History of Accounting

Once upon a time, Luca Pacioli wrote a math book. It was just a little survey and should have been treated like ordinary books of the time and read and then disappeared into historical archives and forgotten. A few brief chapters on practical mathematics made this one special.

The time was 1494. Columbus had discovered America just two years before. The author was a Franciscan monk.

The chapter on practical mathematics addressed mathematics in business. He said that the successful merchant needs three things: sufficient cash or credit, an accounting system that can tell him how heЎЇs doing, and good bookkeeper to operate it. His accounting system consisted of journals and ledgers. It rested on the invention of double-entry bookkeeping. Debits were on the left side because thatЎЇs what Ў°debitЎ± meant, Ў°the leftЎ±. The numbers on the right were named Ў°creditsЎ±.

If everything was done right, then the bookkeeper could do a trial balance (Ў°summa summariumЎ±). Add up all the debits and then add up all the credits, he said. If everything had been done right, the totals should match. If not, Ў°that would indicate a mistake in your Ledger, which mistake you will have to look for diligently with the industry and intelligence God gave you.Ў± He wrote.

Experience

Before computers came along Jack had never got a trial balance right the first time. Many hours were spent looking for the mistakes, though not necessarily with the reverent attitude that Father Pacioli advised!

Double-entry bookkeeping was so simple and met the needs of business so well that it caught on immediately.

In 1850 14 accountants offered services to the public in New York City, 4 in Philadelphia, and 1 in Chicago. The British Isles was the superpower of world commerce. Many enterprises and individuals employed the services of public accountants. Citing the needs of courts to employ public accountants Ў°to aid those Courts in their investigation of matters of accountingЎ± select accountants were titled Ў°Chartered Accountants.Ў± The US equivalent title is Ў°Certified Public AccountantЎ±. These titles are used to this day.

The arrival of the income tax laws were another major event in accounting history. Attorneys naturally thought that since income tax returns were legal documents, they would have exclusive rights to prepare them. Accountants replied that since that the bulk of the work in preparing a return involved accounting calculations, they were more properly accounting work.

The substance of the tasks trumped legal argumentation. US law firms in the 1920ЎЇs were slow to incorporate income tax preparations into their business skills. Public accountants saw a new lucrative opportunity and jumped into tax work with both feet. By the time the lawyers challenged the accountants for practicing law without a license, income tax preparation had been so thoroughly identified with accountants that they lost the case.

The Great Depression rocked the integrity of the accounting profession. The British Steamship Company was just one of the large world giants that went bankrupt just after posting large profits. Ў°How could profitable companies go bankrupt?Ў± Investors asked. Court cases showed that the economic reality was that the companies werenЎЇt profitable after all. The profits were the result of bookkeeping tricks. Moreover the reserve funds that were on the books were non-existent.

So far, these events could be chalked up as individuals' fraud (albeit widespread fraud) and handled through the ordinary course of justice. What made the events historic was when the accountants testified in court that the bookkeeping practices were Ў°generally accepted accounting principlesЎ± and then proceeded to prove that they were. This was more serious than just individual malfeasance. If the basic rules of accounting gave false information, then something was wrong with the basic rules of accounting.

Worse, followed. Corporate accounting was anything goes. There were no rules, per se. There were just Ў°generally accepted accounting principlesЎ±. They were generally accepted because most accountants did certain things. Since accountants were hired by and answered to corporate management, they served the needs of management, not the public. That meant that in practice, the primary function of accounting was to make management look good.

Things had to change. While the profession managed to escape the full New Deal government takeover, rules, standards and legal responsibility had to be shouldered. The American Institute of Certified Public Accountants (AICPA) created their own rule-making body, the