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Chapter 1

The history and

development of
Early history of accounting
There is evidence of double entry
accounting in many early civilisations:
Early history of accounting (contd)
C. Littletons seven preconditions for
the emergence of systematic
bookkeeping are:
the art of writing
private property
Origins of double-entry
Also known as Italian bookkeeping because it
was promulgated by Italian traders
First-known double-entry accounting books are
those of Massari of Genoa in 1340
Luca Pacioli, a Franciscan friar, is credited with
introducing double-entry bookkeeping because
his is the first published discussion on the topic
(1494), in which:
he described the use of debits and credits to
secure a double entry
he advised the computation of a periodic profit
and the closing of the books
Cushings 11 developments
1. Introduction of specific journals
2. Periodic financial statements
3. Double-entry system extended to other types
of organisations, e.g. monasteries, the State
4. Separate inventory accounts for different types
of goods
5. Accounting acquired a better status,
characterised by:
need to inform absentee investors
need for auditing
need for cost accounting
reliance on concepts of continuity,
periodicity and accrual
Cushings 11 developments (contd)
6. Evolution of three methods of treating fixed
assets by the 18th century
7. Development of depreciation methods from
1915 onwards
8. Emergence of cost accounting in the 19th
9. Development of techniques of accounting for
prepayments and accruals in the second part
of the 19th century
10. Development of fund statements (late 19th
and 20th centuries)
11. Development of accounting methods for
complex issues
The development of
accounting principles
Management contribution phase (190033):
management had complete control over the
selection of financial information disclosed
in annual reports
Institution contribution phase (193346) and
professional contribution phase (195973):
professional bodies played a significant role
in developing principles
Overt politicisation phase (1973present):
movement towards a politicisation of
Management contribution
phase (190033)
Characterised by ad hoc solutions to
urgent problems and controversies
Lack of theoretical support
Focus on minimisation of income
Smoothing of earnings
Complex problems avoided in favour
of expedient solutions
Management contribution phase
(190033) (contd)
Significant influences of the period
Interest as a cost controversy:
the need to invest large amounts of
capital for long periods increased
the inclusion of overhead in product
cost became an issue
Growing effect of taxation of business
Management contribution phase
(190033) (contd)
Arguments for improvement in
standards of financial reporting
From 1900, New York Stock Exchange
required corporations to publish annual
financial statements
Calls for protection of investors
Board of Examiners established in 1917
to create a uniform certified practising
accountant (CPA) examination
Institution contribution phase
Increasing role of institutions on development of
accounting principles:
creation of the Securities and Exchange
Commission to administer federal investment
emergence of accounting principles
companies were permitted to choose their
accounting methods but had to disclose them
Committee on Accounting Procedure (CAP)
began issuing accounting research bulletins
(ARBs) in 1938
Professional contribution
phase (195973)
Establishment of the Accounting Principles
Board (APB) and the Accounting Research
The APB was unsuccessful and was
criticised for being over-dependent on
professional associations:
no established theoretical framework
authority of its statements not clear-cut
alternative treatments allowed flexibility
in the choice of accounting techniques
Overt politicisation phase
Development of a theoretical
Emergence of various interest groups
Metcalf report released:
charged that US big eight
accounting firms monopolise the
auditing of large corporations and
control the standard-setting process
made recommendations aimed at
enhancing corporate accountability
History of accounting in
Same major phases as US accounting
For much of the 19th century, most
colonies adopted the British model of
companies legislation
Sydney Stock Exchange (SSE) also
influenced accounting practices:
from 1925, SSE demanded publication
of balance sheets and profit-and-loss
such disclosures sometimes preceded
legislation by many years
Institutional contribution
phase in Australia
Professional opinions on the general
principles of accounting practice were
released in 1937
The Commonwealth Institute of
Accountants (CIA) appointed a Committee
on Accounting Principles (CAP) in 1938
The Institute of Chartered Accountants in
Australia (ICAA) issued the first in a
series of Recommended Accounting
Principles in 1944
Institutional contribution phase in
Australia (contd)
Corporate collapses and the 1960s mining share
boom meant a regulatory agency was required to
protect investors:
1974: The Interstate Corporate Affairs
Commission was created to bring about
uniformity in state companies legislation
1979: The National Companies and Securities
Commission (NCSC) was established
1981: All states adopted the Commonwealth
Companies Act
1989: The Australian Securities Commission
(ASC) was created to replace the NCSE
Professional contribution phase
in Australia
In the 1960s, the ICAA created
several research committees on
accounting principles
In 1965, the Accounting Research
Foundation was established by the two
accounting bodies, and:
was responsible for creating
accounting standards in Australia
contributed to the development of a
conceptual framework
Politicisation of accounting
phase in Australia
Corporate collapses of the 1960s led to the
introduction of legislation to regulate
1983: Companies and Securities
Legislation (Miscellaneous Amendments)
Act 1983 (Cth) required companies to
comply with ASRB-approved accounting
1991: Australian Accounting Standards
Board (AASB) was established
Link between accounting
and capitalism
The Sombart thesis argues that double-entry
bookkeeping has contributed to the development
of capitalism because:
it permits the capitalist entrepreneur to plan,
predict and measure the impact of their
the separation of owners and business allows
the growth of the corporation
Yamey argues that double-entry bookkeeping
was originally used only as a record of
transactions not to keep track of profits and