Understanding Present Accounting Practices Concerning the History and Development of Accounting - Essay Example

Critical review of understanding present accounting practices with respect to the history and development of accounting Introduction Accounting history helps to know the evolution of accounting thought, practices and response to the environmental change, needs of society and consideration of effect due to environmental evolution. This history helps to get the idea of difference and changes of accounting heritage, accounting pedagogy, professional perspective and policies of application of modern process. A good understanding and rationality of the subject for the members and professionals comes from appreciation of intellectual heritage, import of thought advancement, literature contribution over time, historical skills of documentation to avoid loss or fragmentation of recognition, works and references of the past investigation of incomplete work and claims. Accounting history is a better instrument from policy perspective and the considerable assessor of exiting practices with the past. (Belkaoui, 13) To understand the future required development and guiding the future decision-making; history and interrelation between accounting is always helpful. Accounting often focuses on the records of large firms but that does not mean that it neglects the small firms. Small family business accounts depict the picture of the daily life and culture with respect to historical, economical and philosophical sphere. Financial data and documents highlight the differences in gender, class and the distribution of power and control. For the last fifteen years, there is a visible increase of discussion among the researcher to study the influence of accounting history in modern and postmodern history. (Fleischman, Radcliffe and shoemaker, 5-21) In the modern age, there had been steady development in the fields of business and economy. As trade and commerce increased, the world became smaller and the boundaries between the countries became thinner which helped the concept of Company to establish. The subject of accounting also assumed great significance with the development of business. The concept of taxation became more systematic and that resulted in maintaining proper accounting practices for all types of businesses and examining their level of taxes and profit. The field of accounting has gone through a vast change from the early days. Scholars have realized that this is a vast area of study and has promptly diversified it into Management and Financial Accounting. Financial Accounting deals in examining historical records and maintaining the fact file of the company. Both the external and internal parties in the business use the record generated by financial accounting. Management Accounting, on the other hand, provides information that is more precise to the business. Management Accounting provides information to the management for the purpose of future planning and controlling (UNISA, 13). The subject of financial accounting, as a host of external user’s use has governance of law and is adhere to a number of policies and standards. Management accounting on the other hand is much more moderate and customized for different companies. Companies all over the world follow the accounting practices to make them more useful to its users. History and development of accounting Accounting has been in existence for several thousand years; in 3500 B.C., Babylonians recorded business in clay tablets. Although five thousand years ago in Mesopotamia the existence of bank and small industries in noticed who used gold and silver for the measurement of transaction and the credit for few cases used to undergo the accounting process using the codes of Hammurabi by the then accountant called ‘scribe’. The ancient Egyptians used to practice tax accountancy that is the earliest form. The use of papyrus replacing the clay tablets, bookkeepers attached to stores, application of accounting for the internal control but their progress ware limited to listing warehouse items only. China used the accounting system for the evaluation of government efficiency. A reasonable progress took place in the Chao dynasty during 1122 to 256 BC after the introduction of double entry system. The Greeks developed the first public accounting system in the 5th century BC for allowing public to monitor the government finances. Next breakthrough in accounting was also in Greece with the introduction of monetary unit measurement principle to execute banking records, lending and arranging cash transfer. In Rome, cashbooks ware used for accounting the household expenses. Household of Rome were liable to show the assets and liability for using the statement for tax determination. They used to maintain checks and balances for the purpose of government receipts and payment to apply with other innovation like annual budgeting for curbing out the uncontrolled expenditures. In the medieval period, there is another form of tax collection. Under the feudal system, the Government distributed piece of land for a certain period or for the lifetime and the occupier rendered their services to the land, on behalf of the Government, accountants used to monitor the services. Feudalism was economic, political and social in nature emphasizes the accounting evolution was proceeded by the other drivers in one system with the continuous passing of time. In the 4th Century, B.C. accounting development took place in India, too. Kautilya, the renowned economist of the Mauryan era, in