Accountancy is the art of communicating financial information about a business entity A business is a legally recognized organization designed to provide goods and/or services to consumers. Businesses are predominant in capitalist economies. Most businesses are privately owned. A business is typically formed to earn profit that will increase the wealth of its owners and grow the business itself. The owners and operators of a to users such as shareholders A mutual shareholder or stockholder is an individual or company that legally owns one or more shares of stock in a joint stock company. A company's shareholders collectively own that company and are the members of the company by signing the memorandum of association . Thus, the typical goal of such companies is to enhance shareholder value and managers Management in all business areas and organizational activities are the acts of getting people together to accomplish desired goals and objectives. Management comprises planning, organizing, staffing, leading or directing, and controlling an organization or effort for the purpose of accomplishing a goal. Resourcing encompasses the deployment and. The communication Communication is a process of transferring information from one entity to another. Communication processes are sign-mediated interactions between at least two agents which share a repertoire of signs and semiotic rules. Communication is commonly defined as "the imparting or interchange of thoughts, opinions, or information by speech, writing, is generally in the form of financial statements A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by accountants that show in money terms the economic resources In economics, factors of production are the resources employed to produce goods and services. They facilitate production but do not become part of the product (as with raw materials) or become significantly transformed by the production process (as with fuel used to power machinery). To 19th century economists, the factors of production were land ( under the control of management.[1] It is the branch of mathematical science Mathematical sciences is a broad term that refers to those academic disciplines that are primarily mathematical in nature but may not be universally considered subfields of mathematics proper. Statistics, for example, is mathematical in its methods but grew out of political arithmetic which merged with inverse probability and grew through that is useful in discovering the causes of success and failure in business A business is a legally recognized organization designed to provide goods or services, or both, to consumers, businesses and governmental entities. Businesses are predominant in capitalist economies. Most businesses are privately owned. A business is typically formed to earn profit that will increase the wealth of its owners and grow the business. The principles The scientific process generally consists of establishing a cause by analyzing its effect upon objects. In this way, a description can be established to explain what principle brought about the change-effect. For this reason the principle of cause is considered to be a determining factor in the production of facts of accountancy are applied to business entities in three divisions of practical art, named accounting, bookkeeping Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting. The accounting process is usually performed by an accountant. The accountant creates reports from, and auditing The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and for energy conservation.[2]

Accounting is defined by the AICPA The American Institute of Certified Public Accountants is the national, professional association of Certified Public Accountants (CPAs) in the United States, with more than 360,000 members, including CPAs in business and industry, public practice, government, and education; student affiliates; and international associates. The AICPA maintains as "The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."[3]

Accounting is thousands of years old; the earliest accounting records, which date back more than 7,000 years, were found in the Middle East The Middle East is a region that encompasses southwestern Asia and Egypt. In some contexts, the term has recently been expanded in usage to sometimes include Afghanistan and Pakistan, the Caucasus and Central Asia, and North Africa. It's often used as a synonym for Near East, in opposition to Far East. The corresponding adjective is Middle-Eastern. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced.[4]

