Accounting Assignment

Name: Muhammad Ozair Shaukat

Roll No: 728-BSc-AM-2017
Class: BSc (Hons) in Applied Management
Session: 2017-2019
Semester: 1
Teacher: Prof. Mubashir Hussain Awan
Subject: Elements of Financial and Managerial Accounting
Course Code: MGMT 315
Topic: Evolution of
Accounting
Father of Accounting:
The name that looms largest in early
accounting history is Luca Pacioli, who in
1494 first described the system of double-
entry bookkeeping used by Venetian
merchants in his “Summa de Arithmetica,
Geometria, Proportioni et
Proportionalita.” Of course, businesses
and governments had been recording
business information long before the
Venetians. But it was Pacioli who was the
first to describe the system
of debits and credits in journals and ledge
rs that is still the basis of today's accounting systems.

Reference: http://www.investopedia.com/university/accounting/accounting1.asp

Pacioli declare that successful merchant needs three things which allow him to view his
finances at full glances.

1. Sufficient cash or credit.

2. Good keepers.
3. Accounting system.

The trial balance (summa summarium) is the end of Pacioli’s accounting cycle. If the total of
left side and right side does not tally Pacioli says:

“That would indicate a mistake in your ledger, which mistakes you will have to look for
diligently with the industry and intelligence God gave you”

Reference: https://www.slideshare.net/drpadmashankar/history-of-accounting-38292492
History of Accounting:

Accounting is one of the oldest professions that there is. In fact, since prehistoric times the
families had to account for food and clothing. The first record of currency began with tokens
in shapes to symbolize certain commodities such as grain, and other items people needed for
everyday living. These methods were used for over 5000 years, before the first writings were
found. Evidence of accounting records can be found in the Babylonian Empire, in pharaohs
Egypt and in the Code of Hammurabi. Eventually, keeping records became a necessity for
governments to sustain social order.

About Luca Pacioli:

Now, it is the time of the Renaissance and the accomplishments of man are coming to new
heights. This is when a man, by the name of Fra Luca Pacioli, also known as “The Father of
Accounting” would come into play and express his ideas plus his theories on Accounting.
Pacioli showed the world that Accounting was one of the most important inventions know to
man. Born 1445 in Sansepolcro , Italy. Died 1517 in Sansepolcro , Italy. Pacioli was a
mathematician, who was also a friend of Leonardo da Vinci. He wrote and taught in many
different fields, such as mathematics, theology, architecture, games, military strategy and
commerce.

Luca Pacioli Quotes “The quest for our origin is the sweet fruit's juice which maintains
satisfaction in the minds of the philosophers.” Reference: http://izquotes.com/author/luca-
pacioli

Achievement of Luca Pacioli:

Double-Entry Accounting:
In 1494, he wrote a book called “Summa de Arithmetica Gemetria Porportionalita”, which
was on Arithmetic; but included a section dedicated to the description of Double-Entry
Accounting. The book became a major success and was translated from Italian to many other
languages. Even though he was not credited for developing the system he was first to publish
text on its practice. The system that he used included most of today’s accounting routines
such as the use of memorandums, journals, and ledgers. He described the year-end, closing
entries and proposed that a trial balance be used to prove a balance ledger. There would be
little modification to Pacioli’s system for the next years. Double-entry Accounting is used to
catch errors to accurately track the various streams of money in your business. This made
banking reliable and also enhanced trade and commerce.
Duality Principal:
Traditionally, the two effects of an accounting entry are known as Debit (Dr) and Credit (Cr).
Accounting system is based on the principal that for every Debit entry, there will always be
an equal Credit entry. This is known as the Duality Principal.

Debit entries are ones that account for the following effects:

 Increase in assets
 Increase in expense
 Decrease in liability
 Decrease in equity
 Decrease in income

Credit entries are ones that account for the following effects:

 Decrease in assets
 Decrease in expense
 Increase in liability
 Increase in equity
 Increase in income

Double Entry is recorded in a manner that the Accounting Equation is always in balance.

