History of accounting thought
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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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History of Accounting Thought

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History of accounting thought

History of Accounting Thought


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

  • 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


History of accounting thought

  • 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


History of accounting thought

  • 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


History of accounting thought

  • 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


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