Successive Stages of Capitalism and the UKs Accounting Reporting Processes - Essay Example

?How did the successive stages of capitalism change the UK's accounting and financial reporting processes? Accounting, in its externally communicatedscheme, financial reporting, has been shaped by successive progresses in capitalism. The complete changes since the start of the industrial revolution are relatively evident, but the processes of interconnection and inspiration during that period are far less strong and different clarifications, stressing labour process and agency theory, have been advanced to explain the patterns of change. In Bryer’s historical perspective financial accounting is to be understood as a mechanism of accountability within particular social relations of production which produce specific ‘calculative mentalities’ amongst the dominant social class. The emergence of capitalist social relations of production led to a distinct ‘calculative mentality’ and a distinct form of accounting. Thus, the feudal lord directly appropriated surplus labour (labour on the lord’s demesne, or commodities or cash in lieu thereof) from self-sufficient peasants, so that his ‘calculative mentality’ focused on maximising his ‘consumable surpluses. He had no concept of ‘capital as money or equivalent to be invested in production and recovered with a surplus’ (Bryer, 1999, P. 59). A ‘two-step transition from the feudal to the capitalist mode of production’ began with the emergence, in the sixteenth century, of ‘capitalistic’ or ‘semi-capitalist’ farmers, who employed ‘free’ wage workers in the capitalist manner, but still thought in terms of a consumable surplus in the feudal manner (Bryer, 1999, P. 68). Semi-capitalists also give the impression in international trade, one of the leading company among these was the East India Company. These traders were the first to consider the idea of a rate of return. Bryer interpreted this terms as the ‘feudal rate of return’, and well-defined as ‘consumable surplus’ divided by total capital, which developed as the leading economic term after the bourgeois revolution of the mid-seventeenth century. Throughout the period of industrial capitalism, where return was generated mainly over the production of goods, the progressions of the industrial revolution lead to a large number of new openings, that needed slight fixed capital. Later, there was a complete shift to finance capitalism, which demended more capital, and emphasis had been given to the profit generation, through the the purchase and sale of financial instruments of numerous forms, and from the growing needs of the public services. (Hawke, et al., 1981, P. 678). Edwards dates the transition to finance capitalism as 1830, the year in which the Liverpool and Manchester Railway opened for business, and argues that the most recent ‘leap forward’ in financial accounting, the change in emphasis from record keeping to financial reporting, began to take place in the second half of the nineteenth century, ‘in response to the growth of the modern business enterprise and the separation of ownership from management’ (Edwards, 1989, P 13). The substantial capital expenditures and scattered fund raising of finance capitalism in sequence raised up a number of accounting distresses, which is still prominent today, relating to the need to differentiate between capital and revenue expenditure, calculation of periodic profit, and the valuation of fixed assets. The railways, as the leading industry of the mid and late-nineteenth century economy, have generally been rendered a dominant place in the growth of financial reporting, but the canal industry has been almost unnoticed, in spite of its similar standing to the English economy and its substantial impact on the industrial revolution. This is further unanticipated move, since it can be claimed that the canals, using surpluses from the use of capital in agriculture and trade and employment of capital provided by the industrialists and other investors, represent the real starts of finance capitalism. Finance in the age of Canals and Railroads: The canals raised out of river enhancements, naturally carried out under private Acts of Parliament. The first of act was passed in 1424 to expand the navigation of the river Lea in East London and tolls were levied on vessels using the river to pay for the developments. By the sixteenth century, developments stretched to altering the course of rivers by new cuts, again beginning with the river Lea, who’s Act was passed in 1571. (Pratt, & Boughey, 1994. P. 128-29). Throughout stages of wealth after the Restoration, developments became more aspiring and the growth of Liverpool as a main seaport in the eighteenth century. These developments would have been difficult without large-scale developments to the navigation of the Mersey and its branches, which facilitated water communication between Liverpool and Manchester in 1740 and reduced the transportation cost of goods from 40s per ton (by road) to 12s per ton. The canal age proper initiated in 1755, when Liverpool Corporation obtained an Act to advance Sankey Brook, a branch of the Mersey, create it steer able, and so facilitates coal from the St Helens area to be passed by water to Liverpool. But, this proved to be unviable but encouraged