Assets - Liabilities = Capital

Any increase in expense (Dr) will be offset by a decrease in assets (Cr) or increase in liability
or equity (Cr) and vice-versa. Hence, the accounting equation will still be in equilibrium.

Reference: http://accounting-simplified.com/double-entry-accounting.html

The Bookkeepers
Bookkeepers most likely emerged while society was still in the barter and trade system (pre-
2000 B.C.) rather than a cash and commerce economy. Ledgers from these times read like
narratives with dates and descriptions of trades made or terms for services rendered.

Example - Barter and Trade Bookkeeping

  Monday, May 12 - In exchange for three chickens which I provided today, William
Smallwood (laborer) promised a satchel of seed when the harvest is completed in the
fall.
 Wednesday, May 14 - Samuel Thomson (craftsman) agreed to make one chest of
drawers in exchange for a year\'s worth of eggs. The eggs are to be delivered daily
once the chest is finished.

All of these transactions were kept in individual ledgers, and if a dispute arose, they provided
proof when matters were brought before magistrates. Although tiresome, this system of
detailing every agreement was ideal because long periods of time could pass before
transactions were completed.

Reference: http://www.investopedia.com/articles/08/accounting-history.asp

STAGES OF ACCOUNTING:
 Emergent stage (from primitive age to 1494 AD),
 Pre-analytic stage (1495 – 1799),
 Development i.e. analytic stage (1800-1950),
 Modem age (From 1951- onward).

Early 19th Century:

By the 1800’s, Scotland became the world’s leader in modern Accounting. In the lat 1800’s,
Edinburgh society, followed by other accounting societies in Scotland and England, adopted
the title of Chartered Accountant (CA) to identify its members. The first certified Public
Accountant (CPA) law was passed in 1896 in the state of New York. This law required
accountants to pass an examination to become certified. There were no education
requirements since most accountant were trained an apprenticeship and not by formal
education.

Reference: http://www.accountingpapers.net/history-of-accounting.html
In 20th Century:
The actual exam had very little to do with Accounting, it focused on reading, writing, and
arithmetic. By 1912 thirty-three states had CPA laws and by 1921 all fifty states did.In 1973
the Financial Accounting Standards Board (FASB) was founded. Its goal was to establish
standard of financial accounting and reporting. Such standard are important for the creditors,
investors, auditor and other people rely on credible and comparable information about their
finances and the finances of others. The FASB accomplishes this mission by acting to:
improve the usefulness of Financial reporting, keep standards current, and promptly consider
any faulty areas in methods of financial reporting, promote international accounting
standards, and to improve the understanding of the information in financial reports.

Reference: http://www.accountingpapers.net/history-of-accounting.html

Modern Era (1900-2000s):

After the stock exchange crash in 1929, Congress began actively regulating the industry. The
accounting industry responded by releasing a set of ethical guidelines, the Generally
Accepted Accounting Principles (GAAP) book. The 1970s saw another wave of reforms, as
the Financial Accounting Standards Board was created by the federal government. In October
2001, the Enron scandal virtually brought down Arthur Andersen LLP, a prestigious
accounting firm that had a reputation for unimpeachable ethical behavior for over a century.
As a result, Congress passed the Sarbanes-Oxley Act of 2002, which raises the penalties for
accounting fraud.