Early accounts served mainly to assist the memory of the businessperson A businessperson is employed at usually a profit-oriented enterprise, or more specifically, someone who is involved in the management (at any level) of a company, or even an entrepreneur. The term businessperson almost always refers to someone with a "white collar" occupation and the audience for the account was the proprietor A sole proprietorship also known as a sole trader, or simply proprietorship is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business. All profits and all losses accrue to the owner . All assets of the business are owned by the proprietor and all debts of the or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors The term has taken on a specific meaning in finance to describe the particular types of people and companies that regularly purchase equity or debt securities for financial gain in exchange for funding an expanding company. Less frequently, the term is applied to parties who purchase real estate, currency, commodity derivatives, personal property, so double-entry bookkeeping The double-entry bookkeeping system was started in 13th century and refers to a set of rules to record financial information in a financial accounting system wherein every transaction or event impacts at least two different accounts. In modern accounting this is done using debits and credits within the accounting equation, assets = liabilities + first emerged in northern Italy Italy (pronounced /ˈɪtəli/ ; Italian: Italia [iˈtaːlja]), officially the Italian Republic (Italian: Repubblica italiana), is a country located partly on the European Continent and partly on the Italian Peninsula in Southern Europe and on the two largest islands in the Mediterranean Sea, Sicily and Sardinia. Italy shares its northern, Alpine in the 14th century As a means of recording the passage of time, the 14th century was the century which lasted from 1301 to 1400, where trading ventures began to require more capital Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc than a single individual was able to invest. The development of joint stock companies A joint stock company is a type of business entity: it is a type of corporation or partnership involving two or more legal persons. Certificates of ownership (or stocks) are issued by the company in return for each financial contribution, and the shareholders are free to transfer their ownership interest at any time by selling their stockholding created wider audiences for accounts, as investors without firsthand knowledge of their operations Business operations are those ongoing recurring activities involved in the running of a business for the purpose of producing value for the stakeholders. They are contrasted with project management, and consist of business processes relied on accounts to provide the requisite information.[5] This development resulted in a split of accounting systems for internal (i.e. management accounting Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions) and external (i.e. financial accounting Financial accountancy is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation Accounting attestation standards define the basic standards for representing attestation engagements. Attestation is defined as an engagement in which a practitioner is hired to issue written communication that expresses a conclusion about the reliability of written assertions prepared by a separate party. The American Institute of Certified of external accounts by auditors The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and for energy conservation.[6]

Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions and is used to provide information to employees, managers, owner-managers Self-employment is working for one's self rather than for another person or company. In other sense, it is, earning one's livelihood directly from one's own trade or business rather than as an employee of another. To be self-employed, an individual is normally highly skilled in a trade or has a niche product or service for his or her local and auditors The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and for energy conservation. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accounting Financial accountancy is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power and provides information to present and potential shareholders, creditors A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property or service. The second such as banks or vendors, financial analysts A financial analyst, securities analyst, research analyst, equity analyst, or investment analyst is a person who performs financial analysis for external or internal clients as a core part of the job, economists An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are many sub-fields, ranging from the broad philosophical theories to the focused study of minutiae within specific markets,, and government agencies A government agency is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency[citation needed]. There is a notable variety of types of agency. Although usage differs, a government agency is normally distinct both from a. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting is called Generally Accepted Accounting Principles Generally Accepted Accounting Principles is the americanized term used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction which are generally known as Accounting Standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in, or GAAP.[7]

Contents

Etymology

The word "Accountant An accountant is a practitioner of accountancy , which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and other decision makers make resource allocation decisions" is derived from the French French is a Romance language spoken as a first language by about 136 million people worldwide. Around 190 million people speak French as a second language, and an additional 200 million speak it as an acquired foreign language. French speaking communities are present in 57 countries and territories. Most native speakers of the language live in word "Compter", which took its origin from the Latin Latin or sometimes Roman is an Italic language originally spoken in Latium and Ancient Rome. Although often considered a dead language, in view of the fact that it has no native, fluent speakers, Latin continues to be taught in schools and has been, and currently is, used in the process of new word production in modern languages from many word "Computare". The word was formerly written in English English is a West Germanic language that arose in the Anglo-Saxon kingdoms of England and spread into South-East Scotland under the influence of the Anglian medieval kingdom of Northumbria. Following the economic, political, military, scientific, cultural, and colonial influence of Great Britain and the United Kingdom from the 18th century, and of as "Accomptant", but in process of time the word, which was always pronounced by dropping the "p", became gradually changed both in pronunciation Pronunciation refers to the way a word or a language is spoken, or the manner in which someone utters a word. If one is said to have "correct pronunciation", then it refers to both within a particular dialect and in orthography The orthography of a language specifies the correct way of using a specific writing system to write the language. Where more than one writing system is used for a language, for example Kurdish, Uyghur or Serbian, there can be more than one orthography. Orthography is derived from Greek ὀρθός orthós ("correct") and γράφειν to its present form."[8]

