History and Evolution

of Accounting practices
and standards
Melat Hailu
MBA ®008/12
 Accounting
1. Definition and history of accounting
 Is the process /work of keeping financial accounts
 process of recording financial transaction pertaining to the business .
The process includes summarizing, analyzing, and reporting these
financial information for both internal and external users
 Types of Accounting

 Different type of Accounting

* Financial Accounting involves recording and classifying business transaction
,preparing and presentation of financial statement to be used by internal and external
users
* Managerial Accounting provision of financial and non financial decision making
information to managers.
* cost Accounting it determines the cost of producing a specific product.
* Tax Accounting preparing tax returns and engaging in tax planning for the
company.
History of Accounting

 Have an Italian root

 The first accounting practices were employed around 300B.C in Iran.
 In the first millennium the Phoenicians invented an alphabetic system for book
keeping and the Egyptians begin to assign someone to the role of comptroller.
 The father of Accounting is an Italian mathematician Fra Luca Bartolomeo De
Pacioli (Luca Pacioli)
 He describes ;geometria proportioni et proportonalita (the collected knowledge of
arithmetic, geometry, proportion and proportionality.
;the system of debit and credit in journal and ledger.
Cont…….

Charters of accounting / Scotland modernized accounting

 In 1854, the first professional organization of accountants were established in
Scotland . “Edinbrugh society of accountants and Glasgow institute of
accountants and actuaries”
 Each organization granted a royal charter member and they call themselves
“chartered accountant”
2. Accounting standards

 Accounting standard is a common set of principles, standards, and procedures

that defines the basis of financial accounting polices and practices.
 The main purpose of Accounting principles is to improve the transparency of
financial reporting.
 There are two well know accounting standards
# GAAP (up to march 2018)
# IFRS ( from march 2018)
Evolution of Accounting standards

 The first accounting standard launched in 1930’S by the American Institute of

Accounting which is now Known as American Institute of certified public
accountant and the New york Exchange.
 The governmental Accounting standard Board for accounting principles also
established other accounting standards for the local government.
 Those standards specify when and how transactions are recognized, measured
and presented.
 U.S GAAP accounting standards

 After the Accounting institute of certified public accountant developed the first accounting
standard, FASB( financial accounting standard board) took the responsibilities in 1973, the
standard called GAAP.
 GAAP ensure the financial statement from multiple companies are comparable.
 The major purpose of GAAP was
1. to ensure Financial reporting consistent and transparency
2. enable lenders to proper assessment of companies financial condition
3. Information provided under GAAP is clear and comprehensive
4. To make f/statements easily understood and verifiable by auditor &other outside
parties.
Cont……

 GAAP involves three basic principles

#Business entity concept

# cost principle

# Monitory unit assumption

Advantages of GAAP

 Helps in the decision of firms which information they have to choose to share or keep

 Provides consistent financial information

 Help investor to easily evaluate companies

Disadvantages of GAAP

 GAAP provides manipulated & not necessary accurate snapshot of the company financial position and performance

 Provides management with a lot of tools in presenting the financial position

( treatment of depreciation, deferred taxes and amortization)

International financial reporting
standard

 It is a recent set of common rules issued by IASB ( international Accounting Standard

board)
 Designed to bring consistency to accounting language, practices & statements
 IFRS sometimes confused with international accounting standard (IAS) which is the older
standard that IFRS replaced.
 IAS as issued from 1973 to 2000
 In 2001 IASB replaced IASC
 IFRS originated in the European Union
 The intention was making business affairs and accounts accessible across the continent.
Cont....

ADVANTAGE
 Create a single set of accounting standards around the globe
 Reduced time, effort and expense of preparing multiple reports
 Easy to monitor and control subsidiaries from foreign countries
 Improves the rate of FDI around the globe.
DISADVANTAGES
 Increase the cost of implementation for small business
 Requires global consistency in auditing and enforcement
 It would still requires global acceptance to be useful.
 U.S GAAP Vs IFRS
IFRS
 Inventory can be revised.
i.e if some criteria are met
 Only FIFO is applicable
 Developmental costs are capitalized
 It is principle based.
 Unusual items are included in the net income
statement
 Takes in to account whether an asset will have
a future economic benefit.
U.S GAAP
 Inventory has been written down , any
revision is prohibited.
 LIFO method for inventory cost ia allowed.
 Developmental costs are treated as expense.
 It is rule based.
 Unusual items are separated & shown below
the net income.
 Intangible asset recognized at the fair market
value( present value only)
ACCOUNTING PRINCIPLES

