CHAPTER 1 (Part 1)

INTRODUCTION TO ACCOUNTING THEORY

BKAF3083

Chapter 1 - Outlined
1.1 1.2 Historical Development of Accounting Accounting Theory Formulation

BKAF3083

Historical development of Accounting

Early history of Accounting (b) Dating back 3000 BC Chaldean-Babylonian, Assyrian & Sumerian civilization Organized government, oldest government, oldest written language Egyptian civilization pivots on which the whole machinery of the treasury and others departments turned Chinese civilizations, accounting playing a key & sophisticated role during Chao Dynasty (1112 256 BC) Greek civilization, Zenon introduce system of responsibility accounting. Roman civilization law requires taxpayers to prepare statement of financial position, civil right = property declare by them
BKAF3083 3

Contribution factors;
Invention of writing Introduction of Arabic numerical & decimal systems Algebra Inexpensive writing materials Rise of literacy The art of writing Arithmetic Private property Money Commerce Capital

Littleton (6 preconditions, systematic bookkeeping )

BKAF3083

The Italian Method

1340 i.e.. development of commercial republic of Italy, used double entry bookkeeping method Medieval (belonging to middle age) l accounting i.e. tools for management control as describes by Raymond de Rover;
balancing of the books as primary objective Developing cost accounting Introducing reserves Adjustments (accruals & differed items) Audited financial statement But little progress in analysis of financial statement

BKAF3083

Luca Pacolis Contribution

Franciscan monk, 1494 wrote the 1St book, Summa de Arithmetica Geomatrica, Proportioni et Proportionalita (Review of Arithmetic, Geometry & Propotions) (he didnt invent double-entry bookkeeping) 2 chapters, de Computis et Scripturis, describing double entry bookkeeping, Know as the method of Venice or the Italian method He stated;
purpose of bookkeeping was to give the trader without delay information as to his assets & liabilities All entries has to be double entries, that is, if you make one creditor, you must make someone debtor
BKAF3083 6

 Not only was the name of buyer or seller recorded, as well as the description of the goods with its weight, size or measurement, price and term of payment The receive or disburse, the record was shown of the kind of currency and its converted value.

He advice the computation of periodic profit and the closing of the book; it is always good to close the book each year, especially if you are in a partnership with others. Frequent accounting makes for long friendship

BKAF3083

e.g. development of accounting in US (b)

Management & Contribution Phase (1930 1933) Institution contribution phase (1933 1959) Professional contribution phase (1959-1973) Politicization phase (1973 present)

BKAF3083

Development of accounting (g)

BKAF3083

Pragmatic Accounting
18001955 General scientific period theory based on observations of practice rather than deductive logic that is critical in current practice. Overall framework to explain why accountants account as they do Wall Street Crash (1929), lead to creation of Securities & Exchange Commission Lead to improve financial regulation & reporting 1930s give rice to several notable accounting publications (A Tentative Statement of Accounting Principles affecting corporate reports)
BKAF3083 10

 In 1938 AICPA released A statement of Accounting Principles Development in accounting research, the theories to explain practice become more detail and complex Normative accounting

Normative Accounting
19561970 : Normative period norms for best accounting practice what actually happen (less concerned) vs what should happen Debate predominantly about measurement rather than actual practice of recording & reporting Two groups exist: historical cost VS conceptual framework

BKAF3083

12

 Conceptual fwk gain popularity because the fwk are meant to encompass all components of financial reporting & intended to guide practice. Normative period end in early 1970
Unlikelihood of acceptance of any particular of normative period The application of financial economic principles, increased supply of data & testing period

Positive accounting
1970positive era Specific scientific theory
dissatisfaction with normative theories positive accounting theory sought to provide fwk for explaining the practice which were being observed The objective is to explain and predict (lead to hypothesis)
e.g. bonus plan hypothesis
BKAF3083 14

 Important to explain the economic or wealth effect of accounting & why accounting is important to various parties such as shareholders, creditors & managers. Benefits from the research that is enable regulators to assess the economic consequence of the various accounting practice they consider. Failure of accounting info. to signal financial catastrophes focus on accounting behavior rather than on explanation after the event of observe behavior 1930s after stock market crash following Enron & Worldcom

Recent Development
Mix development because it is impossible to develop a single theory, as human greed, opportunism, future uncertainty, & degree of naivety on the part of some shareholders can never be capture in a theory of accounting. Academic focus on capital market, agency theory & behavioral Profession more focus on normative approach

 Important to accounting pedagogy(method & instruction), policy & practice.

Pedagogy

Relevance of accounting history

Educated the members to appreciate intellectual heritage Advance in thought, major contribution to literature, & of crucial study maybe lost, fragmented, or inadequately recognized in longer term unless they are documented and incorporated by scholars Incomplete or unjustified claim about the past

Policy
Better understanding on accounting problems & their institutional context as well as the formulation of the public policy

Practice
Better assessment of the existing practice by a comparison method used in the past.

BKAF3083

17

 betterto understand our present & to forecast or control our future. Accounting history is the study of the evolution in accounting thought, practices & institutions in response to changes in the environment & social needs. It also considers the effect this evolution has worked on the environment Historical research, includes biography, institutional history, development of thought, general history, critical theory, taxonomic & bibliographic database.

BKAF3083

18