HISTORY AND DEVELOPMENT

OF ACCOUNTING AND
ACCOUNTING THEORY
Prepared by:
RADZIE IESKANDAAR MASIMAN
+60197865363
razi_iskandar@yahoo.com
Fakulti Ekonomi dan Kewangan Islam
Universiti Islam Sultan Sharif Ali
 WHAT IS ACCOUNTING?
Accounting can be defined as:

“The process of identifying, measuring, and

communicating economic information to permit informed
judgements and decisions by users of the information.”
HISTORICAL DEVELOPMENT OF ACCOUNTING

Early History of Accounting

• Dating back to 3000BC
• Assyrian-Sumerian civilization - oldest surviving business
records
• Chinese Zhou dynasty – government accounting
• Greek civilization – Zenon, manager of Appolonious
introduce system of responsibility accounting
• Roman civilization – law requires tax payers to prepare
statement of financial position
 THE ITALIAN METHOD
Franciscan monk, Luca Pacioli wrote “Summa de
Arithmetica, Geometria, Proportioni et Proportion” (The
review of arithmetic, geometry, and propostions in 1494.
• 2 chapters of the book describe double entry bookkeeping.
• He stated:
• Purpose of bookkeeping was to give to the trader without delay
information as to his assets and liabilities
• All entries has to be double entries, that is, if you make one creditor, you
must make someone debtor.
• Not only was the name of the buyer or seller recorded, as well as the
description of the goods with its weight, size or measurement, price and
term of payment.
• The receive or disburse, the record was shown of the kind of currency
and its converted value,
 A.C. LITTLETON 7 PRECONDITIONS
1. The art of writing
2. Arithmetic
3. Private property
4. Money
5. Credit
6. Commerce
7. Capital
DEVELOPMENT OF ACCOUNTING
GENERAL SCIENTIFIC PERIOD
• 1800 – 1955
• Theory based on observations of practice rather than
deductive logic that is critical in current practice
• Overall framework to explain why accountants account as
they do
• Wall Street crash in 1929, lead to creation of Securities &
Exchange Commission
NOTABLE PUBLICATIONS
• In 1936, the American Accounting Association (AAA)
released a TENTATIVE STATEMENT OF ACCOUNTING
PRINCIPLES AFFECTING CORPORATE REPORTS.
• In 1938, the American Institute of Certifies Practicing
Accountants (AICPA) released a STATEMENT OF
ACCOUNTING PRINCIPLES authored by Sanders,
Hatfield & Moore.
 NORMATIVE THEORIES
• Normative period: 1956-1970
• Norms for best accounting practice
• Debate predominantly about measurement rather than
actual practice of recording and reporting
• Two group exist: historical cost vs conceptual framework
THE CONCEPTUAL FRAMEWORK
• The conceptual framework is considered as the structured
theory of accounting.
• The conceptual framework gain popularity because the
framework are meant to encompass all components of
financial reporting and intended to be used as a guide to
practice.
DEMISE OF THE NORMATIVE PERIOD
• The normative period ended in the early 1970’s
• Two main factors prompted the demise of the normative
theorists:
1. The unlikelihood of acceptance of any particular normative
theory
2. Normative theories prescribed how accounting should be
practiced
 POSITIVE THEORY
• Dissatisfaction with normative theories
• Positive accounting theory sought to provide framework
for explaining the practice which were being observed.
• The objective is to explain and predict, e.g. the bonus plan
hypothesis – states that managers being wealth-
maximizers would rather have more wealth than less,
even at the expense of shareholders.
• Prediction: Managers who are remuneration via bonus
plans will use income-increasing accounting methods
more than managers who are not remunerated via the
bonus plans.
FROM 2000’s ONWARDS
• Positive theory currently still dominates the accounting
research literature
• There are 2 major groups still actively involved in the
search and development of accounting theory
1. The academics – conducting and emphasizing academic
research
2. The professional – conducting and emphasizing practical
research
 IS THERE A NEED FOR A THEORY OF
ACCOUNTING?

• Theory in accounting is a relatively new concept

compared to theories in mathematics and physics
• Why theory in accounting is needed?
• Problems arisen due to the lack of a general theory of
accounting
1. PERMISSIVENESS IN
PRACTICE
• Accounting practice has been accused of being too
permissive by allowing a number of alternative procedures
• The Association of International Certified Professional
Accountants (AICPA) (1934) once reported to the New
York Stock Exchange the following:
“The more practical alternative would be to leave every
coperation free to choose its own methods of accounting
within the very broad limits to which reference has been
made”
2. AD HOC SOLUTIONS

• The permissiveness has resulted in so much confusion.

• The AICPA issued resolutions to establish order, but their
attempts were not successful
• The resolutions were seen as mere purification fo practice
supported by ad hoc arguments rather thatn by a set of
consistent princples.
3. INFLUENCES AND PRESSURES

• The practices then continued to be influenced by law,

rules set by government agencies and pressures from
business executives.
• The Accounting Principles Board (APB) (Statemenf No.4
paragraph 139) admitted such:
“The accepted accounting princples are generally
conventional, they become generally accepted by
agreement (or often lack of agreement) rather than by
formal derivation from a set of postulates of basic
concepts.”
4. CONVENTIONAL PRACTICES

• The principles were developed on the basis of

“experience, reason, custom, usage and to a significant
extent practical neccessity”
• Do what has been done – by those in practice and by
acceptance.
5. TOO MANY SOURCES

• The Internal Revenue Services (IRS)

• The Accounting Professionals / Practitioners
Accepts LIFO for costing inventory and the accelaration
depreciation method
• Business executives requires accountants to minimize tax
expenses or increase their reported incomes within
“acceptable” schemes.
Thank you