Reference: https://careertrend.com/about-6630389-evolution-history-accounting.html

Evolution:
Accounting practices have become more formalized, with certification protocols established
in the 1800s and federal regulation in the 1900s. In the first decade of the 21st century,
accountants were required to learn methods for valuing complicated financial instruments,
such as derivatives and credit default swaps. As a result, colleges and universities have begun
to offer degrees, at the B.S., B.B.A., and M.B.A. levels, that provide training in the field.
With the rise of globalized businesses and the proliferation of modern information
technologies, accountants have faced increasingly complicated responsibilities in the late
20th century and early 21st century.
Reference: https://careertrend.com/about-6630389-evolution-history-accounting.html

Current period:
Today, computers play an important role in the field of Accounting. Different software types
are doing most of accounting applications. Whether an accounting system is manual or
computerized, the underlying principles of accounting are the same. Microsoft excel play
such a major role in accounting of present day

Reference: http://www.accountingpapers.net/history-of-accounting.html

Basic Phases of Accounting:

1) Recording
2) Classifying
3) Summarizing
4) Interpreting financial data.

Accounting cycle:
The accounting cycle is the cumulative process of recording and processing the accounting
events of a company. It starts when a transaction happens and ends when it is entered into the
financial statements. Legally, every business is required to maintain proper documentation of
its financial records, allowing external agencies to conduct audits when necessary.

Steps of Accounting Cycle:

There are nine steps of accounting cycle which are as follow
 1. Analyzing transactions
2. Recording all transactions
3. Transferring from the journal to the ledger
4. Formulating an unadjusted trial balance
5. Preparing adjusting entries
6. Preparing an adjusted trial balance
7. Creating financial statements
8. Closing entries
9. Preparing the post-closing trial balance

Reference: http://nuvest.net/accounting-101-steps-accounting-cycle-explained/

Branches of Accounting:
There are different branches of accounting came into existence keeping in view various types
of accounting information needed by a different class of people viz. Owners, shareholders,
management, suppliers, creditors, taxation authorities and various government agencies, etc.

Three main branches of Accounting:

1. Financial accounting.
2. Cost accounting.
3. Management accounting.

Besides the above mentioned three branches of accounting, there are many other branches
which are in practice and very useful for various purposes as mentioned below:

1. Auditing
2. Tax Accounting
3. Fund Accounting
4. Government Accounting
5. Forensic Accounting
6. Fiduciary Accounting

Financial Accounting:
Financial Accounting is based on a systematic method of recording transactions of any
business according to the accounting principles. It is the original form of the accounting
process. The main purpose of financial accounting is to calculate the profit or loss of a
business during a period and to provide an accurate picture of the financial position of the
business as on a particular date.
Cost Accounting:
Cost accounting deals with evaluating the cost of a product or service offered. It calculates
the cost by considering all factors that contribute to the production of the output, both
manufacturing and administrative factors. The objective of cost accounting is to help the
management in fixing the prices and controlling the cost of production. It also pin points any
wastages, leakages and defects during manufacturing and marketing processes.

Management Accounting:
This branch of accounting provides information to management for better administration of
the business. It helps in making important decisions and controlling of various activities of
the business. The management is able to take decisions efficiently with the help of various
Management Information Systems such as Budgets.

Auditing:
It is a branch of accounting where an external certified public accountant known as Auditor
inspects and certifies the accounts of a business for their accuracy and consistency.

Tax Accounting:
Tax accounting deals with taxation matters. Its functions include preparation and filing of
various tax returns and dealing with their legal implications. Tax accountants aid in
minimizing tax payments and also help financial accountants in preparing financials for tax
reporting to various authorities.

Fund Accounting:
They deal with keeping records for funds of non-profit business entities. Separate fund
accounts are maintained for separate works like welfare schemes of different nature to ensure
proper utilization of funds.

Government Accounting:
It is done for Central Government (National Government) and State Government budget
allocations and utilizations. Keeping records ensures proper and efficient utilization of the
various budget allocations and safety of public funds.

Forensic Accounting:
Forensic accounting also known as legal accounting enables calculating damages or settling
disputes in legal matters. Investigations are done and evaluation of a third party’s business
and property maintained under the guardianship of another person. and calculations are
carried out to evaluate the damages accurately.

Fiduciary Accounting:
The accounting and evaluation of a third party’s business and property maintained under the
guardianship of another person.

Reference: https://efinancemanagement.com/financial-accounting/branches-of-accounting