CHAPTER 1

HISTORICAL DEVELOPMENT OF
ACCOUNTING
Accounting History

“…the understanding of the past

development will help us in the present and
the future.” (Skinner and Milburn, 2001)
Definitions of accounting
 The Committee on Terminology of the American
Institute of Certified Public Accountants defined
accounting as follows:

‘Accounting is 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 a financial character, and interpreting the
results thereof’.
Definitions of accounting
history
 Defined by Belkoui 1983:

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.
Accounting: an art or science?

• The art view is that the accounting skills

necessary to be a good tradesperson should be
taught and that a ‘legalistic’ approach to
accounting is warranted.
• The social science view permeates the
atmosphere of the academic and research
environment in accounting, creating a growing
division between academia and profession and
between theory and practice.
Who is Luca Pacioli?
 Pacioli was a Franciscan friar who is often
associated with the introduction of double-
entry bookkeeping.
 In 1494 he published the book Summa de
Arithmetica, Geometria, Proportioni et
Proportionalita.
• His work described double-entry
bookkeeping and reflected the trading
practices of Venice, known as ‘the Method of
Venice’ or ‘the Italian method’.
• He did not invent double-entry bookkeeping
but rather made a record of what was
happening in Italy at the time.
• His books were translated into several
languages and so the Italian Method spread
throughout Europe.
What did Luca Pacioli write?
• The terms Debit (adebeo) and Credit (credito)
were used.

• He explained that three books are used in the

‘Italian method’: a memorandum, a journal and a
ledger.

• He said, ‘All entries … have to be double entries,

that is, if you make one creditor, you must make
someone debtor’.

• He advised the computation of periodic profits

and the closing of the books. ‘It is always good to
close the books each year, especially if you are in
a partnership with others. Frequent accounting
makes for long friendship’.
The presence of these forms of bookkeeping in
the ancient world has been attributed to various
factors

 Invention of writing
 Introduction to arabic numerals
 Decimal systems
 Algebra knowledge
 Presence of writing material
 Rise of literacy
 Existence of standard medium of
exchange (barter system, monetary)
 THE AGE OF RECORDKEEPING
PERIOD CIVILIZATION SIGNIFICANT EVENTS
4500 – Chaldean 1st organized government,
3600 BC Babylonian, oldest written languages
Assyrian and Treasury management
Sumerian Egyptian

Chinese (Chao Government accounting

Dynasty)
Greek Responsibility Accounting
system
Roman Tax system
Evolution of double-entry
bookkeeping
The ‘Italian method’ spread throughout Europe in the
sixteenth and seventeenth centuries.

16th Century The introduction of specific journals.

The practice of periodic financial statement.
17th Century Continuing development of the practice of
periodic financial statement.
The use of separate inventory accounts for
different types of goods.
•Growth of the corporation and the Industrial
Revolution and, as a result, accounting
acquires a better status.
Evolution of double-entry
bookkeeping
18th Century Three methods of treating fixed assets:
1. Asset is carried forward at original cost.
2. Asset account is closed at balancing date
and carried forward as the account
balance.
3. Asset is revalued, upwards or downwards.
19th Century •Depreciating property was accounted.
•Cost accounting emerged.
•Techniques of accounting for prepayments
and accruals.
•Development of funds’ statements.
Evolution of double-entry
bookkeeping
The 20th century saw the development of
accounting methods for complex issues.

20th Century •Computation of earnings per share.

•Accounting for business computations.
•Accounting for inflation.
•Accounting for long-term leases.
•Accounting for pensions.
•Accounting for new products of financial
engineering.
Relevance of accounting history

 Accounting history is essential to accounting

pedagogy, policy and practice.

 A good rationale for the relevance of history in

pedagogy:
• appreciate the intellectual heritage
• thought, major contributors and crucial
positive studies may be lost
• empiricists risk basing investigations on
incomplete or unjustified claims about
the past.
Relevance of accounting history

 Accounting history is essential to accounting

pedagogy, policy and practice.
 Pedagogy – history helpful in better
understanding and appreciation of accounting
and its evolution as a social science
 Policy – history can help towards a better
understanding of accounting problems as well
as contribute towards formulation of public
policy
 Practice – history could provide better
assessment of the existing practices by a
comparison with the methods used in the past
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

The nature of accounting
 Accounting has been perceived as an ideological
phenomenon and as a myth, symbol and ritual.
 What is your perception?

Ideology Accounting has been perceived as an ideological

phenomenon because it is a means of sustaining
and legitimizing (lawful/rightful) social, economic
and political arrangements.
Myth, symbol and ritual Accounting has been perceived as a myth, symbol
and ritual that permits the creation of a symbolic
order within which social agents can interact.
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.
Development of Accounting in
Malaysia
 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.
Development of Accounting in
Malaysia
 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.
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
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.
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.
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.
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.
External User

 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..
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.
Accountants skill

 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.
 Limitation 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.