the advancement of the Bridgewater canal, from Manchester to the Duke of Bridgewater’s collieries at Worsley. Even if basically a private project, it involved construction of an channel to bring the canal over the valley of the Irwell at Barton and an permitting Act of Parliament. (Baladouni, 1986, P.59-64). The achievement of the Bridgewater Canal in turn stimulated the sponsors of the Manchester Runcorn Canal to offer a improved substitute to the present Mersey and Irwell Navigation and lead to the opening in the year 1767. When it opened in 1767, the current tolls for carriage were halved. The new canals were not only used for merchandise; but the inland trafficking of the passengers too. This had been introduced in 1770s by the Manchester Runcorn. Other striving schemes also been charted, some of them are the Trent and Mersey and the Leeds and Liverpool canals, as heavy amounts of capital were seen to fetch huge savings in manpower and to intensely reduced the cost of transporting cargo, mainly coal. Too much confidence over commercial predictions led to a period of excessive canal campaigns in the early 1790s and then to a era of constant investment. Even if the amounts used on canals do not associate with those later spent to the railways, they were still significant and amounted to about 0.25% of GNP in Great Britain through the age 1800-40. In the late 14th century, some trader provided a tool, whereby persons could the more simply trade overseas with their own stock of goods and at their own risk. Certain schemes were became successful, and set monopoly rights, even if rarely the advantage of limited liability, by means of Royal Charters, predominantly where the company’s actions were supportive to the state. By the mid-18th century, corporations engaged in trade, investigation or some sorts of local production, comprising the East India (1600), the Hudson’s Bay (1670) , Mines Royal (1568), the Russia Company (1553). Companies required right to use ships and arms for trade with overseas countries and firms providing toll-roads and water supply systems needed their charging arrangements, as de-facto taxation, to be authorized by the state. (Patterson & Reiffen 1990, P. 165). The financial reporting approaches adopted by the companies: It has been claimed that, the canals were the first industry to employ the instruments of finance capitalism. Here, we address three concerns relating to the financial accounting practices of the companies pertinent to substitute theorisations of the accounting answer to the shift to capitalism. First, whether they formed statements or balance sheets to define the opening capital and the capital employed in that trade. Second, whether they created cash or based statements for a particular periods which includes income and expenditure, or receipts and payments accounts or accruals based reports like profit and loss accounts. Third and finally, whether the figures provided enabled the fixation of operational rates of return. In nearly all industries, there is a pre-opening period that heads the functioning stage. In the case of the canals, the pre-opening period was remarkably long, surely in contrast to that of most engineering businesses. The canal companies normally delivered only the transport infrastructure and not the means of transportation. It indicates that, they normally held a thin, but comparatively enduring set of assets. The span of the building period also meant that when operations could initiate, they typically did so in stages, as diverse parts of the overall route were accomplished. The three issues are, therefore, measured in three circumstances: a) During the key production era, those lead the opening of a important part of the route b) During stages, in which both production and operating actions were taking place. c) During stages, in which construction had finished. During the key production period: During the key production phase, the companies offered stockholders with a statement of capital receipts and expenditures, typically on a collective basis from the beginning of the firm, and entitled as General Statement, General Accounts, or somewhat similar. This could be labelled as a ‘Capital Account’, even though the term was not used for the period of the construction by any of the businesses. It could also be understood as amounting to a summary of the cash dealings of the business to that point in time. During stages, in which both production and operating actions were taking place In the case of, Canals, normally opened in stages, so that revenue receipts and costs had to be accounted for while extensive construction work was still in advancement. Generally, this was accomplished by the addition of operating transactions, into the statement offered to stockholders, without any effort being made to differentiate them from capital items or to recognize the operating surplus or deficit. It was an recognized practice and one generally specified in the authorising Act of Parliament that companies should pay a dividend at a pre-determined amount usually 5% p.a, the extreme interest on loans allowed under anti-usury legislation. It is charged on the capital promised by the stockholders during the period of, construction, so that calculation of an operating surplus for the determination