History

Token accounting in ancient Mesopotamia

Map of the Middle East showing the Fertile Cresent circa. 3rd millennium BC It represents a period of time in which imperialism, or the desire to conquer, grew to prominence, in the city states of the Middle East, but also throughout Eurasia, with Indo-European expansion to Anatolia, Europe and Central Asia. The civilization of Ancient Egypt rises to a peak with the Old Kingdom. World population is estimated to have

The earliest accounting records were found amongst the ruins of ancient Babylon Babylon was a city-state of ancient Mesopotamia, the remains of which are found in present-day Al Hillah, Babil Province, Iraq, about 85 kilometers (55 mi) south of Baghdad. All that remains of the original ancient famed city of Babylon today is a mound, or tell, of broken mud-brick buildings and debris in the fertile Mesopotamian plain between, Assyria Assyria was a kingdom centered on the Upper Tigris river, in Mesopotamia , that came to rule regional empires a number of times through history. It was named for its original capital, the ancient city of Assur (Akkadian: 𒀸𒋗𒁺 𐎹 Aššūrāyu; Arabic: أشور Aššûr; Hebrew: אַשּׁוּר Aššûr, Aramaic: ܐܬܘܪ Aṯur. The term and Sumeria Sumer was a civilization and historical region in southern Mesopotamia, modern Iraq. It is the earliest known civilization in the world and is known as the Cradle of Civilization. The Sumerian civilization spanned over 3000 years and began with the first settlement of Eridu in the Ubaid period (mid 6th millennium BC) through the Uruk period (4th, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus The term surplus is used in economics for several related quantities. The consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than the most that they would be willing to pay. The producer surplus is the amount that producers benefit by selling at a market price mechanism that is higher had been gained after the crops had been harvested or the young animals weaned.[4]

Complex accounting tokens made of clay, from Susa Susa (Persian: Ŝuŝ, pronounced [ʃuʃ]; also Armenian ; Greek: Σοῦσα [sousa]); Syriac: ܫܘܫ (Shush); Old Persian Çūšā-; was an ancient city of the Elamite, Persian and Parthian empires of Iran. It is located in the lower Zagros Mountains about 250 km (150 miles) east of the Tigris River, between the Karkheh and Dez Rivers, Uruk period The Uruk period existed from the protohistoric Chalcolithic to Early Bronze Age period in the history of Mesopotamia, following the Ubaid period and succeeded by the Jemdet Nasr period. Named after the Sumerian city of Uruk, this period saw the emergence of urban life in Mesopotamia. It was followed by the Sumerian civilization. The late Uruk, cira 3500 BCE. Department of Oriental Antiquities, Louvre The Musée du Louvre , or officially Grand Louvre — in English, the Louvre Museum or simply the Louvre — is one of the world's largest museums, the most visited museum in the world, and a historic monument. It is a central landmark of Paris, France and is located on the Right Bank of the Seine in the 1st arrondissement (district). Nearly 35,000.

During the period 8000 In the 8th millennium BC, agriculture becomes widely practiced in the Fertile Crescent and Anatolia–3700 BCE, the Fertile Crescent witnessed the spread of small settlements supported by agricultural surplus. Tokens, shaped into simple geometric forms such as cones or spheres, were used for stewardship purposes in relation to identifying and securing this surplus, and are examples of accounts that referred to lists of personal property.[9] Some of them bore markings in the form of incised lines and impressed dots. Neolithic community leaders collected the surplus at regular intervals in the form of a share of the farmers’ flocks and harvests. In turn, the accumulated communal goods were redistributed to those who could not support themselves, but the greatest part was earmarked for the performance of religious rituals and festivals. In 7000 BCE, there were only some 10 token shapes because the system exclusively recorded agricultural goods, each representing one of the farm products levied at the time, such as grain, oil and domesticated animals.The number of token shapes increased to about 350 around 3500 BCE, when urban workshops started contributing to the redistribution economy. Some of the new tokens stood for raw materials such as wool and metal and others for finished products among which textiles, garments, jewelry, bread, beer and honey.[10]

The invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind.[11] The cognitive significance of the token system was to foster the manipulation of data. Compared to oral information passed on from one individual to the other, tokens were extra-somatic, that is outside the human mind. As a result, the Neolithic accountants were no longer the passive recipients of someone else’s knowledge, but they took an active part in encoding and decoding data. The token system substituted miniature counters for the real goods, which eliminated their bulk and weight and allowed dealing with them in abstraction by patterning, the presentation of data in particular configurations. As a result, heavy baskets of grains and animals difficult to control could be easily counted and recounted. The accountants could add, subtract, multiply and divide by manually moving and removing counters.[12]

Globular token envelope with a cluster of accounting tokens. Clay, Susa, Uruk period (4000 to 3100 BCE). Department of Oriental Antiquities, Louvre. Economic tablet with numeric signs. Proto-Elamite script in clay, Susa, Uruk period (3200 BC to 2700 BCE). Department of Oriental Antiquities, Louvre.

The Mesopotamian civilization emerged during the period 3700–2900 BCE amid the development of technological innovations such as the plough, sailing boats and copper metal working. Clay tablets with pictographic characters appeared in this period to record commercial transactions performed by the temples.[9] Clay receptacles known as bullae, were used in Elamite city of Susa which contained tokens. These receptacles were spherical in shape and acted as envelopes, on which the seal of the individuals taking part in a transaction were engraved. The symbols of the tokens they contained were represented graphically on their surface, and the recipient of the goods could check whether they matched with the amount and characteristics expressed on the bulla once they had received and inspected them. The fact that the content of bulla was marked on its surface produced a simple way of checking without destroying the receptacle, which constituted in itself an exercise in writing that, despite being born spontaneously as a support for the existing system for controlling merchant goods, ultimately became the definitive practice for non-oral communication. Eventually, bullae were replaced by clay tablets, which used symbols to represent the tokens.[13]

During the Sumerian period, token envelop accounting was replaced by flat clay tablets impressed by tokens that merely transferred symbols. Such documents were kept by scribes, who were carefully trained to acquire the necessary literary and arithmetic skills and were held responsible for documenting financial transactions.[14] Such records preceded the earliest found examples of cuneiform writing in the form of abstract signs incised in clay tablets, which were written in Sumerian by 2900 BCE in Jemdet Nasr. Therefore “token envelop accounting” not only preceded the written word but constituted the major impetus in the creation of writing and abstract counting.[9]

Accounting in the Roman Empire

Part of the Res Gestae Divi Augusti from the Monumentum Ancyranum (Temple of Augustus and Rome) at Ancyra, built between 25 BCE - 20 BCE.

The Res Gestae Divi Augusti (Latin: "The Deeds of the Divine Augustus") is a remarkable account to the Roman people of the Emperor Augustus' stewardship. It listed and quantified his public expenditure, which encompassed distributions to the people, grants of land or money to army veterans, subsidies to the aerarium (treasury), building of temples, religious offerings, and expenditures on theatrical shows and gladiatorial games. It was not an account of state revenue and expenditure, but was designed to demonstrate Augustus' munificence. The significance of the Res Gestae Divi Augusti from an accounting perspective lies in the fact that it illustrates that the executive authority had access to detailed financial information, covering a period of some forty years, which was still retrievable after the event. The scope of the accounting information at the emperor's disposal suggests that its purpose encompassed planning and decision-making.[15]

The Roman historians Suetonius and Cassius Dio record that in 23 BC, Augustus prepared a rationarium (account) which listed public revenues, the amounts of cash in the aerarium (treasury), in the provincial fisci (tax officials) , and in the hands of the publicani (public contractors); and that it included the names of the freedmen and slaves from whom a detailed account could be obtained. The closeness of this information to the executive authority of the emperor is attested by Tacitus' statement that it was written out by Augustus himself.[16]

Roman writing tablet from the Vindolanda Roman fort of Hadrian's Wall, in Northumberland (1st-2nd century AD) requesting money to buy 5,000 measures of cereal used for brewing beer. Department of Prehistory and Europe, British Museum.

