Chapter 3: History of Accounting Thought

After studying this chapter , you will be able to : 1.Describe the major contribution to accounting knowledge by the European countries. 2.Dicscuss the development of accounting theory and practices. 3.Identify major differences and similarities between the system of accounting that was in place at tune of the twentieth century, and that in place today. 4.Relate developments in accounting to developments in society. 5.Desecribe the growth of accounting knowledge during the past 200 years.

Early history of accounting

Accounting appears to have been practiced since the beginning of recorded history . Business transaction and land sales were recorded by about 3000 B.C. There is evidence in many early civilisations: Babylonian Assyrian Sumerian Egyptian Chinese Greek Roman

Early history of accounting

Loca Paciolio is consider the father of modern accounting . The double entry system laid down by Loca Paciolio was applied earlier in Europe.

The Age of Stagnation

The period between (1494 and 1775) is regarded as the age of stagnation of accounting. The world changed very littlie during this period of about 300 years. We know that accounting is a function of economic (and social) development . There was practically no economic development . Naturally , there was no progress in accounting practices and ideas.

Growth of accounting Knowledge

Accounting knowledge ( principles , practices , systems) has grown much over the period of about 200 years from (1775-2000).
(1775-1850):

The proprietary owners were more interested in knowing their capital (Assets Liabilities). Assets were valued at current value.

Growth of accounting Knowledge

(1850-1900): The basic accounting principles and assumptions (operating guidelines) developed during this periods. 1- Growth of corporations between this period led the development of separate entity assumption . There was greater emphasis on income rather than on balance sheet . 2- This resulted in development of accounting concepts of income and the periodicity assumption. 3- A company was regarded as going concern; and assets were valued at original cost less depreciation.

Growth of accounting Knowledge

4- The revenue principles , the cost principles and the matching principles began to be applied in the construction of income statement. 5- Inventory and fixed assets began to be valued at historical cost due to stewardship reporting. (1900-1950): 1-As for development of this period , stewardship reporting did not remain all that significant around 1950 . Cost accounting and management accounting development during this period . 2- Tax accounting , advising and planning were developed. 3- Auditing techniques , standers and guidelines were issued by the professional bodies.

Growth of accounting Knowledge

(1950-present)
1- Later half of the current century , saw accounting as a Full-fledged information system. 2- Many new theoretical concepts were tested and put to practice . A long descriptive approach ,the normative approach to development of an accounting theory was also regarded as useful . 3- Various accounting standards boards and committees were set up to issue statements of concepts and standards in many countries.

Growth of accounting Knowledge

4- International accounting was developed to harmonize accounting techniques and practices in membercountries. 5- Non-monitory information also began to be reported in annual statement. 6- Now greater attention was laid to systems planning and inter-disciplinary applications. The application of computers has revolutionized accounting system and techniques .information system, information technology (IT), E-commerce, management sciences. - Accounting is now becoming a multiple model (pattern) science.

Development of Accounting Practice and Theory In European Countries

European countries took the lead in developing accounting principles , practices. Various cost accounting , management accounting , financial accounting associations and institute came up in : 1- United Kingdom (UK). 2- Germany. 3- France. 4- Switzerland. These Countries also contributed to the development of accounting principles.

Basic Accounting Equation

All transaction of a business can be referred to this basic equation : Assets = Liabilities + Owners Equity To further explain the transaction of revenues, expenses, losses , and gains, the equation can be expanded thus :
Or Assets + Expenses = Liabilities + Revenue + Owners Equity Or Assets = Liabilities + (Revenue- Expenses) + Owners Equity

The equation must be in balance after every transaction. For every Debit there must be a Credit.

Basic Accounting Equation

Thus , there are five categories of accounts : 1- asset account. 2- liability account. 3- revenue account. 4- expense account. 5- capital or owners equity account.

Normal Balance Debit

Assets
Debit / Dr. Credit / Cr.

Normal Balance Credit

Chapter 3-24

Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Equity
Debit / Dr. Credit / Cr.

Normal Balance

Normal Balance
Chapter 3-23

Expense
Debit / Dr. Credit / Cr.
Chapter 3-25

Revenue
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance
Chapter 3-27

Chapter 3-26