Explore the history of accounting

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

ACCOUNTING HISTORY 1

ACCOUNTING HISTORY

Creation of Accounting

Accounting can be defined as the systematic progression or procedure of categorizing, recording, quantifying, organizing, verifying, summing up, making sense of and communicating business transactions in monetary or financial terms. Accounting results in giving information on loss or profits in a specific period of time, a firm’s value, the nature of liabilities, assets and owners’ equity in a firm. Most often, accounting is referred to the language of business because if an event of a business nature occurs, various parties including creditors, employers, lawyers, etc. rely on the accounting concepts and idioms to describe such a phenomenon. The core purpose of accounting is to provide financial information required for the efficient and effective management of an economic unit. The economic unit ranges from non-profit bodies to business enterprises. Another application of accounting is for the provision of important data vital for making decisions in a business enterprise (Tracie Nobles, 2012, p. 3). Accounting, therefore, provides data on resources at the disposal of a firm, ways of financing these resources and the outcome brought about from their usage.

Accounting is as old as civilization (Jason Alba, 2005, p. 15). It was practiced even before the existence of numbers and writing about 10,000 years ago in ancient Mesopotamia. This region is today known as Iraq and Iran. At the time, this area was comprised of a huge flourishing population and dynamic trading activities between the towns and the cities of the Tigris River and Euphrates River Valley. Traders in this region faced difficulties in accounting for the goods that were sent by river. For example, one trader would load goods for shipping using a boatman to another trader on the opposite side of the river, and there would be reports that the shipment did not match what was anticipated resulting in disagreements. Hence, there was a need to develop a system to account for such occurrences, because the boatman could not be trusted at all times.

The traders developed a plan that involved the use of clay tokens in differing sizes, shapes and markings to identify different goods. Before shipment of goods, the trader would have a token for each product being shipped and enclose them in a ball of clay which was later sun dried. Then this ball of tokens would be given to the boatman together with the products to be shipped. Upon reaching the destination, the boatman would present the products and ball of tokens to the other trader who would break the ball to reveal its contents. Thereafter, he or she would match the tokens to the products shipped to confirm them to be in order, and in that manner, accounting for the shipment (Quinn, 2013, p. 10).The protection of assets was key to the creation of an accounting system.

This system of using tokens in clay balls continued for about 5,000 years until a new invention of scribing marks on a clay slab was developed. The marks or symbols were created representing different products, and subsequently a writing and number system came about in 3,000BC (Emmer, 2012, p. 233).These clay tablets were afterward hardened to form the accounting records. A transaction would involve the parties to the transaction seeking scribes. They would thereafter explain what they required to the scribe who, with the use of special clay, prepares the record of transaction. The scribe used a wooden stylus to write the transaction details on the clay. Thereafter, the parties put their signatures on the slab with use of their respective seals. Afterwards, the scribe would dry the clays slab in a kiln or under the sun. The tablet would then be wrapped with a thin layer of clay to form and envelop it as a way of securing the transaction details.

Following this form of accounting was the abacus used in Sumeria about 5,000 years ago. It involved the sliding of beads across a frame which assisted with counting numbers and minor calculations of subtraction and addition. This was replaced by the papyrus method popular in ancient Egypt in about 4,000B.C.The dried papyrus was used to keep records and carry out administrative activities, such as making court documents and tax receipts. Egypt also used numbers, pictures and words to monitor their agricultural production.

Initial Use of Accounting Laws

Accounting laws are procedures and rules that are recognized by a given country which control the accounting actions of various organizations in the country. There are penalties in place in case of a breach. In the United States, over a long period of time the accounting standards have been put in place by the American Institute of Certified Accountants (AICPA).This is the institute that initially created the 1939 Committee on Accounting Procedure, which in subsequent years was replaced by the Accounting Principles Board. However, in 1973, the Financial Accounting Standards Board replaced it to continue the mandate of providing accounting standards.

In the United Kingdom, accounting laws were initially instituted in the 1940s.The very first were created in 1942 as recommendations for accounting principles. The subject of these recommendations involved tax reserves, claims, war damage contributions and premiums. These recommendations initiated the very beginning of regulation of the accounting practice in the United Kingdom.

It is said that the very first group of professional accountants in Japan were seen in 1907.However, the creation and enacting of the first accounting laws did not take place until 1927.The audit profession was nonetheless established 21 years later after the enactment of the Certified Public Accountants Act, following the endorsement of the Securities Exchange Law in the same year of 1948.In 1949, business enterprises were issued financial accounting standards.

In Canada, the creation of accounting laws paralleled that of the United States. In1936, a committee was formed with the mandate of creating uniformity in accounting terms. However, in 1939, a Queens University research program resulted in the creation of the Accounting and Auditing Research Committee mandated with the role of providing guidelines to the accounting profession in terms of conveying financial information and auditing procedures among other guidelines.