Records of cash, commodities, and transactions were kept scrupulously by military personnel of the Roman army. An account of small cash sums received over a few days at the fort of Vindolanda cira 110 CE shows that the fort could compute revenues in cash on a daily basis, perhaps from sales of surplus supplies or goods manufactured in the camp, items dispensed to slaves such as cervesa (beer) and clavi caligares (nails for boots), as well as commodities bought by individual soldiers. The basic needs of the fort were met by a mixture of direct production, purchase and requisition; in one letter, a request for money to buy 5,000 modii (measures) of braces (a cereal used in brewing) shows that the fort bought provisions for a considerable number of people.[17]

The Heroninos Archive is name given to a huge collection of papyrus documents, mostly letters, but also including a fair number of accounts, which comes from Roman Egypt in 3rd century CE. The bulk of the documents relate to the running of a large, private estate[18] is named after Heroninos because he was phrontistes (trans. manager) of the estate which had a complex and standarised system of accounting which was followed by all its local farm managers.[19] Each administrator on each sub-division of the estate drew up his own little accounts, for day to day running of the estate, payment of the workforce, production of crops, the sale produce, the use of animals, and general expetidirure on the staff. This information was then summarized as pieces of papyrus scroll into one big yearly account for each particular sub—division of the estate. Entries were arranged by sector, with cash expenses and gains extrapolated from all the different sectors. Accounts of this kind gave the owner the opportunity to take better economic decisions because the information was purposefully selected and arranged.[20]

Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents.[21]

Islamic accounting & algebra

In the Holy Qur’an, the word hesab (Arabic: account) is used in its generic sense, relating to one’s obligation to account to God on all matters pertaining to human endeavour. According to the Holy Qur’an, followers are required to keep records of their indebtedness (Sura 2, ayah 282), thus Islam thus provides general approval and guidelines for the recording and reporting of transactions.[22]

The Islamic law of inheritance (Sura 4, ayah 11) defines exactly how the estate is calculated after death of an individual. The power of testamentary disposition is basically limited to one-third of the net estate (ie. the assets remaining after the payment of funeral expenses and debts), providing for every member of the family by allotting fixed shares not only to wives and children, but also to father and mothers.[23] The complexity of this law served as an impetus behind the development of algebra (Arabic: al-jabr) by Muhammad ibn Mūsā al-Khwārizmī and other medieval Islamic mathematicians. Al-Khwārizmī's Hisab al-jabr w’al-muqabala (Arabic: "The Compendious Book on Calculation by Completion and Balancing", Baghdad, c. 825) devoted a chapter on the solution to the Islamic law of inheritance using linear equations.[24] In the twelfth century, Latin translations of al-Khwārizmī's Kitāb al-Jamʿ wa-l-tafrīq bi-ḥisāb al-Hind (Arabic: Book of Addition and Subtraction According to the Hindu Calculation) on the use of Indian numerals, introduced the decimal positional number system to the Western world.[25]

The development of mathematics and accounting was intertwined during the Renaissance. Mathematics was in the midst of a period of significant development in the late 15th century. Hindu-Arabic numerals and algebra were introduced to Europe from Arab mathematics at the end of the 10th century by the Benedictine monk Gerbert of Aurillac, but it was only after Leonardo Pisano (also known as Fibonacci) put commercial arithmetic, Hindu-Arabic numerals, and the rules of algebra together in his Liber Abaci in 1202 that Hindu-Arabic numerals became widely used in Italy.[26]

While there is no direct relationship between algebra and bookkeeping, the teaching of the subjects and the books published addressed the same group, namely the children of merchants who were sent to reckoning schools (in Flanders and Germany) or abacus schools (known as abbaco in Italy), where they learned the skills useful for trade and commerce. There is probably no need for algebra in performing bookkeeping operations, but for complex bartering operations or the calculation of compound interest, a basic knowledge of arithmetic was mandatory and knowledge of algebra was very useful.[27]