the dividend was less essential until this guaranteed dividend was finished and stockholders could receive an uncertain dividend. (Evans. et al, 2002, P.77). Thus the most of the companies including Canal’s in the late 1770s offered its stockholders with cumulative cash accounts, showing all receipts and payments in a single vertical statement. The accrued deficit was recognized and related to new capital that had newly been subscribed, with the remaining cash balance shown as ‘remaining on hand’. The things, which might have been categorized as ‘revenue’, were insignificant and the net balance on processes to date in no way reinforced the ‘interest’ payments made on calls of share capital. Likewise, the Kennet and Avon formed a statement covering the period from February 1800 to September 1803, a cumulative cash account in horizontal format that recorded both the capital and revenue receipts and expenditures, but without making any classificatory difference between capital and revenue items. (Wilson, 1995, P. 134). During stages, in which construction had finished: After construction was finished, the canal companies stopped issuing the primary capital account and arranged only periodic operational statements and nothing that could be reasonably called as balance sheet. Companies usually created operating statements on a simple cash basis. for example, The Trent and Mersey’s ‘State of the Company’s Accounts’ for the six months to 29 December 1792, was a modest, vertical statement of receipts and payments. Receipts were partitioned into ‘tonnage’ and ‘trade clear of all expenses’, where the company was recording goods or passengers on its own account. Maximum of the payments were revenue even though one was clearly capital, one which relating to buildings. (Feinstein & Pollard, 1988, P. 27-47). Likewise, the Birmingham Canal’s ‘Abstract of Accounts’ for the six months to 6 September 1800 was a modest cash account, showing the opening and closing balances of cash in hand, along with revenues. Revenue item subdivided into tonnage-related receipts, rents received, dividends received and interest received from a sinking fund, on the debit side of the account. Payments shown on the credit side comprised of several categories of revenue items, quite a few capital items like land, new works and arbitration expenses. The Oxford Canal created a single account, called the ‘General Account’, in each 6 months. The opening and closing balances were labelled as ‘Balances remaining in the hands of bankers, traders, harbingers etc.’ and enumerated. Receipts were separated between tonnage and a few miscellaneous items like rents Payments of both revenue and capital items also be listed. (Feinstein & Pollard, 1988, P. 68).Other companies accompanied the cash statement with other information. For example, the Leeds and Liverpool, in its annual ‘Account of the Incomes and Outgoings’, presented a series of revenue items, down to the calculated Net Income, in vertical format. The report then gave the usages of the Net Income, like dividends paid, interest on loan, ‘enhancements on both the Lancashire and Yorkshire sides and Parliamentary and other expenses incurred in opposite the ‘submission to Parliament of the Liverpool and Manchester Railway’, in advance to recognizing the surplus income for the year. There was no cumulative facet to the surplus, the insinuation being that this would not be obtainable for delivery in future years. At the bottom of the statement, the firm provided a brief memorandum of the sum of debt outstanding at the year-end. (Feinstein & Pollard, 1988, P. 80).Let’s see the other two companies the Rochdale and the Kennet and Avon, grabbed rather different methods. The Rochdale Canal distributed two statements, both in horizontal format. The first, the ‘Statement of the Receipts and Disbursements’, is simply a cash account in which cash disbursements presented on the left and the year-end balance defined as being ‘in the Treasurer’s hands’, in which no difference was made between capital and revenue items. The second, the ‘Statement of the debits and credits’ identifies the assets and liabilities, with the former shown on the left. The substances shown comprises of cash, bills receivable and payable and loans. The net liability of the company is styled ‘Company in debt’ (Feinstein & Pollard, 1988, P. 80). The Kennet and Avon’s accounts contained of a single statement, in horizontal format, divided into two parts. The ‘Annual Account of the Receipts and Expenditures’ is a cash statement presenting tolls and other income in debit side and expenditures as credits, counting both revenue e.g. salaries and rents and capital items. The balance, was carried down to a general account of the company. This latter account had an debit balance brought forward, comprising of stock and debtors and credit entries that involved, for example in 1830, dividends paid, expenditures on some fixed assets and investments like, shares in other canal and waterway companies. The credit balance comprised of amounts due for tonnage, the cash balance and a stock in hand, land and materials, a creditor for rent etc. Ineffectively, this was a single reformed cash account, with working capital items brought in as balances, as at the Canal , but with the added problem