Luca Pacioli, Father of Accounting
A SHORT HISTORY OF ACCOUNTING AND BUSINESS
Preface
The history of accounting is as old as civilization, among the most
important professions in economic and cultural development, and fascinating.
That’s right,
fascinating! Accountants invented writing,
developed money and banking, innovated the double entry bookkeeping system that
fueled the Italian Renaissance, were needed by Industrial Revolution inventors
and entrepreneurs for survival, helped develop the capital markets necessary
for big business so essential for capitalism, turned into a profession that
brought credibility for complex business practices that sparked the economic
boom of the 20
th century, and are central to the information
revolution that is now transforming the global economy. Twenty-first century
accounting will resemble rocket science and will continue to be among the
critical professions of the new century. Accountants have not excelled in
public relations, but their story is fascinating. And here it is.
There are no household names among the accounting innovators; in fact,
virtually no names survive before the Italian Renaissance. It took
archaeologists to dig up the early history and scholars from many fields to
demonstrate the importance of accounting to so many aspects of economics and
culture. This book covers the great events. From merchants and scribes long
before writing and money, to today’s global information networks.
Accounting history is summarized in seven chapters. An overview places
accounting in perspective. In some ways accounting hasn’t changed since
Paciolli wrote the first textbook in 1494. On the other hand, accounting has
led the information revolution. Many aspects of 21
st century
accounting will be unrecognizable by today’s professional leaders.
Understanding the role of financial needs today and in the future requires an
understanding of the past. The role of accounting in the ancient world is
coming into clearer focus with new archaeological discoveries and innovative
interpretations of the artifacts. It is now evident that writing developed over
at least five thousand years—by accountants. The roles of trade, money, and
credit also have long and complex histories. It is difficult to overestimate
the importance of double entry bookkeeping. It was central to the success of
the Italian merchants, necessary to birth of the Renaissance. The Industrial
Revolution depended on inventors and entrepreneurs, not accountants. It is the
survival of their firms that required innovative accounting and, later, the
development of a profession. Big business, particularly the railroads, required
capital markets that depended on accurate and useful information. This was
supplied by the expanding accounting profession. The earliest of the Big Eight
started in mid-nineteenth century London. Turn of the century America saw the
rise of really big business, governable because of improvement in cost
accounting. But the Crash of 1929 and the subsequent Great Depression
demonstrated problems with capital markets, business practices, and, yes,
considerable deficiencies in accounting practices. Many aspects of current
accounting practices started with the flood of business regulations from the
Roosevelt administration. The earliest electronic computers were funded to
assist the World War II efforts. By 1950 massive efforts were begun to automate
accounting practices, a continuing process. A global real-time integrated
system is a near reality, suggesting new accounting paradigms replacing double
entry and generally accepted accounting principles.
Why read this book? What we do today in accounting is based on a 10,000-year
history. Understanding this history is necessary to comprehending the linkages
of accounting to career potential, financial regulation, tax, accounting
systems, and management decision issues. This history also is a powerful tool
to predict the accounting of the next generation.
Overview—Accounting Toward the 21st Century: Where are we
Now? How Did we Get Here?
Accounting at any point in time and place can represent the level of
civilization then and there. As civilization began around villages and
developed into empires, scribes invented record keeping systems and kept
running inventories of wealth, trade, and tribute payments. Accountants
invented writing using abstract record keeping as temple (and later imperial)
wealth and complexity expanded. Double entry bookkeeping played a crucial role
of Italian merchants’ superior trading skills. Would the Renaissance have been
possible without double entry?
Business history involves long-term processes that incorporated dozens of
specific innovations. For example, the Industrial Revolution included many
inventions from Watt’s steam engine to Hargreave’s spinning jenny. Equally
important were the entrepreneurs who used the inventions successfully, often
combining several innovations to create a successful business, and the changes
to society associated with a new urban labor class. The concept of time took on
a whole new meaning. This was a revolution not because it occurred quickly, but
because it changed civilization in fundamental ways. The middle class (that’s
most of us) is a direct result, as is the associated mind set—the work day,
commuting, a standard of living well above subsistence, and so on. Accounting’s
role was primarily one of business survival, which led to economic innovation.
Railroad history is tied directly both to the Industrial Revolution and the
development of capital markets to finance large business enterprises. After
all, the locomotive was a steam engine turned sideways to drive wheels. The
business people organizing the first railroads were big thinkers, planning the
use of technology that did not exist. Railway surveying, roadbeds, tracks, rail
bridges, tunnels, locomotives, and freight and passenger cars did not exist
(except for prototypes). Capital markets were expanded and new contractual
arrangements invented to finance railroad construction and operations. The
railroads also introduced new accounting problems, like how to deal with a vast
infrastructure that wears out or becomes obsolete.
The inventors and the entrepreneurs of the Industrial Revolution were not
cost accountants. But the entrepreneurs that survived the inevitable
depressions were. Continued success (and avoiding bankruptcy) required
accounting expertise. Beginning in the 19
th century the rise of the
accounting profession benefited business and investors, especially big
business, banks, and other institutional investors. Accounting expertise added
both knowledge and credibility to complex financial transactions.
The first mammoth monopoly was Standard Oil, organized as a holding company
in 1870. The first billion-dollar corporation was U. S. Steel, formed in 1902.
Henry Ford’s moving assembly line turned the automobile industry into a
gigantic industry. Autos are useful to analyze the dominance of American big
business in the first half of the 20
th century and many of the
problems in the second half. These include several accounting topics—both
successes and stubborn problems.
British and American cost accountants and engineers developed calculations
and reporting techniques that allowed the corporate moguls to control vast
business empires from corporate headquarters. Part of the process was to buy
out or destroy competitors, part of the business history. It is not clear that
these practices were illegal or considered unethical. In any case, accountants
were willing participants. The cost accounting (and to a lessor extent,
auditing) techniques were essential to the dominance of American industry in
the first half of the 20
th century.
Monopoly practices, price fixing, speculation, and market manipulation are
part of the Big Business story. So are the market collapse of 1929 and the
Great Depression. This massive market failure led to bigger government and
increasing regulation, including the securities markets and accounting.
Accounting is highly regulated directly because of government response to
perceived market and accounting abuses. The role of government is subject to
continuing debate, but there is no doubt about the direction of government in the
20
th century. The Reagan Revolution may have slowed down the
process, but certainly didn’t reverse it.
The current world of business and accounting is based on the computer and
the Information Revolution, which has been ongoing for nearly 50 years and is
exploding into the 21
st century. The computer proved to be a perfect
fit to business. Computers efficiently crunch the repetitive transactions of
accounts receivable and payable, inventories, and payrolls. IBM had the vision
early and Big Blue dominated the history of business mainframes and became a
billion dollar blue chip multinational. Technology exploded and new industries
(and billionaires) created: personal computers, networks and the Internet, and
“killer applications” software such as the electronic spreadsheet. The
explosion continues as business and accountants struggle to keep pace with
incredible technology progress.
Capital markets are complex, global, operate 24 hours a days, and rely on
accounting information. The role of accounting expands as technology advances.
Soon, virtually any information can be transmitted instantaneously across the
globe. Who will be up to the challenge? The visionaries will most likely
succeed, those with 20
th century blinders likely to drop by the
wayside.
To understand accounting today and predict tomorrow, one must know the
history of accounting. That accounting history parallels the rise and
development of civilization. Accounting has been surprisingly inter-connected
with technology. The accounting-technology-civilization connection is the focus
of this book.