Luca Pacioli and double-entry bookkeeping

Main articles: Luca Pacioli and Double-entry bookkeeping system

Bartering was the dominant practice for traveling merchants during the Middle Ages. When medieval Europe moved to a monetary economy in the 13th century, sedentary merchants depended on bookkeeping to oversee multiple simultaneous transactions financed by bank loans. One important breakthrough took place around that time: the introduction of double-entry bookkeeping[28], which is defined as any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form.[29] The historical origin of the use of the words ‘debit’ and ‘credit’ in accounting goes back to the days of single-entry bookkeeping in which the chief objective was to keep track of amounts owed by customers (debtors) and amounts owed to creditors. ‘Debit,’ is Latin for ‘he owes’ and ‘credit’ Latin for ‘he trusts’.[30]

The earliest extant evidence of full double-entry bookkeeping is the Farolfi ledger of 1299-1300. [31] Giovanno Farolfi & Company were a firm of Florentine merchants whose head office was in Nimes who also acted as moneylenders to Archbishop of Arles, their most important customer.[32] The oldest discovered record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts of the city of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and contains balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.[33]

Pacioli's portrait, a painting by Jacopo de' Barbari, 1495, (Museo di Capodimonte).The open book to which he is pointing may be his Summa de Arithmetica, Geometria, Proportioni et Proportionalità.[34]

Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (Italian: "Details of Calculation and Recording"). It was written primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebra.[35]

Although Luca Pacioli did not invent double-entry bookkeeping,[36], his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today.[37] Even though Pacioli's treatise exhibits almost no originality, it is generally considered as an important work, mainly because of its wide circulation, it was written in vernacular Italian language, and it was a printed book.[38]

According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books of account are at the direct basis of this system: the memoriale (Italian: memorandum), the giornale (journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index.[39]

Pacioli’s treatise gave instructions in how to record barter transactions and transactions in a variety of currencies – both being far more commonplace than they are today. It also enabled merchants to audit their own books and to ensure that the entries in the accounting records made by their bookkeepers complied with the method he described. Without such a system, all merchants who did not maintain their own records were at greater risk of theft by their employees and agents: it is not by accident that the first and last items described in his treatise concern maintenance of an accurate inventory.[40]

The nature of double-entry can be grasped by recognizing that this system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription and calculation. One of its social effects was to proclaim the honesty of merchants as a group; one of its epistemological effects was to make its formal precision based on a rule bound system of arithmetic seem to guarantee the accuracy of the details it recorded. Even though the information recorded in the books of account was not necessarily accurate, the combination of the double entry system's precision and the normalizing effect that precision tended to create the impression that books of account were not only precise, but accurate as well. Instead of gaining prestige from numbers, double entry bookkeeping helped confer cultural authority on numbers.[41]

Post-Pacioli

The spread of the Italian accounting rules over the rest of Europe and thence further afield, was the result of treatises, some of them strongly based on Pacioli's work, describing and explaining the system and its practice. The "Quaderno doppio" (trans. Double-entry Ledger, Venice, 1534) of Domenico Manzoni da Oderzo was one of the first reproductions of Pacioli's "Particularis de Computis et Scripturis". This work, important because of elaborate examples, was very popular and widespread among merchants: it enjoyed no less than seven editions between 1534 and 1574. Other books that are directly or indirectly based on Pacioli's work are Hugh Oldcastle's "A Profitable Treatyce called the Instrument or Boke to learne to knowe the good order of the kepyng of the famous reconynge called in Latyn, Dare and Habere, and in Englyshe, Debitor and Creditor" (London, 1543), a translation of Pacioli's treatise, and Wolfgang Schweicker's "Zwifach Buchhalten" (trans. Double-entry bookkeeping, Neurenberg, 1549), a translation of the "Quaderno doppio".[42]

