L-27-Development in Accounting
PAGE 57 —
CHAPTER 27
Development in Accounting
EVOLUTION OF ACCOUNTING
Accounting is the system of recording, classifying and summarizing financial information in such a way that users of the information can make economic decisions based upon it.
Accounting began as a simple system of clay tokens to keep track of goods and animals, but has developed throughout history into a way of keeping track of complex transactions and other financial information.
Early Accounting
Accountancy has its roots in the earliest history of civilization. With the rise of agriculture and trade, people needed a way to keep track of their goods and of transactions.
Around 7500 B.C., Mesopotamians began using clay tokens to represent goods, such as animals, tools, food items or units of grain. This helped owners keep track of their property.
Instead of counting heads of cattle or bushels of grain every time one consumed or traded, people could simply add or subtract tokens. Different shapes were used for different goods.
Around 4000 B.C., the Sumerians began placing these tokens in sealed clay envelopes. Each token would be stamped into the clay of the outside of the envelope, so the owner would know how many tokens were inside, but the tokens themselves would be kept safe from tampering or loss.
This practice of pressing the tokens into the clay may have been the earliest genesis of writing.
A few hundred years later, more complex tokens began to be used. These tokens had special markings to denote different units or types of goods.
Starting around 3000 B.C., the Chinese developed the abacus, a tool for counting and calculating.
PAGE 58
Figure: Mesopotamian Accounting Tokens
The page contains a photograph/image captioned:
(Figure : Mesopotamian Accounting Tokens)
The image depicts an example of an ancient clay accounting token/envelope arrangement: a large clay object with several impressed holes/marks, together with multiple smaller clay tokens displayed in front of it.
Double-entry Bookkeeping and Luca Pacioli
Throughout much of ancient history and the Middle Ages, accountancy remained a fairly simple affair.
The adoption of coinage meant that accounting now dealt with money rather than actual goods, but single-entry bookkeeping, much like that used in modern check registers, was used to keep track of money exchanged, where it went and who owed what.
During and after the Crusades, European trade markets opened up to Middle Eastern trade, and European merchants, especially in Genoa and Venice, became increasingly wealthy.
They needed a better way to keep track of large amounts of money and complex transactions, and this led to the development of double-entry bookkeeping.
Double-entry bookkeeping means that each transaction is recorded at least twice, as a debit from one account and a credit to another.
In 1494, Luca Pacioli published a math book titled "Summa de arithmetica, geometria, proportione et proportionalita," which contained a description of double-entry accounting.
As the book's popularity grew, double-entry accounting began to sweep Europe, as merchants realized what a valuable tool it gave them for keeping track of detailed financial information.
For this accomplishment, Luca Pacioli is often called the "Father of Accounting."
Still, at this point in history, accountancy was not yet a specific profession, but rather an extension of the clerical duties of scribes, officials, bankers and merchants.
PAGE 59
The Industrial Revolution and the Rise of Professional Accountancy
With the advent of the Industrial Revolution in the late eighteenth and early nineteenth centuries, accounting developed further and came into its own as a profession.
The practice of cost accounting became prevalent as business owners and managers sought to understand how best to make their businesses as cost efficient as possible.
Josiah Wedgwood, the owner of the famous English pottery factory, was among the first to use cost accounting to understand what his company's money was being spent on and to eliminate unnecessary spending.
With the new complexity of accounting and the increasing demand for accurate bookkeeping, people began to specialize in accountancy, thus becoming the first professional public accountants.
Some of the accounting firms that are still in operation today were founded in the mid-nineteenth century.
William Deloitte opened his firm in 1845, and Samuel Price and Edwin Waterhouse opened their joint business in 1849.
Financial and management accounting
The development of joint-stock companies built wider audiences for accounting information, as investors without first-hand knowledge of their operations relied on accounts to provide the requisite information.
This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.
Modern Professional Accounting
Modern Accounting is a product of centuries of thought, custom, habit, action and convention.
Two concepts have formed the current state of the accountancy profession.
Firstly, the development of the double-entry book-keeping system in the fourteenth and fifteenth century and secondly, accountancy professionalization which was created in the nineteenth and twentieth centuries.
The modern profession of the chartered accountant originated in Scotland in the nineteenth century.