his book Arthasastra, considered accounting as a very important component in the armor of economics (Sihag and Balbir). The earliest partnership deed known to modern day civilizations was in 1157. Accounting as a study gained recognition when it was added to the curriculum of Oxford University in 1249 (About.com). The fact that accounting was a very recognized discipline is clear from the fact that Columbus took with him an accountant in the expedition of the Americas in 1492. The accountant helped him in keeping records of inventories and the gains due to trade. In 1494, during Renaissance, a book came out by the name of “Summa” which depicted double entry of book keeping for the first time and the author- Luca Pacioli came to be known as the father of accounting. The basic methods of accounting have remained unchanged over the past 500 years. (Rukkila; DeSantis) The various ancient civilizations of the world used to maintain records of inventory and trade in different methods. Gradually, when men began to move out of their natural habitat to more civilized localities, they got more and more involved in the details of accounting. With the introduction of papers instead of papyrus, the use of papers in accounting practices became usual which also resulted in the increase of commerce and trade. The main driver recognized for the development of modern accounting is the improvement and complexity in trade. Other key factors from the historical circumstance for the development of accounting are private property rights for the entitlement of owners of the property, proper and efficient use of wealth or capital, increased local and overseas trade, requirement of credit transaction along with cash for higher volume, exponential increase of application of denominated money etc. These drivers were the main cause for the establishment of double entry but still debate is continuing over the starting of this system but one clear thing is its need and application in modern time has started from early period. (Kindig; Anders) The Industrial Revolution in Britain is an important date, not only in the history of accounting, but also in the history of humanity as a whole. The industrial revolution saw the implication of mechanism, which boosted the increase in productivity and trading activities and resulted in materialization of new businesses. There was competition in the market, which led to the growth of cost accounting techniques to minimize costs. Companies also looked forward to the future, which gave rise to a developed and scientific branch of accounts- Management accounting. A separate profession for checking the genuineness of accounts- Auditing came into being. It was from the 18th century that the Renaissance of Accounting started (Russel). After the highs of Industrial revolution, the world economy stumbled in the Great Depression of 1920. The depression took place in USA after the First World War and affected the whole world. The main reasons for the depression were unequal income distribution in the economy and increased speculations in the share market (Gusmorino). The frauds that rocked the world were Kreuger & Toll Fraud and Ponzi Pyramid Fraud. These frauds underlined the value and need of proper accounting practices for every business. The frauds shook the accounting industry and as a result, the formulation and implication of GAAP (Generally accepted accounting principles) came into existence. The business houses found a generalized structure to formulate their accounts. Transparency and consistency improved. (Hishasi; Woods) Present Accounting Practices In the present era after 1950, the period marked a sea change to the ongoing concepts of accounts and led more emphasis on the decision-making techniques. The use of different costing techniques for different purposes came into implication, which was the need of the modern age. Cost was classified into differential cost, full cost and responsibility cost. This classification is the base on which modern management accounting stand. The introduction of mathematics to management accounting gave rise to the concept of marginal costing along with discounted cash flows and estimations of statistical cost. (UNISA, 22-25). In this age of globalization, companies are operating in different countries. They are not restricted to the country of their origin. With their different area of operations, it has become imperative to the companies to follow similar practices in terms of accounting. This would mean higher transparency and it would be more useful to the users. In the last century, different frauds unearthed which underlined the value of accounting standards. There are several factors for the creation of accounting standards like political, legal, tax factors, cultural, economic, educational, and capital market but the main four drivers are state of economic development, business complexity, political persuasion, and some reliance on a particular system of law. Accounting system of any country depends on the applied ‘civil or code law’, synonymous to legal system. Along with tax, law has separate force to give considerable impact on the accounting practice and varies from one country to another. The accounting bodies of different countries have devised accounting policies suited to the economic and legal system of those countries. However, it has become necessary to present the accounts of companies in different countries at the same level. Keeping this view in mind, the International Accounting Standards Board (IASB) emerged. The headquarter of IASB