It was the Dutch mathematician Simon Stevin who persuaded merchants to make it a rule to summarize accounts at the end of every year in a chapter entitled Coopmansbouckhouding op de Italiaensche wyse (Dutch: "Commercial Book-keeping in the Italian Way") of his Wisconstigheg hedachtenissen (Dutch: "Mathematical memoirs", Leiden, 1605-08). Although the balance sheet he required every enterprise to prepare every year was based on entries of the ledger, it was prepared separately from the major books of account. The oldest semi-public balance sheet recorded was that of the East India Company dated 30th April 1671, which was submitted to the company's General Meeting on in 30th August 1671. The publication and audit of the balance sheet was still a rarity in England until the passing of the Bank Charter Act 1844.[43]

Between the publication of Pacioli's "Particularis de Computis et Scripturis" and the 19th century, there were few other changes in accounting theory. There was a general theoretical consensus that the double-entry method was superior because it could solve so many accounting problems simultaneously, but despite this consensus, accounting practices were remarkably varied, and merchants in the 16th and 17th centuries seldom maintained the high standards of the double-entry method. The application of double entry bookkeeping varied across countries, industries, and individual firms, depending in part on its audience. This audience shifted in general from sole proprietorship alone to a larger more dispersed group of partnership, coinvestors, shareholders, and even eventually the state, as capitalism became more sophisticated.[44]

In the Ottoman Empire, which at its peak ruled over Anatolia, Middle East, North Africa, the Balkans and parts of Eastern Europe, the merdiban (Persian: ladder or stairs) accounting system that had been adopted from the Ilkhanate in the 14th century was used for 500 years until the end of the 19th century.[45] Both the Ilkhanians and the Ottomans used siyakat script (from the Arabic siyak, to lead or herd), which was stenographic writing style of Arabic used only in official documents which prevented ordinary people from reading important state correspondence.[46] The title for each entry is given by extending the last letter of the first word in a straight line, so that the lines between successive entries would be laid out in the style of steps of a ladder.[47] Permission to replace the merdiban accounting system with double-entry accounting was given by Sultan Abdülhamid II to the Ministry of Finance in 1880.[48]

Accounting scandals

Main article: Accounting scandals

The year 2001 witnessed a series of financial information frauds involving Enron Corporation, auditing firm Arthur Andersen, the telecommunications company WorldCom, Qwest and Sunbeam, among other well-known corporations. These problems highlighted the need to review the effectiveness of accounting standards, auditing regulations and corporate governance principles. In some cases, management manipulated the figures shown in financial reports to indicate a better economic performance. In others, tax and regulatory incentives encouraged over-leveraging of companies and decisions to bear extraordinary and unjustified risk.[49]

The Enron scandal deeply influenced the development of new regulations to improve the reliability of financial reporting, and increased public awareness about the importance of having accounting standards that show the financial reality of companies and the objectivity and independence of auditing firms.[49]

In addition to being the largest bankruptcy reorganization in American history, the Enron scandal undoubtedly is the biggest audit failure.[50] The scandal caused the dissolution of Arthur Andersen, which at the time was one of the five largest accounting firms in the world. It involved a financial scandal of Enron Corporation and their auditors Arthur Andersen, which was revealed in late 2001. After a series of revelations involving irregular accounting procedures conducted throughout the 1990s, Enron filed for Chapter 11 bankruptcy protection in December 2001.[51]

One consequence of these events was the passage of Sarbanes-Oxley Act in 2002, as a result of the first admissions of fraudulent behavior made by Enron. The act significantly raises criminal penalties for securities fraud, for destroying, altering or fabricating records in federal investigations or any scheme or attempt to defraud shareholders.[52]

