A Brief Accounting History to Date

Accounting history can be traced back to a book called Summa de arithmetica, geometria, proportioni et proportionalita, written by the Italian mathematician, Luca Pacioli, in A.D. 1494.

Today, this book is regarded as an essential document in accounting history: it included the first printed work on algebra and also recorded for the very first time the system of the double-entry accounting system, that became popular with Italian merchants during the Renaissance.

History of accounting - Pacioli

The book also included illustrations and diagrams drawn by Pacioli’s friend, Leonardo Da Vinci.

In this book, Luca Pacioli described the use of journals and ledgers, and warned that a merchant should not rest until the debits equal the credits! His ledger had accounted for assets, liabilities, capital, income and expenses. He also demonstrated year-end closing entries and proposed a trial balance be used to prove a balanced ledger.

Summa de arithmetica, geometria, proportioni et proportionalita was the best selling book, published across large parts of Europe, and became the basis for bookkeeping as we know it today. Even today, the double-entry accounting method is used to record entries in both the Profit and Loss register and the Balance Sheet.

Brief Accounting History – Company Legislation History

In 1844 The British Joint Stock Companies Act was an Act of Parliament that allowed companies owned by one or more individuals to be incorporated. Before this, incorporation was only possible through Royal Charter or private act. As a consequence, many businesses operated as unincorporated associations – often with thousands of members and management of these businesses, and the ability for the company to be regulated was limited. If a customer had a grievance against an unincorporated association, their only recourse was to litigate against every member individually, which was virtually impossible in many cases.

The 1844 Joint Stock Companies Act was brought in to place business and economy on a strong foundation and to increase the public’s confidence in the honesty of a business.

It was followed up in 1855 by the Limited Liability Act, which limited the liability of the individual owners and directors of a business. In 1856, the Joint Stock Companies Act was updated and introduced the system still mainly in use to the present day. Companies are incorporated by registration and auditors needed to be appointed for public companies to examine the balance sheet and accounts.

Today, company accounts must follow the guidelines under the Companies Act 1985. This act sets out the responsibilities of companies, their directors and company secretaries. The Companies Act only applies to companies that are incorporated under it. The Act does not govern sole traders, partnerships, limited liability partnerships and co-operatives.

A new Companies Act 2006 will come into place by the end of 2009. The main differences between the old and new acts are down to new provisions for company communications to shareholders, the implementation of new European Directives and clarifications on areas of common law affecting companies.

Accounting History – Standards

During the 1930s and 1940s, there was a concern that there was no standard framework for financial accounting. It was perceived to be a bigger problem in the United States where creative accounting – making a company look more successful than it actually was – was a problem. There were some high profile cases where supposedly profitable companies were able to attract additional investment only to collapse a few months later with huge debts.

The American Institute of Accountants set up the Committee on Accounting Procedures (CAP) in the late 1930s as a self-regulatory body, and this produced a number of Accounting Research Bulletins, which were in effect statements on accounting principles and processes. These were hugely successful in eliminating a number of questionable accounting practices. However, it did not help in establishing an underlying accounting theory for ‘good’ practice.

This was resolved in 1953, when the Committee on Accounting Procedures produced a standard framework of guidelines for financial accounting, called the Generally Accepted Accounting Principles (GAAP). GAAP contained the structures and rules that accountants use in recording and summarising transactions and the preparation of financial statements. While GAAP was written for the United States, it was quickly adopted – with regional modifications – across Europe. GAAP continues to be maintained and updated and is still used to the present day.

In 1959, the Committee on Accounting Procedures was replaced by the Accounting Principles Board (APB). In turn, this was replaced in 1973 by the Financial Accounting Standards Board (FASB), who had additional powers to regulate the Generally Accepted Accounting Principles (GAAP). In 1990, this task was taken over by the Accounting Standards Board (ASB) and today, it is the ASB who have the responsibility of setting and monitoring accounting standards. It is the history of accounting standards.

History of Accounting – Computerised Systems

Accounting History UNIVAC - The worlds first commercial computer

History of Accounting – UNIVAC – The worlds first commercial computer

The history of the first computerised accounting system was also implemented in 1953, when Arthur Anderson Consultancy (now known as Accenture) was asked by General Electric to perform an automated payroll processing system at their site in Louisville, Kentucky.

The system comprised of a UNIVAC 1 (UNIVersal Automatic Computer-1) computer and printer. It was the first-ever commercial computer system ever implemented and became the first ever computerised accounting system.

The first computerised spreadsheet appeared in 1961 while the first ‘off the shelf’ accounting auditing system appeared seven years later in 1968.

The first ever micro-computers started appearing in the mid-1970s. At first, these were expensive, cumbersome and of limited benefit to small or medium-sized businesses. Micro-computers were perceived as being a costly hobby toy with limited benefits. Where micro-computers were used in business, it was typically used for word processing and word processing systems sold for around £10,000 per system.

Visicalc version 1.0

In 1978, two things happened in history. The Intel 8080 processor and the MOS 6502 processor became available significantly bringing down the cost of micro-computers, Apple launched the Apple II microcomputer, and the first commercially available off-the-shelf spreadsheet package was developed: Visicalc.

By modern day standards, of course, Visicalc was incredibly crude, but for its time it was revolutionary: for the first time you could carry out financial modelling using a micro-computer. Visicalc revolutionised micro-computers in the business marketplace and was a fundamental keystone in the acceptance of micro-computers for small and medium-sized businesses.

By the mid-1980s, PCs became an everyday part of office life. The Apple II was superseded by the IBM PC and the IBM PC, in turn, was superseded by Microsoft Windows, Visicalc was superseded by Lotus 1-2-3 and then by Microsoft Excel. Accounting software packages from ACT and SAGE started to be used, and by the late 1990s, PCs were used for accounting by most businesses in the UK.

Accounting History Modern Day – Cloud Accounting

The most recent change in the last few years is the switch from stand-alone accounting packages to cloud accounting. Where employees, bookkeepers and accountants can all access the software online at the same time. This development allows people to work from home and to share information with the relevant people.

If you want to learn more about accounting history, there are many accounts history books and journals available covering from Luca Pacioli to the present day.

Return from Accounting History to Business Accounting Basics page. Further reading can be found on Wikipedia.