If you're considering investing, or even just trying to keep track of your personal income and expenses, it is a good idea to also understand the basics and history of accounting.
History of Accounting: Timeline
Accounting in Ancient Civilizations: Mesopotamia, The Roman Empire
A means of keeping track of income and spending is essential to running a business, or even maintaining personal finances. A system of recording transactions is the basis of accounting. Accounting has been around since as far back as 3300 BC, with archaeologists having discovered accounting on clay tablets from Egypt and Mesopotamia.
The techniques demonstrated on such ancient writing indicates accounting was used to keep track of herd and crop growth - what now are called commodities - to project surpluses or shortages, as the price of commodities ultimately are determined by supply and demand.
Accounting evolved and traveled with traders along trade routes like the ancient Silk Road. By the time of the Roman Empire, 27 BC, Emperor Caesar Augustus began recording his own financial transactions and other "good deeds" as 'Res Gestae Divi Augusti' or "The Deeds of the Divine Augustus." The tome listed distributions to people, land grants, construction projects, military pensions, religious offerings and entertainment spending. Roman historians also kept track of public revenues, treasury holdings, taxes, slaves, and freedmen.
Barter was the main system of trade during the Middle Ages. But Europe returned to a monetary economy in the 13th century, according to historians. At that time, merchants began needing bookkeeping to keep track of multiple transactions. That's also when "double-entry" bookkeeping began, in which a debit and credit value is entered for each transaction by an accountant. Merchants used accounting as a system for ordering transactions, providing them with constant, "real-time" information about their businesses.
1494: Luca Pacioli, the Father of Modern Accounting:
In 1494, Luca Pacioli published "Summa Arithmetica, Geometria, Proportioni et Proportionalita," describing the system of double-entry bookkeeping used by Venetian merchants. In his tome, Pacioli included a 27 treatise purely on the subject of bookkeeping, called "Particularis de Computis et Scripturis," or "Details of Calculation and Recording." The treatise described record keeping and double-entry accounting. His book actually became the teaching tool and reference text on bookkeeping and accounting for the next several hundred years. Historians also note his book was the first to publish symbols for plus and minus (addition and subtraction). As such, besides being the first known published work on the topic of double-entry bookkeeping, "Summa Arithmetica" also was the first known book printed in Italy to contain algebra.
Accounting in the Industrial Revolution:
With the advent of industrial corporations, investors and debtors, though not part of a company's management, nonetheless had a vested interest in the company's results. This interest spurred a need for more advanced cost accounting, and helped turn accounting into a profession.
The professionalization of accountants began in the 1800s, first in the United Kingdom and, later, the U.S.
In the U.S., 31 accountants in 1887 created the American Association of Public Accountants. A decade later, the first standardized test for accountants was given, and the first Certified Public Accountants were licensed by the AAPA in 1896.
Accounting in the 20th Century:
While the U.S. government tried to pass laws to create a national standard for accounting among publicly held companies before the crash of 1929, no commission existed to monitor or enforce the standards.
On June 6, 1934, President Franklin D. Roosevelt created the Securities and Exchange Commission, which required all publicly-traded companies to file periodic reports that had been certified as accurate by professional accountants. Joseph P. Kennedy, father of the future president, was the first Chairman of the SEC.
The AAPA was succeeded, in 1916, by the Institute of Public Accountants. In 1917, the professional group that certifies CPAs changed its name again, to the American Institute of Accountants, and changed its name once more to the American Institute of Certified Public Accountants (AICPA) in 1957. The different versions and growing membership of the AICPA, which had set and monitored the standards of accounting in the U.S., handed that responsibility to a private, independent, not-for-profit standards board in 1973. That's when the Financial Accounting Standards Board was established.
The establishment of the FASB was based on recognition of a need to further standardize accounting practices and reporting by companies. The FASB's main task from its founding was to establish and keep updating Generally Accepted Accounting Principles (GAAP) standards for U.S. firms.
Use of the principles isn't required for all businesses, but the SEC does require publicly traded and regulated companies to follow them in their financial reporting. This means companies that issue stock are held to the standardized rules by the Securities and Exchange Act, which also requires yearly external audits by independent accountants. However, companies that don't have external investors aren't required to follow GAAP.
Meanwhile, government entities have a slightly different set of standards to follow. Those standards are managed by the Government Accounting Standards Board (GASB).
Other countries have GAAP-like rules, established by their own version of the FASB.
Large accounting firms expanded services beyond auditing to different types of consulting in the late 20th century. But they also became involved in corporate scandals as their responsibilities beyond auditing other companies' accounts grew.
Since establishment of the SEC, the pressure to hire good accountants has intensified. The financial cost to companies for falsifying records or having inadequate accounting is high, and continues to grow. Companies that try to manipulate or omit financial information to appear financially stable, like Enron in 2001, eventually face legal consequences and risk insolvency.
It was discovered in 2001 that Enron had been using accounting "tricks" to hide bad debt to the tune of billions of dollars, while also artificially inflating the company's reported earnings.
An SEC investigation concluded Jeffrey Skilling, the company's Chief Executive Officer, and former CEO Kenneth Lay, had managed to keep billions of dollars of debt off the company's reported balance sheet. And the pair were accused of pressuring the company's outside auditors, Arthur Andersen, to ignore it and certify the reports.
Besides Skilling and Lay being convicted, Enron went bankrupt and Arthur Andersen, the once-prestigious auditing firm, was dissolved.
In 2008, the once-prestigious global financial services firm Lehman Brothers - one of the largest investment banks in the U.S. - was discovered to have hidden more than $50 billion in loans as sales. The SEC determined the firm had sold toxic assets to banks in the Cayman Islands, with the understanding Lehman Brothers would buy back the assets in a short time. From an accounting standpoint, it appeared the bank had $50 billion more in cash and $50 billion less in "toxic assets."
Lehman Brothers collapsed as a firm, and some cite its collapse as precipitating the 2008-09 recession.
With modern and consistently updated auditing regulations, accounting standards, and ethical standards for accountants to follow, accountants play a significant role in the U.S. as well as global economy these days. Every individual, government, corporation, company or business uses at least basic accounting principles during their life - some even during daily activities.
The knowledge and use of it has spanned over a thousand years to what is currently in use.
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