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Accounting and Bookkeeping

The Oxford Encyclopedia of Economic History

Gary John Previts,

Rahmadi Murwanto

Accounting and Bookkeeping. 

Over the course of established human history, accounting information and business have had an interdependent relationship, in which each has influenced the progress of the other. The development of business enterprises, from proprietary to corporate forms, has been a factor in the development of accounting; and as accounting has responded to such needs, it has supported the adaptation of business to increasingly complex market conditions. This complementary relationship causes continuing debate among historians about which has influenced the other more. One view claims that changes in the environment and in society have necessitated accounting development. The other argues that the evolution of commerce has been enabled as better accounting methods have been developed. Using improved methods, accounting has helped businesses to understand their operations, to improve, if not to flourish, and to respond to the needs of business owners, managers, and society. In either view, there is considerable agreement that accounting has played an important role in the history of business and the economy of the world.

Throughout history, accounting has had many multifaceted roles in the organization and business community, from the simple need to record transactions, to protect and control assets and activities, to the complex role of establishing decision and behavior parameters to direct the allocation of societal resources. Baladouni (1996) asserts that accounting serves four informational needs in the community:

(1) fulfilling a wide variety of control objectives, (2) profit calculation and planning, (3) cost-benefit analysis, and (4) the formulation of major financial and economic policy decisions in various organizations and on many occasions.

Ancient Civilizations' Record Keeping

Accounting can be traced to the cradle of history, in its role in information generation. A prosperous and advanced society existed in ancient civilizations such as Mesopotamia, Egypt, and Greece, which employed an elaborate record-keeping system to manage complex interrelated governmental and commercial activities, as contemporary society does but with quite different technology. In fact, the record-keeping, verification, and internal control problems encountered by ancient societies were in many ways similar to those of the present day.

Information generation, an important function, defines the development of accounting. The invention of accounting as a record-keeping system preceded the development of writing. From her study of ancient Mesopotamian society, Schmandt-Besserat (1992) argues that writing emerged from counting. The need to account for something resulted in the invention of counting devices, which ultimately led to the development of writing, following interrelated economic and social changes.

In the crescent-shaped fertile area of the Middle East, Mesopotamian society flourished as a prosperous society for a long period. In that business environment, trade was encouraged as farmers regularly had surplus harvests. In addition, other types of business and services developed, such as brickmaking, barbering, weaving, carpentry, and banking. Religious institutions and governments collected various taxes, sacrificial offerings, and services from cities throughout the region. Such cities as Babylon and Ninevah became centers for regional commerce, and a Babylonian empire became the center of business and politics in the known world. Mesopotamian society was the first one known to develop its own bookkeeping system as the need for record keeping emerged to facilitate the extensive scale of business, religious, and governmental activities. This society had its own accounting profession, people called scribes, whose main duties were preparing and reading records as well as facilitating business transactions.

In addition to political stability and extensive business growth, several other factors helped the development of accounting in this period. There were legal codes that penalized the failure to memorialize transactions. Ancient Mesopotamian society also employed standard measures of gold and silver. Credit was used extensively in many business transactions, suggesting the need for information and records.

Other ancient societies developed their own record-keeping systems for assisting the governmental sector and managing the financial sector. Ancient Egyptian society developed its own governmental accounting in a fashion similar to that of the Mesopotamians. The Egyptians kept extensive records, particularly for the network of royal storehouses within which “in kind” tax payments of goods were kept. However, literacy, coin, and currency limitations affected ancient Egypt's accounting development.

Ancient Chinese society developed a record-keeping system to evaluate the efficiency of governmental programs and the civil servants who administered them. In the business community, the Chinese developed a simple commercial accounting method for calculating gain or loss in commerce and simple methods of calculating costs of handcrafted goods.

Similar needs led ancient Greek society in the fifth century bce to employ record keeping. They had a designated profession, similar to that of “public accountants,” to help citizens to maintain authority and control over governmental finances. For oversight of legislation for financial matters and control of receipt and expenditure of public monies, this society employed ten state accountants, who followed codified accounting procedures to fulfill their duties.

The Roman Empire improved upon the record-keeping methods developed by Greece and incorporated them as part of their system of financial administration and accounting. This system helped the empire to control a wide area of Europe and Asia. As the Roman Empire expanded, its system of financial administration and accounting also spread throughout the empire, laying the groundwork for the development of medieval accounting.

Medieval Accounting

Medieval accounting is considered a direct development of Roman accounting traditions. Teichmann (1978) claims that this tradition continued for a time in Italy and later in ecclesiastical organizations. The accounting profession, similar to that in the Greco-Roman era, was present and later expanded as business and trade advanced through venture partnerships and overseas trading. During this period, dating from as early as the twelfth century, advanced bookkeeping techniques were developed to support the development of these new types of venture business. Record keeping tended to be localized and centered around a number of specialized institutions serving entrepreneurs and moneylenders. The introduction of Hindu-Arabic numerals simplified calculations made cumbersome under the Roman numbering systems. The facilitation of mathematical calculation afforded by this new system of numbers represented a significant contribution to accounting method. Accounts were kept because merchants needed to monitor subordinates, acting as their agents, and to settle concluded joint-partner ventures.