is situated in London. The main reason of coming up of this group is to develop a set of recognized accounting policies (International accounting standards board). Today, companies all over the world follow IAS as well as the standards in the countries where they operate. At present, every company despite its size or creed had to operate within the accounting policies and standards to remain scam-free. The IASB have devised 41 standards for countries where there are no standards. The US accounting body, FASB (Financial Accounting Standards Board) has devised Generally Accepted Accounting Principles (GAAP). These are for the companies to follow for better accounting, reporting and for the protection of interest of the investors. (IASB; FASB) This period marked the profound growth of Management Accounting with addressing of business development issues like increasing the proficiency of employees. Management Accounting left the idea of general measuring techniques and addressed the use of the subject in non-financial areas. A major breakthrough of this period was the introduction of Balanced Score Card model. The discipline got more involved in the management and the accessibility of new business in new areas came under its scope (UNISA, 25-27). This decade marked an unprecedented growth of the economy. With the growth came the demand of complex requirements in the day-to-day activities of the business. The watchdogs in the industry had increased their monitoring extensively. They also demanded information from the business houses to cancel out frauds. With the increase in the sphere of activities in accounting, the rapidly advancing field of Electronic Data Processing or EDP came into play. EDP was instrumental in the data processing, which is so important for the existence of any business. Business houses became dependant on EDP for the processing of datas required by the business. EDP gave rise to a new profession – internal auditing to measure the accuracy of the datas processed. Today, internal auditor has become a vital part of the organization (Patel, pp. 8-10). EDP has made accounting faster with huge sources of data processed at frantic speed with more ready availability. The introduction of computers made the use of EDP more relevant. In addition to EDP, various accounting software are available now, which made the job of accounting easy and fast. (Top Accounting Degrees. Com) Conclusion Although the accounting system has evolved and there is acceptance of the international standards by all companies, still cases filed many frauds every year. For example, Xerox- the world’s largest supplier of photocopiers found guilty in a fraud in 2002. Xerox realized sales at the time of signing of lease contract but there should have been uniform distribution of the amount along the lease period. (Corporate Narc) Recently, the fraud of Satyam also came into the limelight. This is because companies are not following the rules and are jeopardizing the wealth of investors. The frauds are unearthed fast nowadays because of the regulations in place. In some cases, companies are confused about different standards of different organizations and this has led to overlapping of general practices. To standardize the format is a huge challenge but the accounting fraternity is working on it. The historical aspects of accounting with respect to the developments at present are very helpful in this type of studies. (Clikeman; Ponzi) The study of accounting from the ancient world of Mesopotamia to the modern world of technology follows a gradual curve of ascendancy. The earliest annals find humans trading using barter for trade. Trade and commerce took place even in those days but they were mainly unorganized. Trades and commerce increased in the medieval Europe (Renaissance) with Genoa as the epicenter of the business world. The need for accounting was recognized and people devised the ways of Double Entry bookkeeping. After the Renaissance, the growth of the civilization came to a halt but it gathered impetus during the period of Industrial Revolution. Gradually the concept of company surfaced and the need for proper accounting emerged. With the increase in business came a group of greedy capitalistic people, who wanted to suck out the money from the system. They did not know that their swindles would paralyze the system and eventually one day their deeds will repay. This feature was widely visible in the 20th century when many frauds were unearthed and led to generalization of accounting practices all over the world. Hence, it is very necessary to study the historical aspects to understand the causes that led to the formation of present accounting practices. (Fleischman and Tyson) References 1. About.com, A peripatetic history of accounting, n.d. Available at: http://inventors.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=inventors&cdn=money&tm=37&gps=182_542_1259_627&f=10&tt=0&bt=1&bts=1&zu=http%3A//www.qvctc.commnet.edu/brian/QVHTMLS/ACCOUN/acop2.gif (accessed on 13th January, 2010) 2. Anders, Dr. Anders’ world famous A brief history of accounting, Finance Professor, n.d. Available at: http://www.financeprofessor.com/francis/accountinghistory-anders.htm (accessed on 13th January, 2010) 3. Belkaoui, Ahmed. Accounting theory, Cengage Learning EMEA, 2004. Available at: http://books.google.com/books?id=fE9STcvKw-QC&pg=PA1&dq=present+accounting+practices&cd=3#v=onepage&q=present%20accounting%20practices&f=false. (accessed on 13th January, 2010) 4. Clikeman, Paul M. 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