Accounting Theory &

Practice
Lecture 1: History of Accounting
Learning objectives
 To understand and analyze accounting history.
 To understand the link between accounting and capitalism.
 To understand the role of the double entry bookkeeping in accounting history.
 To understand financial reporting regime and accounting standard setting in Malaysia.
 To explain economic development in Malaysia
 To understand the relevance of accounting history.
What is Accounting History?

 Accounting history is the study of the evolution in

accounting thought, practices and institutions in response
to changes in the environment and societal needs. It also
considers the effect that this evolution has worked in the
environment.
 It is a study of the heritage of accounting and its
contribution to accounting pedagogy policy and
perspective in any country.
Historical development of accounting
 Excavations conducted by archaeologists invariably discover evidence
that accounting was a feature of early civilizations.
 Many of the early records which are recognizable accounts, or the raw
materials of accounts, lack those systematic attributes of form and
content with which we associate modern accounting practice.
 They consists mostly of inventories, lists of commodities used as
payments, contracts of sale or loan, and rarely simple journal entries.
 For example, in Ancient Egypt and India, cowrie shells and cattle
were utilized as a means of exchange, respectively.
Historical development of Accounting
 Ancient farmer recorded his assets in terms of value as follows:

Items Value (cattle)

A House 200
20 sheep 5
10 cattle 10 cattle
A piece of land 250
Total 465

 Thereafter, the use of money was needed to exchange goods and services.
Early usage of money

 The force which provided the necessary impetus for the development of
modern accounting was the introduction of money as a means of exchange.

 The earliest usage of coins as money in ancient Mesopotamia (Iraq) was about
4,500 B.C. Then followed by Greeks (Athenians) and Romans.

 At the beginning, only plain pieces of metal was used as coins. Then the
image of sheep was impressed on metals.

 However, the coinage of money having a uniform value suitable for use as a
medium of exchange, first took place in Europe in the seventh century B.C.
Early usage of money

 The use of coins as money was already used in China well before it was used
in the West. The reason is that the Chinese empire flourished in trading
activities.
 The first emperor (Xia Dynasty 2205 – 1766 BC) kept the empire together by
building trunk roads and he standardized weights, measure and coinage.
Money needed by the government to pay bureaucrats and troops and the large
bills for its military.
 Besides the use of money, the ability to read and write however simple, must
first exist before there could be any form of accounting records.
 Such abilities already existed in some ancient civilizations such as Egypt,
Mesopotamia, Greece, Rome and India.
Accounting in Ancient Civilizations
 As discussed, the ancient civilizations were already using money in their business dealings.
Early accounting practices had been developed in governmental and private entities: to
administer or manage stores of assets and in societies which carried out trade.
 Early keepers of accounting record were Mesopotamians, the Greeks, the Romans and the
Chinese.
Egypt: Egyptian records were kept in form of picture writing called hieroglyphic. They used a
form of paper called the papyrus made form papyrus reed. The civilization flourished because
of the administration’s ability to keep detailed records of the state treasury in the various
districts. The governors are required to report daily to the treasurer who in turn reported to
the Prime minister (Vizier). Vizier then reported monthly to the king on the total treasury.
Mesopotamia: Traders who record their business transactions using clay tablets impressed
with the markings of the cuneiform (wedge shaped) script. These clay tablets served as a
strong evidence of the early form of accounting records in Mesopotamia. The writing on the
clay tablets also served as evidence of the ability to read and write in Mesopotamia at that
time.
 Accounting in Ancient Civilizations

Greece: Evidence was discovered in Greece in the form of “Zenon papyri” ( or

Zenon’s document). Zenon who is an administrator of a large estate in Egypt kept
his accounting records involving the estate on Egyptian paper known as ‘papyri’.
These documents merely showed the records of the daily movement of cash and
other assets. It also showed monthly, yearly and triennial summaries of
transactions. It was not a complete business records as there was no information
showing the measure of the profitability of the estate. The records were just a
primitive form of balance sheet, not an income statement.

