FAR661

• The history of accounting or accountancy is thousands of years old and can be traced to ancient civilizations = The use of Clay token
• Many attempts have been done to locate the origin of double-entry bookkeeping. Some form of bookkeeping can be traced as far back as to 3000BC
• Accounting has its roots in the earliest history of civilization. Around 7,500 B.C., Mesopotamians began using clay token to represent goods, such as animals, tools, food items, or unit of grain
• Documents from ancient Mesopotamia show lists of expenditures, and goods received and traded. The development of accounting, along with that of money and numbers, may be related to the taxation and trading activities of temples
• Early civilizations with evidence of complex business trade and agriculture

  • Roman civilization (200BCE-400BCE)
  • Chaldean-Babylonian, Assyrian and Sumerian civilizations (2,000-3,000BCE)
  • Egyptian civilizations (1,000-3,000 BCE)
  • Chinese civilization (3,000 BCE)
  • Greek civilization (1-1,000 BCE)
• Factors attributed to the presence of bookkeeping in the ancient world

  • Invention of writing
  • Introduction of Arabic numerals and of the decimal system
  • Diffusion of knowledge of algebra
  • Presence of inexpensive writing material
  • Rise of literacy
  • Existence of a standard medium of exchange
• The early development of accounting dates back to ancient Mesopotamia, and is closely related to developments in writing, counting and money and early auditing systems by the ancient Egyptians and Babylonians
• A number of studies found that writing and arithmetic were among the important factors which contributed to the creation of double entry
• The emergence of agriculture, trade and capital has also increased transactions which make the keeping of records and accounts inevitable
• 7 factors that led to the creation of double entry bookkeeping (A.C Littleton, 1956)


  • The art of writing
  • Arithmetic
  • Private property
  • Money
  • Commerce
  • Capital
  • Credit
• Luca Pacioli, a mathematician, introduced a double-entry bookkeeping system and published his book 'Summa de Arithmetica Geometrica, Proportioni et Proportionalita' in 1494
• Debit


  (adebeo)
• Credit


  (credito)
• Pacioli indicated that 'all entries must be double entries… if u make one creditor you must make someone debtor'
• Pacioli suggested that not only the name of the buyer and seller should be recorded but also the description of goods sold (weight, size, measurement, price and term of payment)
• Pacioli's System: Memorandum, Journal and Ledger
• Accounting records found 3600 years ago (Achaemenid era) shows records of payments, receipts of allotments, trade exchanges. Tax collections and expenditure. "Balance Sheets"
• Post-Islamic era (circa 1400 years ago) Siagh accounting (similar to sub-ledgers) evolved to "Five Books" which were used for book-keeping of main groups of accounts in the Ghajar era
• Double-entry bookkeeping is at the centre of modern accounting and it was in Italy in the fourteenth century that it was first introduced
• By the fifteenth century they had begun to use accounting as a tool of management control
• Development of accounting over the centuries

  • 16th century – specific journals for different type of transactions
  • 16th to 17th centuries – practice of periodic financial statement and application of double entry system were expanded to other type of organizations
  • 17th century – separate inventory account for different type of goods and the incorporation of East India Company where auditing, cost accounting and reliance on concepts of continuality, periodicity and accruals are needed
  • 18th century – methods of treating fixed assets evolved (assets are carried forward at original cost, assets account are closed at the balance sheet date and revaluation of fixed assets
  • 19th century – depreciation of property, cost accounting and development of techniques of accounting for prepayments and accruals
  • 19th – 20th centuries – development of funds statements
  • 20th century – complex issues such as EPS, accounting for business computations, inflations, long term leases and others
• Accounting


  The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and event which are in part at least, of a financial character and interpreting the results of thereof
• Roles of accounting


  • As a historical record
  • As a Language
  • As intra-corporate Politics
  • As a decision making tool
  • As Standard Setting as Politics/ Political Process
  • As a Mythology
  • As Communication-decision Information
  • As a Magic
  • As Economic Goods
  • As a Social Commodity
  • As an Ideology & Exploitation
• Classification double entry


  Debit portrays a classification and credit portrays another classification
• Causal double entry


  Describe the cause and effect relationship between increment and decrement
• The influence of management in the formulation of accounting principles arose from the increasing number of shareholders and the dominant economic role played by industrial corporations after 1900
• The diffusion of stock ownership gave management complete control over the format and content of accounting disclosures
• Consequences of the dependence on management initiative

  • Accounting techniques lacked theoretical support
  • Focus was on the determination of taxable income and the minimization of income taxes
  • Techniques adopted were motivated by the desire to smooth earnings
  • Complex problems were avoided and expedient solutions were adopted
  • Different firms adopted different accounting techniques for the same problem
• William Z. Ripley and J.M.B. Hoxley argued for improvement in standards of financial reporting
• Adolph A. Berle and Gardiner C. Means called for the protection of investors
• Main players during the Management Contribution Phase (1900-1933)


  • American Institute of Accountants (AIA)
  • The New York Stock Exchange
• The 1918 Act was the first to recognize the role of accounting procedures in the determination of taxable income, which set the stage for the beginning of a harmonization between tax accounting and financial accounting
• In 1934 Congress created the SEC to administer various federal investment laws including the Securities Act of 1933 and Securities Act of 1934
• Section 13 (b) of the 1934 Securities Exchange Act provides the SEC the authority to prescribe accounting 'guidelines' or 'forms' for reports submitted to it
• On April 25, 1938, the SEC sent a definitive message that unless the profession established a standard-setting body, the SEC would use its mandate and develop accounting principles
• The "broad principles" approved by the AIA

  • That income accounts should not include unrealized profit, and expenses ordinarily chargeable against income should not be charged against unrealized profit
  • That capital surplus (additional paid-in capital) should not be charged with amounts chargeable ordinarily to income
  • That earned surplus (or retained earnings) of a subsidiary company created prior to acquisition was not part of the consolidated earned surplus of the parent
  • That dividends on treasury stock may not be credited to the company's income
  • That amounts receivable from officers, employees, and affiliated companies should be sho
• Accounting Principles Board (APB)


  Established in 1959 by the AICPA to advance the written expression of generally accepted accounting principles
• Financial Accounting Standards Board (FASB)


  Created in 1973 to establish the Generally Accepted Accounting Principles and set accounting standards in the U.S.
• Accounting Principles Board (APB)

  Issued 31 Opinions dealing with controversial issues between 1959 and 1973
• The APB was criticized for limited controversial or ad hoc Opinions, and for failing to solve problems of accounting for business combinations and goodwill