Brief History of Accounting: From Ancient to Contemporary

Key Takeaways

Though it is unknown when accounting exactly began or was developed, evidence of early accounting methods being used were found in the region where ancient Mesopotamia civilizations were once located.
Accounting has evolved alongside economic, cultural, political, and technological changes throughout history. Recording financial transactions continued to change from the use of tokens and clay tablets in ancient civilizations to the use of contemporary accounting software and electronic spreadsheets.
During the Industrial Revolution, the demand for accounting practitioners increased alongside changes in business structures, processes and distributions. These events triggered the development of organized accounting professions.
The need to harmonize accounting standards across different countries and regions due to globalization resulted in the establishment of the International Accounting Standards (IAS) and, subsequently, of the International Financial Reporting Standards (IFRS).

Introduction

Disclaimer: The contents of this post is a synthesis of information from existing resources on the history of accounting. Nothing in this post is based on original research.

Like most things in life, having a deeper understanding of accounting begins with knowing its history. Learning how accounting evolved, from the use of primitive counting tools to the use of highly-sophisticated accounting software, is a good starting point in appreciating accounting as we know it today.

There is no known point or period in human history where accounting really began. However, there are speculations that it may have existed when humans started to form societies and live in organized groups or communities.

When ancient humans began trading with each other through barter and any other form of currency at that time, primitive accounting methods may have been employed to record transactions and keep track of goods and provisions in storehouses. Accounting methods have evolved over time to accommodate changes in the business, economic and political landscape.

To easily digest the information in this post, we’ll break them down into four main chronological periods in the history of accounting:

Ancient Civilizations to the Middle Ages (5,000 BC to late 15th century)
The Italian Renaissance (14th to 17th century)
The Industrial Revolutions (18th century to present)
Contemporary Accounting

Ancient Civilizations to the Middle Ages

This period spanning around 5,000 BC to the late 15th century encompass the age of Ancient Civilizations, the Roman Empire and the Middle Ages.

Early accounting methods made use of stones, clay tablets and clay bullae to account for commercial and government transactions in ancient civilizations that dominated the Mesopotamia region. The bullae are hollow ball-like clay envelopes that contain smaller tokens used to identify and represent the recorded goods and their quantities.

The discovery of clay tablets suggested that the Sumerians, the earliest known civilization in Mesopotamia, used them to inscribe commerce activities. Over time, clay bullae and tablets were replaced by papyrus and then parchments as people found them easier and more efficient to store and handle.

The development of accounting in Mesopotamia was closely related to the development of writing. Some historians and archaeologists even believe that accounting may have been developed before writing.

The Babylonians, also based in Mesopotamia, and the ancient Egyptians had primitive auditing systems in place to check the movements of contents in the royal storehouses. The first known usage of papyrus, a thick paper used for writing, began in Egypt when information related to public records and inventory in royal storehouses are recorded.

The first emperor of the Roman Empire, Caesar Augustus, composed his monumental inscription Res Gestae Divi Augusti. It showed a text on the accounting of the emperor’s stewardship to the Roman people. The inscription listed the expenditures and distribution of resources such as money, land and grain to the Roman people and soldiers.

In China, the first paper money was used during the Tang and Song dynasties in the 7th century. The concept of paper money was introduced in Europe by Marco Polo’s travel accounts to China during the 13th century. Paper money was invented to replace the use of metal coins and to reduce the burden of carrying heavy coins in conducting transactions.

During the Early Middle Ages, Muhammad ibn Musa al-Khwarizmia, a Persian polymath, composed the Compendious Book on Calculation by Completion and Balancing (also known as Al-Jabr in which the term algebra was derived). It is an Arabic mathematical treatise on Algebra which is a landmark work in the history of mathematics. The book contains a chapter about the double-entry bookkeeping as a solution to the inheritance accounting that is required for Muslims.

The Italian Renaissance

The Renaissance Period encompasses the dates between 1350 to 1620 (14th to 17th century) in Europe. The Renaissance, which is the bridge between Medieval Europe and the modern era, began as a cultural movement in Italy, and later spread throughout Europe.

The modern concept of banking and accounting were introduced during the Renaissance. This period marked extensive trade and recordkeeping among Italians and the use of bank loans and capital. The development of accounting during the Italian Renaissance continued to influence the practice of accounting in subsequent periods of history.

The city of Florence, which is considered as the birthplace of the Italian Renaissance, became a center of commerce and rose to economic prominence at that time. The groundwork for modern-day business enterprise, capitalism and banking were laid down here.

The economic development in the Italian city-states of Genoa, Florence and Venice demanded for new accounting forms and methods that are applicable to the rise of commerce during the Renaissance. This is the point where the famous accounting method of double-entry bookkeeping was widely introduced to banks and merchant ventures.

There is no evidence that exactly points out where and when the double-entry bookkeeping originated. However, it was in the three city-states previously mentioned where this method was widely used and developed as a response to the economic growth during the period.