Today, accounting is a business unto itself, with thousands of practitioners worldwide and a large number of professional organizations and official guidelines to codify practices and requirements.
Particularly in the United States during the Great Depression, demands were made for better standardization of accounting practices and a set code of professional guidelines.
Today, the Generally Accepted Accounting Principles, or GAAP, set forth the standards by which public accountants must do business.
Every country has a similar set of accounting guidelines.
PAGE 60
RECENT DEVELOPMENTS IN ACCOUNTING
1. Human Resource Accounting
There is one school of thought which requires Human resources of an entity to be recognized as an Asset.
R. Likert was the first person to give model on Valuation of Human resources.
As per Him,
Value = Acquisition Cost + Training Cost
Such Value is depreciated over useful life of employee.
Another method of valuing HR’s is Discounted Wages & Salary Model (Law & Schwartz Model): This model is based on assumption that entity will generate benefits equal to Salary paid. It also assumes that Salary will remain same over period.
Value = Present value of expected Salary of employee till retirement.
Human Resource Accounting (HRA) is a new branch of accounting.
HRA means accounting for people as the organizational resources.
It is the measurement of the cost and value of people to organizations.
It involves measuring costs incurred by an organization to recruit, select, hire and train and develop employees and judge their economic value of the organization.
2. Environmental Accounting
Environment Accounting or Green Accounting is the practice of incorporating principles of environmental management and conservation into reporting practices and cost/benefit analyses.
Environmental accounting allows a business to see the impact of ecologically sustainable practices in everything from their supply chain to facility expansion.
It allows accountants to report on the economic impact of those decisions to stakeholders so as to allow for proactive decision making about processes that simultaneously meet environmental regulations while adding to the bottom line.
The highest profile, most globally reaching, actionable example of environmental accounting is the Kyoto Protocol.
The Kyoto Protocol is a legally binding agreement entered into voluntarily by developing and fully industrialized nations designed to reduce six greenhouse gasses that are believed to contribute to global warming.
3. Carbon Accounting
Carbon accounting or Greenhouse gas accounting refers generally to processes undertaken to "measure" amounts of carbon dioxide equivalents emitted by an entity.
It is used by states, corporations and individuals to create the carbon credit commodity traded on carbon
PAGE 61
markets.
Carbon credit is a statutory allowance given to those countries or businesses, which have lowered their greenhouse gases below their emission quota.
A generic concept is indeed carbon credit accounting where pollution level is controlled.
Awareness about environment pollution is on rise and along with it is significant decrease in Global warming levels by using mechanism like CER (Certified Emission Reduction).
CERs (Certified Emission Reduction) certificates are issued to entities for reducing the level of carbon in the atmosphere and these credits can be tradable in the stock exchange.
There are also options for making it saleable through purchase agreements or by auction.
4. Social Accounting
Social accounting is the process of communicating the social and environmental effects of organizations' economic actions to particular interest groups within society and to society at large.
It is also known as social accounting and auditing, social accountability, social and environmental accounting, corporate social reporting, corporate social responsibility reporting, non-financial reporting or accounting.
Social Responsibility Accounting is in its formative process, which aims at accounting for social costs incurred by business as well as the social benefits, created by it.
It emerges from the growing social awareness about the undesirable by-products of economic activities.
While earning profit, an enterprise incurs numerous social costs like pollution, using the resources of society like materials, land, labour etc.
To compensate for this social cost, an enterprise is expected to generate some social benefits also like employment opportunities, recreation activities, quality products etc.
(Refer Chapter 20 of Book 1)
VISUAL / IMAGE CONTENT CHECK
The only image-based visual element identified in the document is on page 58:
Figure: Mesopotamian Accounting Tokens
- Caption exactly shown in the source: “(Figure : Mesopotamian Accounting Tokens)”
- The image shows an ancient clay accounting-token artifact with several smaller tokens placed in front of it.
- The surrounding text explains that Mesopotamians used clay tokens beginning around 7500 B.C. to represent goods such as animals, tools, food items and units of grain.
- The text further explains that around 4000 B.C., the Sumerians placed such tokens in sealed clay envelopes and impressed the tokens into the clay exterior.
There are no separate tables, charts, flowcharts, or additional diagrams visible in the supplied five-page document; the remaining content is textual apart from the page-58 photograph/figure.
