Historical Development of Accounting

Historical Development of Accounting
Introduction 
Accounting History is a specialist, international peer-reviewed journal that encourages critical and interpretative historical research on the nature, roles, uses and impacts of accounting and provides a forum for the publication of high quality manuscripts on the historical development of accounting across all organizational forms. The journal is acknowledged as a premier journal in its field and is a prized resource for academic, practitioners and students who seek to augment understanding of accounting's past and use that understanding to elucidate accounting's present and its p   ossible future development. Accounting History is the official journal of the Accounting History Special Interest Group of the Accounting and Finance Association of Australia and New Zealand. It is believed that the very origins of writing itself may have developed out of early marks used to keep account of goods at ancient warehouses more than 5,300 years ago. The notion that pre-numerical counting systems pre-dated even written language, didn’t come as a surprise to many historians and archeologists who have long since recognized that the history of human civilization is largely indistinguishable from the history of commerce.

Early Accounting
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.


The history of accounting is closely linked to the development of human society and commerce. In fact, accounting has made significant contributions to both over the past five and a half thousand years.The origins of accounting can be traced back to at least 3600BC when trade between tribes in the region of Mesopotamia required records to be kept on stone and clay tablets. In those times the ‘scribes’ who possessed a knowledge of writing also served as bookkeepers.It is believed that many of the first examples of what we call ‘writing’ were actually records of transactions carried out more than 5,000 years ago. Some scholars believe that even then there were accounting systems in use that had counterparts for our modern ledgers and receipts.

Accountants And Auditors in Ancient Egypt
The ancient Egyptians had a far more sophisticated system, thanks largely to their having advanced systems of distribution that required quantities of various commodities to be stored in warehouses and disbursed over periods of time as required. To keep track of where goods were and what had been consumed, there was one set of scribes that recorded amounts brought into the warehouse and another set of scribes that recorded outwardmovements.

A third set of scribes functioned as auditors, comparing both sets of records and checking them against the quantities remaining in the warehouses. It was a simple way to ensure that the Pharaoh wasn’t being cheated in the transactions that were carried on. Rulers of that period also required accounting records to be compiled for the purpose of taxation. The Roman Empire was run for profit and needed to identify the location and ownership of wealth so a share could be extracted and returned to finance the expenses and extravagances of its emperors.

I n attempting to explain why double entry bookkeeping developed in fourteenth century Italy instead of ancient Greece or Rome, accounting scholar A.C. Littleton describes seven "key ingredients" which led to its creation:
Private property: The power to change ownership, because bookkeeping is concerned with recording the facts about property and property rights;
Capital: Wealth productively employed, because otherwise commerce would be trivial and credit would not exist;
Commerce: The interchange of goods on a widespread level, because purely local trading in small volume would not create the sort of press of business needed to spur the creation of an organized system to replace the existing hodgepodge of record-keeping;
Credit: The present use of future goods, because there would have been little impetus to record transactions completed on the spot;
Writing: A mechanism for making a permanent record in a common language, given the limits of human memory;
Money: The "common denominator" for exchanges, since there is no need for bookkeeping except as it reduces transactions to a set of monetary values; and
Arithmetic: A means of computing the monetary details of the deal.
Many of these factors did exist in ancient times, but until the middle ages they were not found together in a form and strength necessary to push man to the innovation of double entry. Writing, for example, is as old as civilization itself, but arithmetic - the systematic manipulation of number symbols - was really not a tool possessed by the ancients. Rather, the persistent use of roman numerals for financial transactions long after the introduction of Arabic numeration appears to have hindered the earlier creation of double-entry systems.


Nevertheless, the problems encountered by the ancients with record keeping, control and verification of financial transactions were not entirely different than our own today. Governments, in particular, had strong incentives to keep careful records of receipts and disbursements - particularly as concerns taxes. And in any society where individuals accumulated wealth, there was a desire by the rich to perform audits on the honesty and skill of slaves and employees entrusted with asset management. But the lack of the above-listed antecedents to double entry bookkeeping made the job of an ancient accountant extraordinarily difficult. In societies where nearly all were illiterate, writing materials costly, numeration difficult and money systems inconsistent, a transaction had to be extremely important to justify keeping an accounting record.

Accounting In Mesopotamia, Circa 3500 B.C.   
German archaeologists say carbon dating places the age of the tablets at 3300 BC to 3200 BC More than two-thirds of the translated hieroglyphic writings, on small pieces of clay tablets and the sides of jars, are tax accounting records. The discovery was met with interest by historians, who have generally regarded the Sumerians of the Mesopotamian Valley (present-day Iraq) as the first people to employ writing - also for accounting purposes (see main text). The oldest existing Sumerian writings are believed to have been made sometime before 3000 BC.