Notes and references

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  1. ^ Elliot, Barry & Elliot, Jamie: Financial accounting and reporting, Prentice Hall, London 2004, ISBN 0273703641, p. 3
  2. ^ Goodyear, Lloyd Earnest: Principles of Accountancy, Goodyear-Marshall Publishing Co., Cedar Rapids, Iowa, 1913, p.7[1]
  3. ^ Singh Wahla, Ramnik. AICPA committee on Terminology. Accounting Terminology Bulletin No. 1 Review and Résumé.
  4. ^ a b Friedlob, G. Thomas & Plewa, Franklin James, Understanding balance sheets, John Wiley & Sons, NYC, 1996, ISBN 0471130753, p.1
  5. ^ Carruthers, Bruce G., & Espeland, Wendy Nelson, Accounting for Rationality: Double-Entry Bookkeeping and the Rhetoric of Economic Rationality,American Journal of Sociology, Vol. 97, No. 1, July 1991, pp. 40-41,44 46,
  6. ^ Lauwers, Luc & Willekens, Marleen: "Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli" (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.302)[2]
  7. ^ Friedlob, G. Thomas & Plewa, Franklin James, Understanding balance sheets, Wiley, NYC, 1996, ISBN 0471130753, p. 4
  8. ^ Pixley, Francis William: Accountancy — constructive and recording accountancy (Sir Isaac Pitman & Sons, Ltd, London, 1900), p4[3]
  9. ^ a b c Salvador Carmona & Mahmoud Ezzamel:Accounting And Forms Of Accountability In Ancient Civilizations: Mesopotamia And Ancient Egypt,IE Business School, IE Working Paper WP05-21, 2005), p.6 [4]
  10. ^ Denise Schmandt-Besserat: From Tokens to Writing: the Pursuit of Abstraction, Bulletin Of The Georgian National Academy Of Sciences, 2007, vol. 175, no. 3, p.162–3 [5]
  11. ^ Oldroyd, David & Dobie, Alisdair: Themes in the history of bookkeeping, The Routledge Companion to Accounting History, London, July 2008, ISBN 978-0-415-41094-6, Chapter 5, p.96
  12. ^ Denise Schmandt-Besserat: From Tokens to Writing: the Pursuit of Abstraction Bulletin Of The Georgian National Academy Of Sciences, 2007, vol. 175, no. 3, p.165 [6]
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  14. ^ Salvador Carmona & Mahmoud Ezzamel:Accounting And Forms Of Accountability In Ancient Civilizations: Mesopotamia And Ancient Egypt,IE Business School, IE Working Paper WP05-21, 2005), p.7 [8]
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  17. ^ Bowman, Alan K., Life and letters on the Roman frontier: Vindolanda and its people Routledge, London, January 1998, ISBN 978-0-415-92024-7, p. 40-41,45
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  21. ^ Matt. 25:19
  22. ^ Lewis, Mervyn K.: Islam and accounting, Wiley-Blackwell, Oxford, 2001, p. 113 [12]
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  24. ^ Gandz, Solomon (1938), "The Algebra of Inheritance: A Rehabilitation of Al-Khuwarizmi", Osiris (University of Chicago Press) 5: 319–91, doi:10.1086/368492
  25. ^ Struik, Dirk Jan (1987), A Concise History of Mathematics (4th ed.), Dover Publications, ISBN 0486602559
  26. ^ Alan Sangster, Greg Stoner & Patricia McCarthy: "The market for Luca Pacioli’s Summa Arithmetica" (Accounting, Business & Financial History Conference, Cardiff, September 2007) p. 1–2
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  40. ^ Alan Sangster, Using accounting history and Luca Pacioli to teach double entry, Middlesex University Business School, September 2009, p.9[24]
  41. ^ Poovey, Mary "A history of the modern fact" (University of Chicago Press, 1998) Ch.2 p.30, 58 & 54
  42. ^ Lauwers, Luc & Willekens, Marleen: "Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli" (Tijdschrift voor Economie en Management, Katholieke Universiteit Leuven, 1994, vol:XXXIX issue 3, p.301)[25]
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  45. ^ Toraman, Cengiz, Yilmaz, Sinan & Bayramoglu, Fatih: Estate accounting as a public policy tool and its application in the Ottoman Empire in the 17th century, Spanish Journal of Accounting History,] no. 4, Madrid, June 2006, p.1
  46. ^ Erkan, Mehmet, Aydemir, Oguzhan & Elitas, Cemal: An Accounting System used between 14th & 19th centuries in the Middle East: The Merdiven (Stairs) Method, Afyon Kocatepe University, Afyonkarahisar, July 2006, p.6-7 [27]
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