In China, the first accounting law was issued in 1985 by the People's National Congress. The law was aimed at providing regulations for accountants and financial accountability in general.

Creation of Accounting Laws by the US Government

The US government started creating rules and laws to govern accounting after the stock market/wall street crash of 1929.The stock market crash was the genesis of the Great Depression. An account of the events leading to Black Tuesday indicate that the end of the World War saw enthusiasm, optimism, and inventions leading to limitless boundaries to the growth of the economy. People were very optimistic about the economy and collected money from their bank accounts and under their mattresses and invested mostly in the stock market.

Though the stock market is seen as a risky platform in which to invest, during the 1920’s, it seemed infallible for the future growth of investments. An increase in stock market investments increased stock prices. Between 1925 and 1926, the stock prices were unstable, but come 1927, the prices shot up and, by 1928, a boom in the stock market was experienced. This boom enticed even the common man to invest in the stock market with a view of becoming super rich; the return on investment was very high and the need to buy stocks grew even more. An increasing number of people yearned to invest in the stock market but lacked funds; as a result, they opted for buying on margin. These people were not cautious regarding the risk and continued borrowing large sums of money from brokers to buy stocks. In early 1929, many across the US wanted a piece of the stock and scrambled for it; some banks even went to the extent of buying stock with customer deposits without their knowledge.

In March of 1929, the stock market underwent a mini crash, a sign of the forthcoming complete stock market crash. Prices of stocks began having a downward fall and subsequently margin calls were sent out by the brokers. However, in the summer of 1929, the stock market experienced a boom to its highest level. In the September of 1929, the Dow Jones reported an industrial average which closed at 381.17; this was the peak of the stock market. The following two days saw a drop in stock prices and a subsequent massive drop on Black Tuesday (Lange, 2009, p. 7).

The general view was that the stock market crash was as a result of the accounting practices in the 1920’s. This era experienced a rapid change from an agrarian society to a small town, and eventually an industrialized society. The crash is partly attributed to the incapability of institutions of the stock market to quickly adapt to the changes that were occurring during that era. Indications are that the stock was overpriced. The stock exchange is supposed to be a free playing ground for demand and supply, however there was some degree of manipulation because of illegal activity such as insider trading. Also, the banks investing customer deposits without consultation was not legal. In addition, there were misleading financial statements that contributed to the inflated prices of the stock. The margin buying was also a cause for the stock market crash, though it is not the prime reason. Further, the then president of the Federal Reserve Board in view of the high stock prices set out to lower them, but instead damaged the economy.

Following the stock market crash, the New York Stock Exchange sought advice on procedures and policies with regard to financial statements of companies listed on the stock market. After the stock market crash, ensuing great depression and subsequent dissatisfaction with the accounting reports made available, the US Federal Government and the stock exchange, alongside the accounting profession. have actively made strides in improving accounting. This led to the development of primarily institutionalized and uniform accounting principles.

References

American Institute of Certified Public Accountants (AICPA). (2011). International Financial Reporting Standards (IFRS): An AICPA Backgrounder. Retrieved November 5, 2014, from IFRS.

Brown, K., & Dugan, I. J. (2002, June 7). Arthur Andersen's Fall From Grace Is a Sad Tale of Greed and Misues. The Wall Street Journal.

Chaocharia, V., & Grinstein, Y. (2007). Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules. New York: Johnson School of Management, Cornell University.

Cohen, D. A., Day, A., & Lys, T. (2003). The effect of the Sarbanes-Oxley Act on earnings management: What has changed? Evanston, IL: Kellogg School of Management, Northwestern University.

Emmer, M. (2012). Imagine Math: Between Culture and Mathematics. Netherlands: Springer Science & Business Media.

Jason Alba, M. B. (2005). Vault Career Guide to Accounting. Missouri: Vault Inc.

Lange, B. (2009). The Stock Market Crash Of 1929: The End of Prosperity. New York: Infobase Publishing.

McLean, B., & Elkind, P. (2004). The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Penguin Books.

Norris, F. (2014, May 28). New Standards for Companies' Revenue Accounting Will Begin in 2017. The New York Times.

Price Waterhouse Coopers (PWC). (2005, August). Similarities and Differences: A comparison of IFRS, U.S. GAAP and U.K. GAAP. Retrieved November 5, 2014, from Price Waterhouse Coopers (PWC).

PWC. (2014). Financial Accounting Standards Board (FASB): Select news releases. Retrieved November 6, 2014

Quinn, M. (2013). Brilliant Accounting ePub eBook: Everything you need to know to manage the success of your accounts. United Kingdom: Pearson UK.

Tracie Nobles, C. S. (2012). College Accounting. Chicago: Cengage Learning.

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.