Rome: The early Roman were well known for their administrative and
organizational skills. This would not be possible without the knowledge of some
systematic form of record keeping. The Romans kept their bookkeeping records
using impressions on wax tablets but much of these were destroyed over time.
Nevertheless, the Romans tried to develop some simple form of double entry
system at the time, but the studies were not quite conclusive.
 Accounting in Ancient Civilizations

China: The ancient Chinese civilization was well known for the ability and energy
in keeping and maintaining all sorts of records.
The ability to keep accounting records was one of the main reasons that had
allowed the central government to keep tracks of the political and economic
events.
Chou Dynasty had some system of accounting records that enabled them to
maintain a systematic tax collection. It also enabled the government to keep
tracks of various funds including the general reserve fund and the special reserve
fund.
Reflection

 What are the characteristics of ancient accounting records?

Pre renaissance period

 The next important accounting development emerged during the pre

renaissance period.
 This was the use of paper and the Arabic numeral system. A more
comprehensive business recording was now possible.
 By the time the new period of the revival of learning or the Renaissance
began in Italy in about 1400, the business world was already equipped with
the use of paper and the new Arabic numerals.
 The Double Entry System

 The next advancement in the development of accounting

was the emergence of the double entry system.
 This is a system whereby each transaction is recorded
twice, in two different accounts. The double entry system
opened a new era in accounting thought and practice.
 The system was first discovered and used in the thirteen
century at Italy.
 The Double entry system

 It was revealed in two books; first written by Luca Pacioli (Summa de

Arithmatica Geometria Proportioni et Proportionalita) published in
1494 and the second was written by Benedetto Cotrugli published in
1573.
 Luca Pacioli was more influential and had emerged as a historical
figure. His book was translated into several languages and soon used to
spread the knowledge of double entry system in Europe and Britain.
 His description of accounting practice was quite comprehensive:
included entries in journal and ledger. He emphasized that each
transaction must have a double entry (debit and credit).
The birth of modern Accounting

 The emergence of the double entry system is considered as the beginning of

the modern accounting (Renaissance period). Most of the businesses were
involved in trading rather than industrial activities (15th century).
 Manufacturing activities – cottage industries (manorial system). Large scale
industries not yet begun. Double entry system still new and its technicality
was not easily grasped. The single-entry system was still prevalent.
 To calculate profit - Simple deduction of the costs/expenses from revenues
with little consideration of depreciation and bad debt allowances.
Rise of Capitalism

 With the coming of the Renaissance the whole of Europe was beginning to
awake with a new philosophy and a new outlook. The expansion of
commercial activities created greater demand and greater opportunities –
increasing interest in trade amongst individuals.
 At the same time, Papal control over religious affairs was beginning to loosen
culminating with the establishment of the Church of England. All these
contributed the weakening of the manorial system. It encourage the rise of
individual business ventures and lead to the beginning of capitalism.
 Capitalism – everyone is free to do business and make profit in a competitive
market.
Capitalism and double entry system