The double-entry bookkeeping is a method of recording financial transactions using debit and credit entries. The term debit may refer to the Italian term debere which means “to owe”. On the other hand, credit may also refer to the Italian term credere which means “to entrust”.

DR and CR are abbreviations of debit and credit, respectively. There is no accurate explanation about where the abbreviations were derived but some theories suggest that they were the abbreviations of debere and credere, or debtor and creditor, or debit record and credit record.

The oldest double-entry ledger that was discovered are the Messari (Italian for Treasurer) records in the city of Genoa. This contains accounts with debits and credits recorded in two equal sides.

Another city that made a significant influence on accounting was Venice. This is where the double-entry bookkeeping system was further developed and spread to the rest of Europe with the help of Venice’s advanced printing press. The floating city of Venice was a very important center of commerce and finance during the renaissance due to its location. Its advantage as a port and major financial and maritime center made it one of the wealthiest cities during the Middle Ages and Renaissance.

Luca Bartolomeo de Pacioli, an Italian mathematician and Franciscan friar, wrote the Summa de Arithmetica, Geometria, Proportioni et Proportionalita which was printed and published in Venice in 1494. The book was a synthesis of mathematical knowledge of his time and was noted to include a 27-page treatise on bookkeeping called Particularis de Computis et Scripturis.

The treatise contains the first published description of double-entry bookkeeping which formalized and laid down the foundation of bookkeeping as it is known and practiced today. The treatise contained discussions about the journal, ledger, memorandum, trial balance, and the accounting cycle as it is known today.

Because of the influence and impact of his work, Luca Pacioli was widely known as the Father of Modern Accounting. His book was used as reference by merchants on recording business transactions and auditing the accounting records. This enabled the merchants to lower the risk of theft, ensure equal debits and credits, and maintain accurate inventory records.

Luca Pacioli did not invent double-entry bookkeeping nor any of the mathematical topics contained in the Summa de Arithmetica. He clearly stated in the book that he did not contributed any original concepts in the book. However, it was the most comprehensive mathematical textbook that was widely published at that time. Even if the Summa did not contain original work, it was an important book used as reference by European mathematicians and merchants. The bookkeeping system described in the treatise is still the basis of modern accounting systems today.

The Industrial Revolutions

The Industrial Revolution is a series of economic and political changes in the world that began in the 18th century and is considered to continue until today. Prior to the industrial revolution, people lived in small agricultural and rural communities where they make goods from their homes and small shops using handheld tools and small equipment.

When the First Industrial Revolution began in Britain in 1760, it marked the great transition from small agricultural communities into industrialized urban societies. Production of goods shifted away from homes and to factories with the introduction of the factory system. This brought unprecedented increase in the volume of goods that were produced as well as decrease in manufacturing costs.

With the introduction of complex manufacturing processes, more sophisticated accounting methods were demanded by business owners and investors. Advanced cost accounting methods were adopted in order to cope with the needs of manufacturers to track the prices of the goods.

Manufacturing of goods shifted from hand production methods to the use of highly specialized large-scale machinery that are capable for mass production of goods. As a result, accounting for depreciation, overhead costs and inventory management became more important because of the use of fixed assets for production.

The forms of business organization during this period also shifted from sole proprietorships to larger ones like partnerships and corporations. Together with the shift to larger business entities came the concept of limited liability to protect business owners from personal liabilities. Tax accounting systems were also adopted as a response to increase in government regulations.

With all the economic changes brought by the Industrial Revolution, the natural demand for accounting practitioners also increased. This raised the status of accounting practitioners and caused the subsequent development of an organized accounting profession.

The Institute of Chartered Accountants of Scotland (ICAS) which was established in Scotland on December 11, 1854 became the first professional organization of accountants in the world. Other earlier professional organizations are the Edinburgh Society of Accountants (1854), the Glasgow Institute of Accountants and Actuaries (1854), the Aberdeen Society of Accountants (1867), and the Institute of Chartered Accountants in England and Wales (1880).

The American Association of Public Accountants (AAPA), which was the predecessor of the American Institute of Certified Public Accountants (AICPA), was formed in 1887. The AICPA is the national professional organization of Certified Public Accountants (CPAs) in the United States.

The First Industrial Revolution was succeeded by three other industrial revolutions that marked more advancements in technology, communications and industrial processes. Accounting continually evolves with every economic and technological changes.

The Second Industrial Revolution, also known as the Technological Revolution, was observed in the late 19th and early 20th centuries. It is a period of greater economic growth and increased productivity caused by the use of extensive railroad systems and telegraph networks. The use of electricity gave rise to the modern production line which used machines that replaced many factory workers. The advancements in transportation and communication technology has also accelerated globalization which connected many global economies and cultures.

