According to historians, ancient people in Babylon, Assyria and Sumeria used tokens to keep track of crops and herds. For example, one small clay token of a certain shape can represent a bulky basket of grains, another, a cattle and a third a container of oil. This enabled easier accounting of crops and herds compared to handling bulky grain baskets or the constantly moving cattle. Addition, subtraction, multiplication and division could be done simply by moving around the compact tokens. The accounting in those times involved keeping track of surpluses. In those ancient times, the producers did not accumulate the surpluses. Instead, community leaders gathered the surpluses for distribution among those who were unable to be producers, and for use in religious rituals and festivals.
Roman Accounting
Roman emperors had access to records of their munificence. The records accounted for the grants of land and money to army veterans, and moneys given for constructing temples, conducting gladiatorial games and other such public deeds. Accounts of freedmen and slaves were also kept. The emperors’ records were not accounts of state revenues and expenses. Personnel of the Roman army, on the other hand maintained meticulous records of cash, commodities and transactions at their camps. And in Roman Egypt, accounting was carried further. At a certain estate, managers of different sectors of the estate maintained accounts of production and sale of produce, payments to workers, use of animals and general expenditure. The accounts were then summarized by sector, providing information for better economic decisions by the “top” manager.
Double Entry Accounting
When monetary economy replaced barter economy, accounting became more complex. Whereas earlier single entry accounting recorded only moneys owed to creditors and those owed by debtors, the new double entry accounting described by Luca Pacioli of Italy recorded a “debit” and “credit” for every transaction. Pacioli was not the inventor of double entry accounting; he only described the system. Pacioli’s system involved keeping a Memorandum, a Journal and a Ledger. The system enabled merchants to keep an eye on their inventories, which could otherwise have been stolen by their employees or agents without them being any wiser.
Refinements such as summarizing the accounts once a year in the form of a Balance Sheet appeared subsequently. The first semi-public Balance Sheet was reportedly submitted by East India Company to the company’s General Meeting in 1671. Publication and audit of Balance Sheets became compulsory in England with the passing of the Bank Charter Act of 1844. Refined as it is today, double entry accounting records the receiving and giving of a value involved in every business transaction. For example, you receive a bottle of Olive Oil and give a certain amount of money. If you maintained your personal accounts along double entry lines, you will record a debit in the Olive Oil account and a credit in your Cash account for the amount involved.
Accounting Today
The principles of accountancy are used these days in Accounting, Bookkeeping and Auditing. According to AICPA, accounting is "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof." Financial accounts are meant mainly for people outside the company, such as shareholders, prospective investors, creditors, financial analysts, economists and government agencies. Standard accounting practices and government rules determine the information disclosed and the way they are presented. A body of practice known as Generally Accepted Accounting Practices (GAAP) has evolved over a period of time. Frauds such as Enron and WorldCom have resulted in tightening the disclosure requirements and the responsibility of top management for published accounts. Auditors are expected to carry out checks that will enable them to report on the fairness of results as reported by published accounts. The Enron Fraud reflected on the competence of a top auditing firm, Arthur Andersen, which was subsequently dissolved. Accounts along GAAP lines are of little use to internal managers as support information for making business decisions. To serve the needs of this group, Management Accounting developed.
Management Accounting involves a number of different techniques that help in providing decision-support information about business operations. These are much more detailed than GAAP-compliant accounts. Accountancy has come a long way from the days of tokens for community accounting.