1. ABC (Activity based costing )

ABC is an approach to costing and monitoring of activities which involves tracing
resources consumption & costing final output. CIMA( chartered institute of management
accountants)
ABC is an accounting method that identifies the activity that a firm performs & then
assign Indirect costs to cost objectes.(ICMAB)
Institute of cost management Bangladesh
ABC is a costing method that indicates activities in an organization & assigning t
the cost of each activity to all product & services according to the actual consumption by
each.
Historical development of ABC
 The concept of ABC were developed in the mfg sector of U.S during 1970’ and 80’
 Consortium for advanced management international (CAMI) provides a formative role
for studying &formalizing the principles that have become more formally known as
ABC.
 Roobin cooper & Robert s. Kaplan, proponents of the balanced score card brought
notice to these concept in n° of article published in Harvard business review in 1988.
 They described ABC as an approach to solve the problems of traditional cost
management system.
 Instead of using arbitrary percentage to allocate costs, ABC seeks to identify the cause
&effect relationship to objectively assign costs.
 ABC identifies areas of high overhead costs per unit so directs attention to finding ways
to reduce costs or to change more for costly pdts.
Cont.....

 ABC was first clearly defined by Robeet s.kaplan and w. Bruns as a

chapter in their book of accounting & management: A field of study
perspective focused on manufacturing industry where increasingly
technology and productivity improvement have reduced the relative
proportion of the direct costs of labour and materials bit have increased
proportion of i direct cost.
 Later ,in 1999, peter .f.drucker explained ABC in his book “management
challenges in 21st century”. He states that traditional cost accounting
focus on what is cost to do something.
Cont.....
Advantages and Disadvantages of
ABC
 Advantage
• Provides realistic costs of manufacturing for specific products
• Allocates MOH more accurately.
• Determines products profit margins.
• Identifies unnecessary &waste costs
• Offer better understanding & justification of costs in MFOH.
 Disadvantage
• Collection &preparation of data is time consuming
• Source data isn't always available
• Not be useful for companies where OH is small
Grezplantkosterechnung (GPK)

 Is a Germany cost accounting method

 GPK referred as flexible margin costing
 Was developed in 1950’s and 60’s by Hans George Plaut & cost accounting
researcher Wargang kingar.
 Their aim was to develop cost accounting method that support the decision making
 GPK consist 3 important elements
* cost type accounting
* cost centre accounting
* product/service cost
Cont....

1. Cost type accounting :separate different cost type such as labour and material. Gpk also included
interest in cost type. Each cost type is decomposed into variable and fixed cost along with the
assignment of cost to the cost centre.
2. Cost centre accounting: major element of GPK accounting. It is area of responsibility that is
assigned to a manager who held accountable for its performance.
There are two kinds of cost centre ; primary and secondary cost centre.
# primary cost centre: provides output directly consumed by a saleable product.
# secondary cost centre :includes IT services & HR areas that offer hiring &training
function.
3. product/services cost centre: where all of the assigned costs that are related will be collected in the
GPK costing method.
Resource consumption accounting
 Is a management theory describing a dynamic integrated & comprehensive management accounting approach
that provides managers with decision support information for enterprise optimization.
 New and modern approach
 Based largely on Germany management accounting
 Emerged as a management accounting approach around 2000 & was subsequently developed at CAMI ( the
consortium of advanced management international)
 In 2008 RCA institute established to introduce RCA to market place & raise the standard of managerial
accounting knowledge by encouraging disciplined practices.
 By 2009, professional accountants in business(PAIB) committee of International good practice guidance(IGPG)
publication called Evaluating & Improving costing in organization &its company document; Evaluating the
costing journey; a costing levels contain maturity model acknowledging RCA attains a higher level of accuracy
& visibility compared to ABC for managerial accounting information when the incremental benefit of RCA
better i formation exceeds the incremental administrative effort & cost to collect.
Throughtput accounting

 Is a principle based and simplified management accounting approach that

provides managers with decision support information for firm profitability
improvement.
 It is a new approaches that identifies factors that limit an organization from
reaching its goal, and then focuses on simple measures that drives behaviour in
key areas towards reaching and organizational goals.
 TA accounting includes obtaining the maximum net profit in the minimum time
period given limited resources capacities and capabilities.
 The main advantage of throughput accounting is that it yields the best short term
incremental profit.