving –solution of present day

accounting problem.

� Prediction – help predict the future.

13

Importance of Accounting History

� Accounting Pedagogy – Accounting history is helpful to a better understanding and appreciation of accounting and its evolution as a social science.

� Accounting Policy – Accounting history can help towards a better understanding of accounting problems as well as contribute towards formulation of public policy

� Accounting Practice – Accounting history could provide a better assessment of the existing practices by a comparison with the methods used in the past.

14

Development of Accounting in

Malaysia

� Prior to 1957 – Companies Ordinance (and amendments) of 1940, 1946, 1956.

� 1958 – Malaysian Association of Certifies Public Accountants (MACPA) was formed.

� 1965 – Establishment of Companies Act, 1965. Companies ordinance were then repealed. Contain Ninth Schedule (disclosure requirements).

� 1967 – The Malaysian Institute of Accountants (MIA) was established under the Accountant Act, 1967. Remained inactive for 20 years.

15

� 1968 – MACPA issued first accounting guidance which dealt with specimen company accounts.

� 1978 – MACPA was admitted as a member of International Accounting Standards Committee (IASC) and began adopting IAS.

� 1984 – MACPA issued the first Malaysian Accounting Standard.

� 1985 – Companies Act 1965 was amended. New Ninth Schedule with more comprehensive disclosure requirements that includes the preparation of statement of source and application of funds.

16

� 1987 – Operation of MIA were activated.

MIA began issuing accounting standards.

� 1993 – Securities Commission were

established. Public listed companies are

required to show full disclosure

requirements as required by SC’s.

� 1997 – Financial Reporting Foundation

(FRF) and Malaysian Accounting Standard

Board (MASB) was established under the

Financial Reporting Act, 1997.

17

The Development of Professional

Bodies in Malaysia - MACPA

� Was established in 1958.

� Function is to regulate the practice of its members who carry the title Certified Public Accountant (CPA).

� It also act as the institution for training and examinations leading to professional qualification.

� 1968 – issue it first accounting guidance which dealt with a specimen company accounts.

� 1978 – admitted as a member of IASC and start adopting IAS.

� 1984 – MACPA issued first MAS.

18

Malaysian Institute of Accountants (MIA)

� Established in 1967 under Accountant Act, 1967.

� It is a public sector accounting body, but its regulations cover the whole accounting practices in Malaysia.

� After its establishment, it remained inactive and concentrated mainly on the registration of accountants in Malaysia

� In 1987, the operation of MIA were activated to be those of a national accounting body.

� 1987 – began to issue accounting standards, technical bulletins and pronouncement to guides its members.

19

Development of Financial

Reporting

� Refer to: Accounting Past to Present – The

history of accounting to 1900 (FAR 350

compilation)

� Industrial revolution

� Economic and legal changes

20

Development of Accounting in Islam

� Development refer to Syed Musa, Sharifah

Khadijah and Mahfudzah, ‘A Study on

Accounting Theory and Practice’ pg. 21-25.

� Basic concept of Islamic accounting are ethics,

justice, truth and fairness in conducting business

and recording the transactions.

� Islamic accounting vs. Conventional accounting.

� Financial reporting from the perspective of Islam

– back to the basic concept of Islamic accounting.

21

Accounting in Muslim Civilization

� Importance of numerals and mathematics:

– Mathematics – used in trade, distribution of spoils of war,

zakah, land survey, weights and measures.

– Numeral system adopted from Hindu system. Before numeral,

alphabets were used as a symbol to calculate.

– Al-Quran – importance of concepts of numbers and period

(haul) – prayer, zakah, fasting and hajj.

� Zakat administration:

– Importance of more formalized recording at the time of

Prophet Muhammad s.a.w. as well as Khulafa al – Rashidin.

– Existence of Bait-ul-maal, Waqf institutions, Diwan-Diwan

(State Register Offices) requires systematic recording

transactions.

22

� Accounting records in Muslim civilization:

– Muslim scholars in Mathematics, Algebra, Geometry, Astronomy and Physics.

