Historical Development of Accounting

Accounting is the system of recording, classifying and summarizing financial information in such a way that users of the information can make economic decisions based upon it. Accounting began as a simple system of clay tokens to keep track of goods and animals, but has developed throughout history into a way of keeping track of complex transactions and other financial information.

Accountancy has its roots in the earliest history of civilization. With the rise of agriculture and trade, people needed a way to keep track of their goods and of transactions. Around 7500 B.C., Mesopotamians began using clay tokens to represent goods, such as animals, tools, food items or units of grain. This helped owners keep track of their property. Instead of counting heads of cattle or bushels of grain every time one was consumed or traded, people could simply add or subtract tokens. Different shapes were used for different goods. Around 4000 B.C., the Sumerians began placing these tokens in sealed clay envelopes. Each token would be stamped into the clay of the outside of the envelope, so the owner would know how many tokens were inside, but the tokens themselves would be kept safe from tampering or loss. This practice of pressing the tokens into the clay may have been the earliest genesis of writing. A few hundred years later, more complex tokens began to be used. These tokens had special markings to denote different units or types of goods. Starting around 3000 B.C., the Chinese developed the abacus, a tool for counting and calculating.

Throughout much of ancient history and the Middle Ages, accountancy remained a fairly simple affair. The adoption of coinage meant that accounting now dealt with money rather than actual goods, but single-entry bookkeeping, much like that used in modern check registers, was used to keep track of money exchanged, where it went and who owed what. During and after the Crusades, European trade markets opened up to Middle Eastern trade, and European merchants, especially in Genoa and Venice, became increasingly wealthy. They needed a better way to keep track of large amounts of money and complex transactions, and this led to the development of double-entry bookkeeping. Double-entry bookkeeping means that each transaction is recorded at least twice, as a debit from one account and a credit to another. In 1494, a Franciscan monk and mathematician named Luca Pacioli published a math book titled "Summa de arithmetica, geometria, proportione et proportionalita," which contained a description of double-entry accounting. As the book's popularity grew, double-entry accounting began to sweep Europe, as merchants realized what a valuable tool it gave them for keeping track of detailed financial information. For this accomplishment, Luca Pacioli is often called the "Father of Accounting." Still, at this point in history, accountancy was not yet a specific profession, but rather an extension of the clerical duties of scribes, officials, bankers and merchants.

With the advent of the Industrial Revolution in the late eighteenth and early nineteenth centuries, accounting developed further and came into its own as a profession. The practice of cost accounting became prevalent as business owners and managers sought to understand how best to make their businesses as cost efficient as possible. Josiah Wedgwood, the owner of the famous English pottery factory, was among the first to use cost accounting to understand what his company's money was being spent on and to eliminate unnecessary spending. With the new complexity of accounting and the increasing demand for accurate bookkeeping, people began to specialize in accountancy, thus becoming the first professional public accountants. Some of the accounting firms that are still in operation today were founded in the mid-nineteenth century. William Deloitte opened his firm in 1845, and Samuel Price and Edwin Waterhouse opened their joint business in 1849.

Today, accounting is a business unto itself, with thousands of practitioners worldwide and a large number of professional organizations and official guidelines to codify practices and requirements. Particularly in the United States during the Great Depression, demands were made for better standardization of accounting practices and a set code of professional guidelines. Today, the Generally Accepted Accounting Principles, or GAAP, set forth the standards by which public accountants must do business. Every country has a similar set of accounting guidelines.

Due to the complex nature of today's economic system, specialized branches of accounting have developed. In addition to traditional financial accounting, there are now subdivisions, such as tax accounting, management accounting, lean accounting, fund accounting and project accounting. Professional accountants are required for these fields, as they involve the need for a thorough and specific understanding of business needs and accountancy practices.