History of Accounting
One can never really understand a subject, unless they know where it
came from. Therefore, a short history of the subject of accounting may
be of interest to students of accounting. Here is a very brief history
of how accounting evolved:
- Single Entry Accounting System
Accounting is as old as financial transactions themselves. As soon as
credit was invented, humans began to use accounting to simplify their
lives. As expected, the oldest system of accounting used single entry
accounting. This is the most intuitive form of accounting but is also
incomplete. Records have been found on clay tablets in ancient
Mesopotamia that show the existence of single entry accounting in that
time.
- Bahi-Khata System
Prior to rise of European commerce in the Medieval Ages, India was
the primary center for bustling trade and commercial activity. Although
there has been no record of this fact, but is claimed that Indian
merchants had very advanced accounting systems at that time. These
systems were called the Bahi Khata system. It is rumored that the
westerners designed the double entry system based on the principles of
Bahi Khata system but once again there is no conclusive proof.
- Merchants of Venice
The birthplace of modern day accounting is Venice. In the Medieval Ages, Venice was a center of trade and commercial activity. Merchants had giant businesses and they were struggling to run these corporations efficiently. It is then that Luca Pacioli developed the double entry accounting system. There is still debate about whether he developed it or just improved it and made it available to the merchants. However, debate or no debate, Luca Pacioli is considered to be the “Father of Modern Day Accounting”.
- Chartered Corporations
In the era of colonialism, chartered corporations were common. The
government would approve certain companies and give them exclusive
rights to trade with certain colonies. Citizens were encouraged to
invest in such companies. Shares of a few such companies had paid rich
dividends and hence it was common to invest in such companies.
However, the performance of such companies had to be reported to the shareholders on a periodic basis. Therefore accounting systems were further developed. They were now providing information to external shareholders apart from providing information to internal management.
- Modern Accounting
The chartered companies have long gone. The world is now a free
market. But information still needs to be provided to the external
shareholders about the conduct of operations. Accounting, therefore has
been further developed and is highly regulated in most countries.
- Merchants of Venice