– Formulation of fiqh Mu’amalah principles e.g. every accounting entry should have a valid supporting documents.

� Accounting in Muslim administrative office:

– Evidences suggested that modern-day-like bookkeeping and accounting control procedures may have been practices in an integrated accounting system that existed in Muslim administration office of the 10th centuries e.g. modern-day accounting practices were introduced into Europe through the Muslim Arab (use of Arabic)

23

Development of Accounting in Islam

� Issue – influence of religion on accounting, where Islam influence the manner which Muslims conduct public and private lives.

� Basic premise – ethics, where in Islam business ethics flows automatically from the practice of religions rather then codes devised and imposed upon members by professional organizations.

� In Islamic accounting, ethical approach is naturally emphasis on concepts of justice, truth and fairness.

�Justice – equitable treatment to all parties involved.

�Truth – provide information without any misrepresentation.

�Fairness – rules and procedures not for a particular interest group only.

24

Development of Accounting in

Islam - continued

� Primary objective – to ensure the system

discharge Islamic concept or sustainability

satisfactorily.

� Thus, development of Islamic accounting

encompasses moral, spiritual, material and

social aspects.

25

Islamic Corporate Reporting/Financial

Reporting From Islamic Perspective.

� Based on concept of accountability.

� Two essentials principles:

�Full disclosure

�Social responsibility

� Purpose – financial reports should enable Muslims

to determine zakat liability and ultimately achieve

socio-economic justice.

26

� How?

�Current Value Balance Sheet vs Historical Cost B/S – include as part of reporting requirements.

� Full disclosure - historical and current cost information.

�Uses to Islamic users

- current value relates to justice and equity in zakat payment.

- reflects the value-in-exchange between vendor and purchaser.

- allows inclusion in financial statement the market value based on information obtained from outside firm database.

27

� Value Added System vs. P/L.

– Supports accountability in Islam.

– Show how benefits of the efforts of an

enterprise being shared amongst

employees, shareholders, government and

enterprise itself.

– Emphasis care and share aspects of a

business in line with concepts of justice

and mutual cooperation.

28

� Emphasis in Islamic corporate reporting.

� Reporting of externalities

- provides measures of success in achieving goals

than just profitability (safeguard welfare of community).

� Social accountability

- focus more on socially related information e.g. monopoly practices and unfair trading. Include SRA (disclosure issues and enabling Muslims to determine liability for zakat).

� Thus, Islamic accounting/reporting - pursuits of profits not at the expense of the community. The responsibility of accountants not limited to what is being laid down by management and profession but compliance with the percepts of Shariah is also required.

29

Accounting Records in Muslim Civilization

� Al-Khawarizmi prescribed the need for an accurate, detail and permanent record which is based on valid supporting documents bya trustworthy person who is cautious in checking errors and the records also need to have witnesses (audited).

� In light of the above practices certain Fiqh Mu’amalah principles were formulated:

� All financial transactions are to be in writing and show gross total collections, total expenditures and net surplus.

� Every accounting entry should have a valid supporting documents.

� All property should be kept in designated place for control and security.

� All accounting work should be done by trustworthy person with sufficient documental proofs (evidence)

� Every account should be verified by an independent party who will then endorse with a comment

� Stock take should be done with due care at periodic intervals orannually and reconciliation is to be made with the records. Any variation should be explained.

30

Financial Reporting From an Islamic Perspectives

� From the Islamic perspective, the primary objective of accounting is to ensure that the system discharges the Islamic concept of accountability.

� Accountability in Islam is derived from the Shariah (Islamic Law).

� The Shariah is derived primarily from the Quran (containing broad guidelines and principles) and Hadith (which supplements the revelations in the Quran.

� Islam has the well being of all (public) as the main objective. To achieve this, every individual is subjected to a code of behavior or discipline.

� In relation to financial reporting, the accountant, as an individual, is not only reporting to the investors but to a wider audience, That is the public.