 Littleton argued that the rise of capitalism had given rise to the emergence of the double
entry system – double entry system was ‘constructed’ by capitalism. However there is
another viewpoint that the particular relationship ( the double entry system) contributed
to the growth of capitalism).
 Sombart (1924) and F.R. Nussbaum stated that double entry system had served as a tool
that had led to the development of a new economic and social order (capitalism).
 But Yamey (an economist) argued that many business progressed without the need of
proper books of accounts. He also stated that double entry system was not necessary to
determine profits.
 However Winjum (an accountant) countered Yamey’s argument – accounts were necessary
for business to determine profit and hence capitalism could not have emerged without the
double entry bookkeeping.
 Whatever it is, it is important to note that capitalism had important implication upon the
development of accounting and accounting in Malaysia.
Development in Malaysia
 Double entry bookkeeping was introduced in Malaysia with the coming of the British. The
Industrial revolution in England coincided with the occupation of Penang by Francis Light
(An officer of the East India Company in 1786). From there the British influence
expanded and the whole area of Malaysia (including Singapore and Brunei) came under
British control.
 The expanding of industries in England led to the opening of rubber estates and tin
mines through out the country. The acquisition of Singapore by Stamford Raffles in 1819
caused the trade began in the region; this in turn led to the economic growth in
Malaysia. This further led to the establishment of first bank in Malaysia which is
Mercantile Bank in Penang followed by Chartered Bank in 1875.
 Accounting practice in the region (Malaya, Singapore, Sabah, Sarawak and Brunei) was
first based on the requirement on the UK Companies Acts. Bookkeepers were trained
locally with the aid of such British commercial schools such as London Chamber of
Commerce and Royal Society of Arts. Early accountant were imported from UK then later
more local accountants began to obtain their qualification from UK and from other
commonwealth countries (Australia, New Zealand and Canada). These practices led to
the financial reporting regime in Malaysia.
Financial Reporting Regime in Malaysia
 In Malaysia, the financial reporting regime is governed by the statutory
regulations, frameworks and standards.
 In Malaysia, the first documented financial reporting regulations were those
of the Companies Ordinances (and amendments) of 1940, 1946 and 1956,
before Malaysia (then Malaya) achieved her independence on 31 August 1957.
 The Ordinances continued to play an important role in regulating financial
reporting after the independence of Malaysia until the establishment of the
original Malaysian Companies Act in 1965 repealed them.
 Over the years, the reporting requirements of the Act remained relatively
unchanged until 1985 when the original Act was amended.
 In April 2016, the companies Bill 2015 was approved in Parliament to
introduce a new Companies Act of 2016. The new Companies Act 2016
replaced the original Companies Act in its entirety.
Financial Reporting Regime in Malaysia
 Apart from the Act’s requirements, the development and advancement of financial
reporting in Malaysia were left mostly to the accounting professional bodies.
 The Malaysian accounting professional bodies started with the Malayan Association of
Certified Public Accountants (MACPA) in 1957 then renamed as the Malaysian Institute of
Certified Public Accountants (MICPA) in 1958. The MICPA gives professional guidance to
members. It also conducts professional examinations which are recognized by MIA and
has no regulatory powers.
 After the MICPA, the Malaysian Institute of Accountants (MIA) was formed under the
Accountants Act 1967.
 The MIA regulations cover the practices of the whole accounting profession in Malaysia.
MIA also recognizes accounting qualification issued by professional accounting bodies in
UK (ACCA/CIMA/ICAEW) and other qualifications issued by accounting bodies of
commonwealth countries (CPA Australia). In 1987, the operations of the MIA were
elevated to that of a national accountancy body in Malaysia.
 It is noteworthy that the standard of financial reporting regime has improved over the
years in Malaysia.
Accounting Standards Setting in Malaysia

 The accounting development in UK influenced the development of accounting standards

setting in Malaysia. The operation of limited companies in pre independent Malaya was
then governed by the Companies Ordinance (adopted from UK Companies Acts).
 After independence, the UK Companies Act 1948 was adopted and adapted to become
Companies Act 1965. Two years later the Accountants Act 1967 was passed and with it,
Malaysian Institute of Accountants (MIA) had been established in order to regulate the
accounting profession in Malaysia.
 The Companies Act 1965 now Companies Act 2016 stated that the financial statements
of limited companies should reflect a true and fair view, and the preparation of
financial statements is to comply with the accounting standards.
 Previously, MIA developed and issued accounting standards before Malaysian Accounting
Standards Board (MASB) took over to maintain independence. MASB as an independent
body was established under Financial Reporting Act 1997.
Accounting Standards Setting in Malaysia

 In December 1996, the Malaysian Government announced its intention to

establish a new financial and reporting regime, and this intention was
subsequently endorsed in Parliament when the Financial Reporting Act 1997
was passed and gazetted on 6 March 1997.
 With this Act, two independent bodies were established: the Financial
Reporting Foundation (FRF) and the Malaysian Accounting Standards Board
(MASB).
 The functions of the FRF are set out in s 4(1) of the Financial Reporting Act
(FRA) while the functions of the MASB are set out in s 7(1) of the Financial
Reporting Act (FRA).
Accounting Standards Setting in Malaysia