Although Oxford University Professor of Egyptology John Baines views the Germans' discovery as "very important," he was quoted by the Associated press as saying, "I would say it is likely that writing was invented in both places (Egypt and Mesopotamia)." Most of the writings were accounts of linen and oil delivered to King Scorpion I in taxes, short notes, numbers, lists of kings' names and institutions. While hieroglyphic symbols are employed, it is considered true writing because each symbol represents a consonant for the spoken word.

Accounting for Long-Term Liabilities


Accounting for Long-Term Liabilities

Introduction

Debts, or liabilities, are the claims creditors have against a firm’s assets. Assets consist of anything that the firm owns that is of monetary value, such as real estate, equipment, cash and inventory. You will find a business' debts listed on its balance sheet in the liabilities section immediately following the section listing the firm’s assets. Liabilities are always divided into short-term debt and long-term debt. Short-term debt is referred to as current liabilities and long-term debt as long-term liabilities

This chapter will focus on the liability side of the balance sheet, particularly current and long-term liabilities including capital and operating leases. Pay close attention to the section concerning the classification of leases as capital vs. operating, and how each classification affects other accounts. This concept is tested heavily in the CFA Level 1 exam.

Current Liability Basics

Liabilities
These are obligations a company owes to outside parties. Liabilities represent others' rights to money or services of the company. Examples include bank loans, debts to suppliers and debts to employees.

Current liabilities
            These are debts that are due to be paid within one year or the operating cycle, whichever is longer; further, such obligations will typically involve the use of current assets, the creation of another current liability or the provision of some service.

Long-term liabilities
            These are obligations that are reasonably expected to be liquidated at some date beyond one year or one operating cycle. Long-term obligations are reported as the present value of all future cash payments.
Uncertainties Regarding Liability Value
            In some cases the timing and/or the total liability may be difficult to estimate:

  1. Some companies offer clients a warranty period. The company does not know at the time of the sale who the payee will be. Furthermore, the company does not know when this payment will occur.
  1. At year-end some companies will estimate some expenses, and recognize some liabilities such as pension benefits.
Recording and Reporting Estimated and Contingent Liabilities
Liabilities whose timing and amount are known can easily be accounted for. But others - such as warranties, taxes, vacation-pay liability and contingent liabilities, among others - require some estimation.

Warranties
            When a company sells a product, it sometimes offers its customers a warranty of a certain number of years. To be consistent with the matching principle, companies, at the time of the sale, must estimate an amount that must be allocated to the costs associated with the warranties. Most companies will use a historical or industry average to estimate its warranty cost. The estimated warranty cost or liability will be allocated to the estimated warranty liability. For example, say Company ABC sells 100 appliances at $100 and estimates that each appliance will carry a $10 warranty liability.



Contingent Liabilities
            Contingent liabilities are liabilities that will materialize if some future event occurs and are contingent on a specific outcome. The most frequent contingent liability is a pending lawsuit against the company, which will materialize only if the firm is found guilty. Pending lawsuits can be significantly large for some companies, especially those involved in large class action lawsuits with hundreds or even thousands of potential plaintiffs. Examples of these industries include pharmaceuticals, oil companies or any company that produces large amounts of products that can harm consumers.

            The disclosure and/or inclusion of contingent liabilities in a company's financial statements will depend on the company's ability to estimate the amount of the liability and the likelihood that it will occur.

Rules for classifying liabilities:
  • If the liability is probable and can be reasonably estimated, it must be included in the company's financial statements. The loss will be included in the financial statements, and the liability must be included on the balance sheet.

  • If the liability is probable but cannot be reasonably estimated, then only a footnote disclosure is required.

  • If the liability is not probable and cannot be reasonably estimated, then no disclosure is required.

Accounting for Long-Term Liabilities

Mortgages payable
            A mortgage is a long-term debt secured by a real estate property such as a building or land. The mortgage is usually paid back in equal installments. These installments include a portion that is attributable to interest expense and the other to capital repayment.

Long-term leases
Companies generally acquire the right to use an asset by purchasing it outright. But in some cases companies can lease an asset as opposed to an outright purchase. Leases can be classified as operating leases or capital leases. Operating leases are defined as short-term leases by which the company enters into an agreement with the lessor to use the asset for a portion of the asset's economic life. The lessee (the company leasing the equipment) will have no obligation to purchase the asset in the future. Capital leases, on the other hand, are long-term leases that create a long-term obligation for the lessee. If the asset qualifies as a capital lease, the asset is recorded on the balance sheet and the present value of the lease obligations are also recorded on the balance sheet. The asset is amortized over the life of the lease by using a straight-line depreciation method. Each rental payment includes a portion that is allocated to interest expenses and repayment of principal.
 
Pensions
            A pension plan is a qualified retirement plan set up by a corporation, labor union, government or other organization for its employees. A pension plan is an agreement under which the employer agrees to pay monetary benefits to employees once their period of active service has come to an end. A third party frequently manages the pension plan.

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