The use of systematic accounting procedures also helped Charlemagne to manage his estate, in the ninth century in pre-Norman England. He issued an ordinance containing elaborate instructions for the management of royal states. In this ordinance, the Capitulare di Villis, there is a requirement for keeping and rendering accounts for income and expenditure and for the auditing of accounts.

Luca Pacioli and the Birth of Double-Entry Accounting (1400s)

Double-entry accounting is dated and identified with medieval Venice, which inherited and gradually developed accounting as practiced in the Roman Empire. This region also had direct relationships with various commercial centers in many locations, from Africa to China. To support such long-distance business relationships, Italian merchants in the Middle Ages developed the partnership venture as a type of business organization. A partnership was used to form and manage each voyage and was dissolved when the venture/voyage was completed. This arrangement evolved to the development of a separate entity for control and reporting, in order to provide an accounting for each voyage. Later, changing conditions made more enduring partnerships necessary, because of established trade between Italy and trade locations. Voyage-based capital partnerships became the established entities for asset control and reporting purposes, and represented an important mercantile institution.

As trade became commonplace, capitalism emerged as the rationale for viewing a business enterprise. Italian capitalists formed agencies to channel their capital. Banks replaced moneylenders and began to play an important role in allocating capital among various new ventures, employing techniques to establish instruments of credit. As these developments occurred, the need to control partners and agents arose, and the practice of reporting to capital sources became institutionalized. Indeed, some scholars consider this the origin of the profit mentality that prevails in contemporary times. As banks required adequate records for their accounts, accounting and the accounting profession were about to undergo a modern transformation. Businesses used their services regularly, and customarily employed accounting system and information; and accounting methods transformed into double-entry bookkeeping. Littleton (1966) points out that double-entry bookkeeping was not an individual's invention but the result of a long evolution. The introduction of Hindu-Arabic numerals facilitated this development. This new numeric technology enabled accounting to handle far more transactions than before, and business records became extensive. Record keeping enabled merchants to handle transactions with more facility, and business could develop faster than before.

Luca Pacioli, a medieval mathematician, building upon the work of Cotrugli and others, developed a refined version of double-entry bookkeeping using the business mathematics of that era. After working on the treatise for thirty years, Luca Pacioli published his Summa de Arithmetica, Geometria, Proportioni, et Proportionalita in Venice in 1494. Pacioli stated that the bookkeeping section was written as a collection of material and ideas from many sources and by many authors, including Leonardo da Pisa. Most of the techniques explained in the book for double-entry bookkeeping are related to practices used in modern record keeping that underlie accounting reports. The Summa quickly became popular throughout Italy, as the business community could easily use its techniques in their bookkeeping. The new technology of typeset printing helped to disperse the “Venetian method” widely. Its suggestion that Italian merchants held a competitive advantage may have made copying this technique an important competitive necessity. McMickle and Vangermeersch (1987) identify further adaptions, abetted by commercial typeset printing, in the text writings of Jan Ympyn Christofells in Antwerp, 1543, Simon Stevin in Leyden, 1607, and John Carpenter in London, 1632, who disseminated the Italian double entry system as trade developed to the East Indies. Spanish applications of voyage accounting have been attributed by Alistair Cooke to Columbus's journeys to the New World of the West Indies.

Accounting and BookkeepingClick to view larger

Accounting. Luca Pacioli (c. 1445–c. 1514), portrait by Jacopo de' Barbari (c. 1440–c. 1516).

(Gallerie Nazionali di Capodimonte, Naples/Alinari/Art Resource, NY)

The Summa spread throughout Europe as intercountry trading increased. The double-entry bookkeeping that once contributed to the excellence of Italian business became commonplace outside that region. The spread of double-entry bookkeeping coincided with commercial voyages in Europe in the sixteenth and seventeenth centuries. Many European countries, such as England and the Netherlands, that had extensive fleets used and developed accounting methods around double-entry bookkeeping, once they embraced this type of bookkeeping for managing their venture and trading businesses. Double-entry accounting also assisted them in managing their trading colonies as well as local businesses developed in these colonies.

As the use of the corporate form of business emerged in England and other northern European countries, the notion of mutual association, as represented in the Italian partnership form of limited liability, was emulated and extended to corporate entities. Large companies, such as the Russian Company (chartered in 1555), the East India Company (1600), and the Hudson's Bay Company (1670), emerged through viable forms of incorporation that conferred a privilege of exclusivity as a royal prerogative and thereby granted monopoly status. Together, double-entry accounting and the corporate form of business led to ways to develop modern enterprises and support even more complex information needs.

