WHAT IS ACCOUNTING THEORY

Accounting theory is concerned with; The study of the history and development of accounting systems in the context of their socio-economic environments; (accounting history) The study of the development of conceptual frameworks for accounting and financial reporting standards. The critical analysis and interpretation of accounting and financial reporting standards and Generally Accepted Accounting Practices (GAAPs).

THE ORIGINS OF ACCOUNTING THEORY

We need to examine the origins of accounting theory because of two major reasons: To identify similarities and differences between ancient and modern recording accounting systems. To examine whether there is a relationship between socio-economic environments and the corresponding accounting systems existing at any particular point in time.

ANCIENT ACCOUNTING SYSTEMS

Ancient accounting systems were characterized by the notion of the stewardship concept of accounting and the recording of both physical and monetary resources. However, there was absence of income measurement and decision making techniques

The Mesopotamian (Iraq)

Early civilizations existed along the Tigris-Euphrates rivers between 4500BC and 500BC. The civilizations were sufficiently complex to necessitate a system of record keeping to account for the ownership of property and transactions between parties through the use of clay tablets to record transaction in grain.

ANCIENT

ACCOUNTING

SYSTEMS

Economic tablet with numeric signs. Proto-Elamite script in clay, (3200 BC to 2700 BC). Department of Oriental Antiquities, Louvre. The Mesopotamian civilization emerged during the period 37002900

ANCIENT

ACCOUNTING

SYSTEMS

Complex accounting tokens made of clay, from, circa 3500 BC. Department of Oriental Antiquities, Louvre.

ANCIENT

ACCOUNTING

SYSTEMS

Globular token envelope with a cluster of accounting tokens. Clay, (4000 to 3100 BC). Department of Oriental Antiquities, Louvre.

ANCIENT ACCOUNTING SYSTEMS CONTD

Greece and Roman

The Greeks invented coinage (money as a medium of exchange) in about 630BC and systems of used in parts of the Athenian Empire primarily to detect fraud and inefficiency. The Romans modified the Greek system and introduced the use of ledgers as we know them today. Chinese Influence The Chinese system had a public sector focus responding to the feudal system that existed during the Chou dynasty during 122125BC as compared to the Greek and Roman Systems that had a private sector focus and were concerned with record keeping for merchants, temples and estates. The system allowed for large distances, several hierarchies of officials and the need to collect taxes in the form of goods by the imperial government.

ANCIENT ACCOUNTING SYSTEMS CONTD

Medieval Manorial Accounting Systems
This was a system of record keeping used in England during the Middle Ages (12th century). The feudal estate or manor was the major social and economic unit administered by stewards who reported to the landlord on how the manor had been managed during the accounting period (monthly, quarterly, half yearly etc.) The system went close to the double entry and was known as the charge and discharge made of two parts Arrears (expected income from property rentals and farm produce)=(Total=The Charge) Expenses (money delivered)=(Total=The Discharge) and the balance The system lasted from the 12th to the 19th century and was largely in single entry form.

MODERN DEVELOPMENTS (DOUBLE ENTRY BOOKKEEPING)

Luca Pacioli was a mathematician who published several books in mathematics. He was born in 1446 in Borgo San Sepolcro, a small Tuscan town and died at the age of 70 on 19th June 1517. Although Luca Pacioli codified rather than invented this system, he is widely regarded as the "Father of Accounting". The system he published in the book Summa de arithmetica, geometria, proportioni et proportionalita (Venice 1494), a textbook used in the schools of Northern Italy included most of the accounting cycle as we know it today.

LUCA PACIOLI
THE FATHER OF ACCOUNTING

MODERN DEVELOPMENTS (DOUBLE ENTRY BOOKKEEPING)

It was a synthesis of the mathematical knowledge of his time It is also notable for including the first published description of the method of bookkeeping that Venetian merchants used during the Italian Renaissance, known as the double-entry accounting system. He described the use of journals and ledgers, and warned that the accounts could not be considered to have balanced until the debits equalled the credits.

MODERN DEVELOPMENTS (DOUBLE ENTRY BOOKKEEPING)

His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses the account categories that are reported on an organization's balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. Also, his treatise touches on a wide range of related topics from accounting ethics to cost accounting

MODERN DEVELOPMENTS (DOUBLE ENTRY BOOKKEEPING)

Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalit" (Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (Italian: "Details of Calculation and Recording"). It was written primarily for, and sold mainly to, merchants who used the book as a reference text or accounting manual.