 Malaysian Financial Reporting Standards (MFRS) are mainly those adapted and
adopted from International Accounting Standards (IAS) which issued by
International Accounting Standard Committee (IASC) which later became the
International Accounting Standards Board (IASB).
 In addition to the standards adopted from IAS, MASB also developed standards
which are peculiar to the Malaysian Environment.
 To assist companies which operate in Islamic principles, MASB issues
Technical Releases (TR) that provide the interpretation from the Islamic
perspective of the fin. reporting standards.
Malaysia’s post colonial economic development

 During the colonial period, authority over plan formulation and

implementation rested with senior British officials mainly concerned with
imperial interests and committed to protecting the predominantly British
plantation and mining interests in Malaya.
 Colonial bias for these interests was reflected in public development
expenditure that prioritized economic infrastructure to service the primary
commodity export economy.
Malaysia’s post colonial economic development

 As Britain’s most profitable colony, Malaya provided much of the export

earnings that financed British post-war reconstruction.
 Legal developments during this era played an important role in shaping and
developing British Malaya.
 During the early and mid-1950s, the colonial government initiated reforms,
including rural development and affirmative action efforts in education that
further boosted output and productivity.
Malaysia’s post colonial economic
development

 Malaysian economic development has been shaped by public policy in response

to changing national and external conditions. Public investments peaked in the
1970s and early 1980s, until the policy reversals driven by sovereign debt
concerns and new policy ideology fads. Foreign investments continued to be
favoured after independence for ethnic political reasons. Poverty reduction and
ownership redistribution by ethnicity were most successful during the 1970s
and early 1980s, although it is unclear how much these improved inter-ethnic
relations. Economic liberalization and the growing influence of business
interests and political elites have undermined the government’s developmental
role, culminating in the 1997–98 financial crisis and lacklustre growth since.
 DOI:10.1093/acprof:oso/9780199671557.003.0003
Relevance of Accounting History

 Accounting history is important to accounting pedagogy, policy, and practice

in Malaysia. It makes it possible to “better…understand our present and to
forecast or control our future” in Malaysia accounting context. Accounting
history may be narrated by relating episodes of accounting history in a
particular, specific, non-analytic manner, “with descriptions of theories of
knowledge, the unique work of individuals, their system of values and the
criticisms of their related work”, or interpretational by providing explanations
of these episodes. A good definition of accounting history follows:
Relevance of Accounting History

 With regards to policy perspectives, accounting history is instrumental to a

better understanding of the accounting problems and their institutional
contexts as well as the formulation of public policy in Malaysia.
 With regards to accounting practice in Malaysia, accounting history could
provide a better assessment of the existing practices by a comparison with
the methods used in the past.
 The relevance of accounting history to accounting practice, policy and
pedagogy call for more accounting history inquiry. The subject matter of this
historical research will include such areas as biography, institutional theory,
development of thought, general history, critical history, taxonomy and
bibliographic databases, and historiography.
Relevance of Accounting History
 With regards to pedagogy, accounting history can be very helpful to a better
understanding and appreciation of the field of accounting and its evolution as
a social science. A good rationale for the relevance of history in pedagogy in
Malaysia goes as follows:
 First, a profession based on traditions built over many centuries should
educate its members to appreciate their intellectual heritage. Second the
import of advances in thought, of major contributions to the literature, and
of crucial positive studies may be lost, fragmented, or inadequate recognized
in the longer term unless they are documented and incorporated by scholars
who have historical skills.
 Third, without access to analyses and interpretations of historical
developments in accounting thought and practice, today’s empiricists risk
basing their investigations upon incomplete or unjustified claims about the
past.
Learning Outcomes
You should have understood:

 The analysis of accounting history.

 The link between accounting and capitalism.
 The role of the double entry bookkeeping in accounting history.
 Financial reporting regime and accounting standard setting in Malaysia.
 Economic development in Malaysia
 The relevance of accounting history.