The Development of Modern Accounting and the Influence of Information Technology

The corporate business form and the development of double-entry accounting were preconditions for the Industrial Revolution in the eighteenth century, particularly in England and the United States. Using the corporate form, a company was able to accumulate the needed capital to expand in a period of new technological developments, which led to “revolutionary” new methods of manufacturing, transportation, and communication. This was a period of unparalleled and rapid accumulation of wealth. Capital markets began to supply the needs of larger and larger entities. London became the center of the world's capital markets, just as Venice had been during the period of merchant venture kingdoms. By the early twentieth century, New York replaced London as the largest capital center; but most developed economies, including France, Germany, Japan, the Netherlands, and Spain, also had growing capital-market centers. Rapid geographic and demographic expansion and competitive political environments aided this development, all of which contributed to open global conflicts.

Accounting served the business community by providing information needed for decisions about capital allocation, as increasingly there was a separation of ownership from active management control. At this time, just as today, the need for periodic reports was established, and financial statements were an expected communication, especially in the United States. Many individuals who contributed capital, in public markets, needed information about their venture or investment. Accounting became a means of measuring and communicating useful information. As the corporate form of business organization combined with merging large-scale technology, as in railroad, refining, and steel operations, the stage was set for substantial distribution of information. For example, information about railroad companies provided by John Moody and Henry Varnum Poor supplied investment banking and financial institutions with information about company conditions, which was further disseminated into the growing public-investment community.

Changes in public investing led the British government to enact the 1844 Companies Act. This law, designed to protect the providers of capital to corporations, required companies to keep books and to present a “full and fair” balance sheet at each ordinary meeting of shareholders. This law also required companies to appoint auditors to make a report on the balance sheet to be read at the meeting and to be filed, together with the balance sheet, with the legal “Registrar” of the company.

By the end of the century, a series of such acts codified the practices of the Industrial Revolution, namely, the requirements for financial statements, an audit of those statements, and the filing of the statements with an independent agency or a branch of the government. However, early in this period, an auditor was a layman, usually a shareholder acting on behalf of all shareholders. These laws initially were satisfied by the emphasis on financial reporting provided by the balance sheet.

By the beginning of the twentieth century, the business and investment community had discovered that an emphasis on earning power shifted the orientation of financial reporting to an income statement, especially in the United States, where large public stock holding by small investors meant that the most effective way of showing stockholder displeasure was to sell one's holdings. Prospective investors, speculators, bankers, and creditors are eager to evaluate the quality of management and its earning capacity. A clear statement of the details of operations thus was the next emphasis in U.S. accounting. This development was amplified by the enactment of federal income-tax laws in the early twentieth century. In the United Kingdom, the government enacted legislation in 1929 that called for an income statement for the purpose of selling and trading securities.

As the business community began to understand the importance of income statements, professional management teams developed and refined accounting methods for use in managing day-to-day operations and to communicate standard performance ratios, such as ROI (return on investment) and EPS (earnings per share). Accordingly, management accounting (cost accounting) was developed, and it was integrated into the general-ledger system of the Industrial Revolution as it increased in importance. New tax laws, as noted above, made it necessary that companies maintain adequate records to support their cost computations in tax returns.

In the years 1890 to 1910, publications describing cost-accounting methods often were initiated by engineers, and were distributed both within the traditional business community and in the newly formed academic business community. Procedures for integrating cost with financial accounting, as well as the basic methods for job orders and process cost, were laid down. Later (1909–1919), a standard cost system, using predetermined costs, was developed. Industry also started to develop and adopt a uniform system of cost determination and accounting. J. Hugh Jackson (1952) argues that this development represented a very definite awakening, or cost-consciousness, on the part of industry generally, and industry leaders' attempted to educate all units within their respective industries about the value and the use of modern, scientific methods of cost determination. This helped eliminate unfounded “cutthroat” competition, yet supported more efficient organization, better purchasing methods, and improved controls for many organizations. Methods were continually refined and improved, especially in computation and determination of standard costs, computation and distribution of overhead or burden expense, handling and pricing materials (FIFO, LIFO), recording cost variations, and preparing cost reports and summaries.

Following the stock market crash of 1929, the accounting profession was given a mandate by the U.S. government, under supervision of the Securities and Exchange Commission (SEC), to develop accounting practices and standards for the purpose of financial reporting and to conduct audits of financial statements, according to securities laws passed in the 1930s. This marked the beginning of an era of development and promulgation of accounting standards by independent accounting standard committees and boards. As the need for providing reliable information in capital markets became greater, the need for comparable accounting reports became clear. Accounting evolved into two branches:

(1) financial accounting was developed around the need to communicate to capital markets; (2) management accounting was developed around the need to support the functioning of management in individual companies.


Throughout history, accounting has helped to satisfy society's information needs, aiding it in managing its allocation of investment capital and productive economic resources. From the cradle of civilization to the era of the Internet, accounting has evolved in its role, providing information to society for control, performance measurement, and key management decisions. The role of accounting professionals continues to develop, as the value of such information is considered essential to fair and full use of the world's limited physical and knowledge assets.


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                            Gary John Previts and Rahmadi Murwanto