The History of Accounting Theory

by Contributing Writer; Updated September 26, 2017

Accounting has been around in one form or another since the beginning of organized trade and business. Accounting is the foundation to intelligent business management and managerial decision making. Without accounting, business would be much like playing cards blind.

The Father of Accounting

Luca Pacioli wrote a math book in 1494 that included a chapter on the mathematics of business. This is thought to be the first official book on accounting. Pacioli said, “that the successful merchant needs three things: sufficient cash or credit, an accounting system that can tell him how he’s doing, and good bookkeeper to operate it.” This is still true today. Pacioli’s accounting theory included both journals and ledgers. It popularized the use of the double-entry accounting that had been in place since the late 1300s. In double entry accounting the debits are listed on the left side and the credits on the right side of the account within the accounting book. This form of accounting caught on and was accepted as the standard almost immediately.

Cost Accounting Introduced

Accounting remained practically the same until the depression of 1772 when the profession was extended beyond record keeping. The theory and idea was transformed into a method of determining whether a business is operating efficiently or using an excess of labor and resources. The new theory was called cost accounting. This allowed a professional bookkeeper or accountant to use the numbers to extract efficiency data. This was a new idea but led to the survival of businesses that otherwise would have failed during that depression.

Accounting in the US

The first US governmental accounting system was created in 1789, with the end of the American Revolution. It was established to account for and manage the treasury of the United States. The double entry theories and practice were adopted; however, few regulations were in effect. The national accountant held to extreme conservatism and made the decision to not list any assets. The government still does not list land assets for accounting purposes. In 1850 the British courts ruled that they needed professional accountants to help them with financial information as it related to court cases. The chartered accountant designation took hold. The US equivalent of this designation is the Certified Public Accountant (CPA).

The First CPA

In 1887, 31 accountants migrated to the United States. They formed the predecessor to our current day American Institute of Certified Public Accountants (AICPA). The organization began to form standards, operational job aids and the certification process for becoming a certified accountant. In 1897, the first standardized exam was created, and Frank Broaker became the nation's first CPA.

Modern Cost Accounting

Modern cost accounting was established in 1923 by General Motors. The company developed cost accounting methods that helped the company cut costs, streamline operations and continued to be used for the next half century. Some of the new accounting techniques that were created are return on investment, return on equity and many new budgeting formulas. GM actually fashioned a new concept: flexible or adjustable budgets.


Financial accounting regulation was established in the US between 1936 and 1938. The Generally Accepted Accounting Principles (GAAP) were established by the newly formed Committee on Accounting Procedure (CAP). This brought the standard for accounting practices for all companies throughout the US. In 1953, GAAP was updated and new standards were issued. However, CAP was replaced in 1959 by the APB, or the Accounting Principles Board. The APB suffered from poor management and a weak stance on accounting regulation much like CAP did. In 1973, the APB was replaced by FASB, or the Financial Accounting Standards Board. This organization was created with expanded powers that garnered more respect.


Between 1973 and 2009, FASB has issued almost 200 pronouncements. The organization has established the foundation of accounting standards and ethics that are in use today. There is a current move within the US accounting community to change all accounting practices away from US GAAP to the IFRS (International Financial Reporting Standards).