that, an effort has been made to distinct operational and non-operational receipts and expenditures. Capital items appear in both portions of the statement, but items in the Receipts and Expenditures Account appear to narrate to parts of the canal that were open for trade and those in the General Account to gives still under construction. Conclusions: Even though the overall changes in financial reporting, since the beginning of the industrial revolution are fairly noticeable, the procedures of interconnection and inspiration during that period are far less visible and alternate theorisations of the process of alteration have been put forward, highlighting especially, agency theory and labour process. From an agency viewpoint, variations in financial reporting are mainly focused by changes in the fundamental association between financial principals and their agents, resulting upon opposing forms of speculation and of the business unit. Edwards has therefore divided the growth of accounting into four main periods, pre-capitalist, commercial capitalist, industrial capitalist (1760-1830) and financial capitalist (1830 to date). The courses of industrial capitalism, where profit was tracked mainly through the production of goods, intricate comparatively little fixed capital and it was not till the shift to financial capitalism resulting upon the development of the public utilities that the burden for large amounts of capital transported about the familiar world of investment, limited liability and publicly available financial reports. Edwards dates the evolution to finance capitalism as 1830, the year in which the Liverpool and Manchester Railway unlocked for business, and claims that the most recent dive forward in financial accounting, the alteration in stress from record keeping to financial reporting, began to happen in the second half of the 19th century, ‘in response to the growth of the modern business enterprise and the separation of ownership from management’ (Edwards, 1989, P. 12-15). From a labour process viewpoint, however, it is the change to capitalism, as a system of labour surplus withdrawal, that appears to be important and not the portion of capitalism into its numerous commercial, industrial and financial stages. Given the differences between these viewpoints, the canals are theoretically enlightening, as they can be seen to characterize the early stages of finance capitalism yet their profits subsequent from tolls on cargos using their waterways, a method of rent, not from surplus value take out from the workers they employed. The financial accounting practices of canal companies during the second half of the 18th and the first half of the 19th have been analyzed, during periods of both construction and operating with specific positioning to the question of whether they formed statements that distinct the opening capital and the capital employed, and consequently, whether the data provided simplified the calculation of operating rates of return. Funded by outside, who could trade their stocks in capital markets that were in any case continuously active, the canal firms faced issues of responsibility that would not be elevated in business generally until the late 19th century, namely, how such stockholders could be kept knowledgeable and how they could hold the management to account and evaluate the latter’s performance. (Evans, 1936 P.135). Consistent with this viewpoint, the rate of return approach apparent in manufacturing industries did not appear in this period in the canal subdivision of the economy, although some of the depositors were the same people. On the Rochdale canal, the main part of the asset came from local textile builders, including cotton spinner, capitalists in the typical industry of the industrial revolution, however the rate of return approach did not carry over from their essential business to their other investments. Finally, the rate of return approach would pierce universally, but it would be a long process. The company accounts studied in this paper deliver indication that sharply clashes with agency theory but is far more reliable with other thesis on the development of calculative attitudes and their replication in accounting practic Reference List Bryer, R.A., 1999. “Marx and Accounting”, Critical Perspectives on Accounting, Vol. 10 No. 5, P. 68 Baladouni, V., 1986. “East India Company’s 1783 Balance of Accounts”, Abacus, Vol. 22 No. 2, P. 59-64 Evans, G.H., 1936. British corporation finance, the Johns Hopkins Press, Baltimore. P.135 Edwards., 1989. A History of Financial Accounting, Routledge, London, P.12-15 Evans. et al., 2002. Transport in Britain, Hambledon and London, London, P. 77 Feinstein, C.H. & Pollard, S., 1988. “National Statistics, 1760-1920”, in Feinstein, and Studies in Capital Formation in the United Kingdom 1750-1920, Clarendon, Oxford, P. 80 Hawke, G.R. et al., 1981. “Transport and Social Overhead Capital”, in Economic History of Britain since 1700: Cambridge University Press, Cambridge, P. 678 Patterson. & Reiffen., 1990. A History of Corporate Finance, Cambridge University Press, Cambridge, P. 165 Pratt, & Boughey, J., 1994. Hadfield's British canals, 8th Ed., Sutton, Stroud. 1912, P. 128-29 Wilson, J F., 1995. British Business History, 1720-1994, Manchester, P. 134 Read More