MODERN DEVELOPMENTS (DOUBLE ENTRY BOOKKEEPING)

The book represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebra

MODERN DEVELOPMENTS (DOUBLE ENTRY BOOKKEEPING)

Although Luca Pacioli did not invent double-entry bookkeeping, his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for doubleentry bookkeeping as it is practiced today

MODERN DEVELOPMENTS (DOUBLE ENTRY BOOKKEEPING)

According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about the business, and allows an evaluatuation of how the business is going and to act accordingly. Pacioli recommends the Venetian method of doubleentry bookkeeping above all others. Three major books of account are at the direct basis of this system: the memoriale (Italian: memorandum), the giornale (journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index.

MODERN DEVELOPMENTS (DOUBLE ENTRY BOOKKEEPING)

Paciolis treatise gave instructions on how to record barter and other transactions in a variety of currencies. It also enabled merchants to audit their own books and to ensure that the entries in the accounting records made by their bookkeepers complied with the method he described. Without such a system, all merchants who did not maintain their own records were at greater risk of theft by their employees and agents for that reason the first and last items described in his treatise concern maintenance of an accurate inventory.

MODERN DEVELOPMENTS (DOUBLE ENTRY BOOKKEEPING)

The nature of double-entry can be grasped by recognizing that Paciolis system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription and calculation.

SOMBARTS THEORY
Despite the fact that it is generally agreed that accounting responds to the needs of the environment in which it is embedded, some researchers (especially Sombart 1924) suggest that Double Entry Bookkeeping was such a powerful tool that it led to the development of a new social and economic system which we call capitalism. This is a position unsupported by any evidence, taking into account how ancient accounting systems developed. The weight of available evidence does support the generally accepted view that that Double Entry Bookkeeping was the product of economic and social change and responds to the needs of the environment and not the other way round.

BRITISH INDUSTRIAL REVOLUTION AND MODERN DEVELOPMENTS

Accounting Implications of the British Industrial Revolution (1750-1900) The industrial revolution was characterized by the invention of powered or mechanical machinery (the steam engine) and production changed from hand mechanised systems The industrial revolution brought about the following social and economic changes in that country: The use of machinery in production systems New accounting problems emerged including the concept of depreciation, useful lives of machinery, annual depreciation charges and residual values and these problems had a significant impact on profit determination in a way that did not exist before.

BRITISH INDUSTRIAL REVOLUTION AND MODERN DEVELOPMENTS

Accounting Implications of the British Industrial Revolution (1750-1900) The construction of factories to facilitate the mass production of goods and the emergence of increase labour force New accounting problems emerged including inventory control and valuation, ascertaining the periodic inventory valuation and balances, how to allocate overhead costs to inventories and which method to account for the issue of inventory (FIFO, LIFO and AVCO etc.) Several issues emerged such as how the accounting function has the responsibility to provide information that facilitates collective bargaining by organised labour (trade unions), safety at work and motivation (industrial sociology)

BRITISH INDUSTRIAL REVOLUTION AND MODERN DEVELOPMENTS

Accounting Implications of the British Industrial Revolution (1750-1900) The emergence of large scale industrial and commercial activities This necessitated the formation of joint stock companies (limited liability companies) dating back as the 1844 Joint Stock Companies Act. The central issue was the separation between ownership and management (shareholders and directors). The need for the accountancy profession to get organised and respond to the accounting needs of its environment in an orderly and efficient manner. This was characterised by the early pronouncements of the Institute of Chartered Accountants in England and Wales (ICAEW) during the early 1960s.

BRITISH INDUSTRIAL REVOLUTION AND MODERN DEVELOPMENTS

Accounting Implications of the British Industrial Revolution (1750-1900) The formation of the Accounting Standards Steering Committee (ASSC) in 1970. The ASSC changed to be known as the Accounting Standards Committee (ASC) and was then joined by the Scottish and Irish Institutes of Chartered Accountants and the Association of Chartered Certified Accountants (ACCA). The professional accounting bodies referred to above formed the Consultative Committee of Accountancy Bodies (CCAB) still in existence today. The ASC issued accounting standards known as Statements of Standard Accounting Practice (SSAPs)

BRITISH INDUSTRIAL REVOLUTION AND MODERN DEVELOPMENTS

The ASC was changed to become the present Accounting Standards Board (ASB). On the international scene, the International Accounting Standards Committee (IASC) was established in 1973 and issues International Accounting Standards (IAS). The IASC became known as the International Accounting Standards Board (IASB) in 2001 and issues International Financial Reporting Standards (IFRS).