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History of Accounting Thought. Accounting is a function of the society and environment (Principles, procedures, concepts etc. are governed) E.g. Industrial revolution, Hike of oil prices, corporate social responsibility

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Accounting is a function of the society and environment (Principles, procedures, concepts etc. are governed)

E.g. Industrial revolution, Hike of oil prices, corporate social responsibility

  • No much contribution from countries like India, Sri Lanka (Development stage, academic research ?)
  • The importance of knowing history: to understand the;
    • Present condition &
    • What will happen in future
the development
The Development
  • Early forms of measurement record keeping
    • Before even 4000 B.C. Clay Tablets were used in Mesopotamia for recording purposes
    • In 600 B.C. – Advent of Coinage changed the form of record keeping methods. But had a very limited influence due to very slow adoption
  • Earliest written documents in Accounting
    • Accounting records are found in Babylonia, Egypt, China and India
    • Most of the records are in physical quantities
    • Greeks and Romans expressed both in money and goods
Purposes of these records
    • To keep track
    • Exercise control over (the wealth entrusted)
  • The Stewardship Function
    • The statement prepared is the ‘Charge and Discharge Statement’ for one year
    • The Charge Section: Cash and goods held at the beginning + collected during the year by the steward
    • The Discharge Section: Cash and goods expensed by the steward on behalf the owner
The Practice of the Double Entry System
    • Not known when and where originated
    • Was described by Luca Pacioli
    • Without any change still it is in practice
  • The Industrial Revolution:
    • Had a profound effect on Accounting
    • Invention of powered machinery, factories, large scale production required changes in accounting. The main change is from domestic system to factory system
    • Under domestic system: records had to be kept to ensure they are not used for their own use
The Industrial Revolution: (Contd..)
    • Factory System + Railways lead to depreciation accounting, cost accounting techniques (Fixed Cost Vs Variable Cost, Overhead Allocation & Absorption) etc.
development from pacioli to present day
Development from Pacioli to Present Day

The development is divided in to 5 arbitrary stages for convenience;

  • 1494 – 1775
    • Period of stagnation
    • Society changed very little
    • Social and economic development was very low
    • Predominant form of business was sole proprietorships
  • 1775 – 1850
    • Also a period of stagnation
    • Business form: sole traders, but some partnerships may have existed
development from pacioli to present day1
Development from Pacioli to Present Day
  • 1850 – 1900
    • Post industrial revolutionary period
    • Businesses were in corporate form
    • The entity concept was emphasized
    • The P& L got more prominence than B/S
    • The Audit function was important
  • 1900 - 1950
    • Emphasis changed from stewardship function to decision accounting
    • Cost accounting methods were improved
    • In UK the P&L become mandatory along with the B/S
development from pacioli to present day2
Development from Pacioli to Present Day
  • 1900 – present day
    • Has grown very rapidly
    • New concepts such as green accounting, environmental accounting, human resources accounting, forensic accounting has emerged
    • Has stepped in to a knowledge paradigm
theories of accounting
Theories of Accounting
  • The proprietary theory:
    • According to this theory the content and measurement principles underlying the FS is focused on placing the owner at the centre. All observations are done on his (owners) view point
    • E.g. Assets are things owned, liabilities are debts owed.
    • Acc Equation: A – L = Equity
    • Applicable more on sole proprietorships and partnerships
    • More Balance Sheet oriented
theories of accounting1
Theories of Accounting
  • The Entity Theory:
    • Net income doesn\'t belong to the proprietors, but to the entity, which is separate from the owners
    • Now the centre is the business organization
    • A = L + E (resources are owned by the company)
    • More P&L oriented
    • Suitable for corporations
theories of accounting2
Theories of Accounting
  • The Residual Equity Theory:
    • Much related to proprietary theory
    • But the main difference is that it excludes the PS capital from proprietary group (E.g. EPS)
    • Assets - Specific Equity = Residual Equity
    • Specific Equity = Claims to all creditors + PS holders
    • Ordinary shareholders are bearers of residual risk + residual awards
    • Prime objective is to provide better information to Ordinary Share Holders for investment decision making (based on future dividends)
theories of accounting3
Theories of Accounting
  • The Enterprise Theory:
    • Emphasizes the social responsibility of an entity (the impact through its activities)
    • The concentration is not only on SHs
    • Hence, it is an extension of entity theory as it covers more stakeholders (employees, customers, community, government, society etc.)
    • Broad concept of Income: Value added (Mkt price of the output – price of the goods acquired) Salaries, Dividends, Interest, Taxes etc.
theories of accounting4
Theories of Accounting
  • The Fund Theory:
    • The entity is viewed as a fund
    • Neither the owner nor the entity is used as the basis of accounting
    • The activity oriented unit (the Fund) is used as the basis of accounting
    • The Accounting unit consists of economic resources (fund) and related obligations and restrictions to use of resources
    • Assets = Restriction of Assets
    • More asset centered
    • The fund statement gets the prominence
    • More suitable for govt. and non profit organizations