� A business firm should regard itself as part of the community. The firm’s success should then be measured by how well it has met the needs of the society in which it operates.

31

Financial Reporting From an Islamic Perspectives –

cont.

� Two essential principles underline the concept of accountabilityin Islam:� The rule of full disclosure

� The concept of social responsibility

� A society dedicated to the improvement of the welfare of its members should have an information system that satisfies the needs of all interested parties.

� Given the emphasis on community welfare, financial reporting should focus more on socially oriented information.

� Zakat constitutes one aspect of social accountability in Islamic societies. Financial reports should therefore enable Muslims to determine zakat liability and ultimately achieve socio-economic justice.

� For zakat purposes, current values (as opposed to historical cost values), should be used. This is based on the practice followed during the Prophet’s (SAW) time.

32

Financial Reporting From an Islamic Perspectives –

cont.

� Current value information will allow the inclusion in financial statements of market values that are based on information obtained from outside of the firm’s database. This will extend the accountability of the firm into the social domain.

� Thus accounting must also be adapted to provide measures of success in achieving more goals than just profitability.

� The responsibility of the accountant in an Islamic society is not limited to what is being laid down by management and the profession, but that compliance with the rules of the Shariah is also required.

� The key to sound corporate reporting does not primarily rest on the books of accounting or the principles of accounts, but with the ethical values of the accountants.

� As such, importance is attached to reforming the inner person through faith, prayers, education and moral training.

� It is the ‘social good’ that will guide the accountant in the decision to disclose or not to disclose, thus reducing the risk of actions which will harm others.

33

Financial Reporting and Reporting Role of

an Accountant:

� External reporting – basically for external

users, for publication.

� Internal reporting – basically for internal

users, for strategic planning, decision

making.

34

Accountant’s Reporting Role

� Accountants have to ensure that the information provided is useful for decision making.

� Internal Users

�Done by interacting with the users and establishing exactly what financial information is relevant to the decision to be made.

� Steps:

� Users identify decision and how it is to be made.

� Establish with accountant the necessary information.

� Seek relevant data from the accountant.

�User and accountant interaction helps:

� Provide an understandable report to the user.

� Prepare report for user to help him to make decision.

� Provide relevant information.

� Identify the material information needs by the users.

35

� External Users

�Achieved by providing a general purpose financial

statement that complies with statute and is reliable (i.e.

free from bias – prudence, neutrality, completeness,

faithful presentation, freedom from material errors).

� Based on:

� Stewardship orientation - a means of achieving

accountability over cash resources and investment

decisions.

� Prediction orientation - assess company’s ability to

pay dividends.

36

Accountants Skills

� Internal reporting

� Skilled in identifying the information that is needed and

conveying its implication and meaning to the user.

� Skilled communicator – must be able to instill

confidence in the user that the information is relevant,

measured objectively, presented within a time-scale,

verifiable, reliable, complete picture of material items,

fair presentation of business transactions.

�A trained reporter of financial information, thus need

commercial awareness and should not operate in

isolation.

37

� External reporting

�Ensure that financial statements comply with

statutory and SEC requirements and other

generally excepted practices thus should

possess technical expertise.

�Ensure that financial statements present the

substance of the commercial transactions the

company has entered into, i.e. commercial

awareness.

38

Limitations of Accounting History

� Historical inquiry could either narrative or interpretational is conditional and not definitive –it may be incomplete.

� History may not reveal cause of an event as a certainty but can indicate probable factors affecting the event.

� Historians ‘explanation and causal analysis’ begin with searches for patterns of development –attempts to proceed from determination (what happened) to a contingency (how it happened) basis – judgmental process constrained by time.

39

Tutorials

� Ignore History at Your Peril by J.R Edwards.

� Tan Lian Tong, Financial Accounting and Reporting in Malaysia, Chapt. 1.

� Accounting From Past to Present: The History of Accounting to 1900.

� Corporate Reporting From an Islamic Perspectives by Dr. Maliah Sulaiman, UIA.