The Third Industrial Revolution, which is also known as the Digital Revolution, began in the later part of the 20th century after World War 2. This is characterized by the extensive use of computers and communication technologies in manufacturing and other business processes. Technology began to shift from mechanical and analogue to digital.

The Fourth Industrial Revolution was introduced by Klaus Schwab, the founder and executive chairman of the World Economic Forum (WEF), in a 2015 article published by the Foreign Affairs magazine. This is marked by the increased automation in manufacturing and business processes using smart technology such as smart sensors, 3D printing, data analytics, the Internet of Things (IoT) and Machine to Machine (M2M) communications, to name a few.

Accounting in Contemporary Times

Globalization

The advancements in technology, transportation and communication during the Industrial Revolution led to Globalization where economies, cultures and societies across the globe become integrated.

In the old days prior to globalization, business was only conducted in local and regional areas and there is no widespread trade beyond the borders of a country or region. But the accelerating advancements in technology, communication and transportation systems led to the cross-border trade. This resulted to the inevitable growth of multinational corporations, foreign investments, business acquisitions, and outsourcing of business processes and manufacturing.

Employment and commodities became more available in less-developed nations, resulting to a shift in wealth from developed countries. More investment opportunities across international markets became available to investors seeking higher returns and taking advantage of economic growth in other countries.

Internationalization of Accounting Standards

The practice of accounting was also affected by globalization. A multinational corporation that operates in more than two countries should adhere to different financial reporting standards and regulations. This resulted to new and more complex accounting procedures that include consolidation of accounts, foreign currency translations and reconciliation of different financial reporting practices.

Different countries have their own accounting standards that are established by their specific accounting organizations. This required investors and other stakeholders of international companies to have an understanding of the accounting standards of each country where they have vested business interests.

The differences in accounting standards could lead to obscure analysis and interpretation of financial statements. These complexities spurred the adoption of uniform accounting standards that are internationally recognized across different countries and jurisdictions.

The harmonization of accounting standards is the consequence of different accounting practices in a highly-globalized business world. As a response to the demand of a common accounting language that is recognized globally, the International Accounting Standards Committee (IASC) was founded on June 1973 in London.

The IASC is an independent private sector body that was tasked to set-up international accounting standards with the objective of achieving uniformity in accounting principles that are used for financial reporting around the world. The standards that were approved and published by the IASC are called the International Accounting Standards (IAS).

In April 2001, the IASC was replaced by the International Accounting Standards Board (IASB). They issued a new globally-accepted uniform accounting standards called International Financial Reporting Standards (IFRS). The standards which were established by the IASC was adopted by the IASB and continue to be designated as International Accounting Standards or IAS.

The IFRS is a set of understandable high-quality global accounting standards that bring greater transparency and degree of comparability in financial reporting. As of March 30, 2017, a research conducted by the IFRS Foundation shows that 150 jurisdictions now either require or permit the use of IFRS by local and international businesses.

Accounting Technology

From the use of bullae, clay tablets, papyrus, and parchments in recording financial transaction to the use of calculators and computers, the accounting process continues to evolve as new technologies are introduced. In the large part of accounting history, bookkeeping was done manually, but with the prevalent use of computers nowadays, bookkeeping became a lot easier and financial reports can be generated with only a few clicks of the mouse or a few taps on a touch screen device.

The use of powerful accounting software by businesses has transformed the nature of accounting from a tedious task-oriented work into a fast-paced and dynamic profession where accountants are seen as business advisors rather than just financial scorekeepers. Accounting technology has made the job of accountants easier and much more efficient. This left accountants with more free time for data analysis, interpretation and advisory.

Before the era of computers, the recordkeeping process was done by hand using manual ledgers and paper worksheets. Finding errors in the trial balance and ledgers was tedious work and usually takes a lot of time, money and effort. With the advent of accounting software and electronic spreadsheets, however, the once tedious job of bookkeeping and locating errors were virtually eliminated and the accuracy of data entry improved dramatically.

Modern and powerful accounting tools have helped accountants get their job done faster and with lower margins of error. However, accountants are now required to also have basic IT skills. Cloud computing, receipt scanning tools, mobile accounting, and special tax software are some of the technologies that are now transforming the accounting industry.

Advances in automation, artificial intelligence and blockchain technology can potentially disrupt the accounting industry by eliminating all routine and repetitive data entry tasks. Machine learning could impact tasks such as bank reconciliations, invoice categorization and invoice clearing by learning over time how to accomplish them independently without human intervention. Accountants and businesses should be willing to embrace the rapid changes in accounting technology to remain relevant and competitive.

Review Questions

How do accounting software and electronic spreadsheets make the accounting process more efficient?
How was accounting done during the period of ancient civilizations in the Mesopotamia region?
Why is there a need to establish a set of international accounting standards that are recognized by many countries around the world?
What are some of the roles of the Industrial Revolution in the evolution of the accounting profession?
In what ways can artificial intelligence impact the accounting profession?