The History of Accounting (Final Part)

The History of Accounting: The Age of Scientific Accounting

As mentioned in the previous articles, European Imperialism spurred the development of new accounting practices because business itself was getting bigger and more complex. One of the new developments which arose in this period was the development of trading companies.

Trading companies such as the East India Trading Company (the shipping company, not the overly-expensive clothes brand!) can be seen to be one of the first ‘multinational companies’ (or MNCs as we say nowadays) with branches overseas and back in their home countries. The creation of trading companies was driven by the need to raise large amounts of capital (MONEY!!!) in order to finance trading ships which went out and did business in the world.

You see, financing a ship is no easy matter, first you have the cost of the ship itself (pricey!) then you have to pay the ship’s crew’s salaries (more pricey!) then you need to worry about pirates (scary!) and the cost of insuring against such piracy and/or damage to shipping goods (even scarier!). All this financial risk is too much for one person to bear, therefore, individuals began forming shipping companies and started selling shares of the shipping company to other individuals in order to share the risk of managing a shipping company amongst several individuals. This allowed each individual who owns a share in the business to limit their liability to the amount of money they paid for the share (their investment), this brought about the creation of the limited liability company, or LLC (Bhd Company for all you Malaysia types!).

The buying and selling of shares was a new business concept then which demanded proper accounting treatment, hence the classification of shares as business equity. Along with shares came the creation of dividends (an expense) and also bonus stocks (the issuance of new stock to existing shareholders instead of cash dividends).

With greater industrialisation, accountants began forming professional bodies in order to better represent their interests and uphold the principles of good, honest accounting. Among the first to be formed was the Institute of Chartered Accountants in England and Wales (ICAEW) in 1880. The ICAEW is still around today and is widely considered to be the ‘best’ accounting professional body there is, primarily due to its high entry requirements and demanding professional criteria.

As accountants began to band together, they began to create standards on how to record accounts. The creation of standards represented an important milestone in accountancy as it meant that accountants from other organisations can easily read and interpret the accounts of another organisation. This created a more efficient flow of financial information. Through the creation of standardised accounts came standardised financial reporting (see: income statement, balance sheet) which allowed shareholders and stakeholders alike access to the company’s financial performance. This created greater transparency and accountability (accounting – accountability, its like we accountants invented the term!).

Standards however were individually developed in each country respectively. For the UK and the Commonwealth, we use the FRS (Financial Reporting Standards). The US uses GAAP (Generally Accepted Accounting Practices) and similar national standards exist throughout the world. This creates problems for accountants as companies become more globalised and are spread throughout the world. Consolidation of all these different accounts prepared according to different standards can be a headache for most accountants.

Enter the IFRS (International Financial Reporting Standards) with its aim to standardise the reporting systems of the entire world. Through the IFRS, financial reports will be prepared according to the same standard anywhere in the world. The IFRS will make the accountant’s job much easier and allow for greater efficiency and less errors in preparing accounts.

Another point worthy of mention in this particular age is also the usage of computer-based Accounting Software. Through the use of computers, accounting is made much easier as accountants do not have to manually balance the accounts and can focus more on managing the company’s financials.

While mentioning computers, I guess I should mention the Internet, which has benefited Accountants much as it has benefited the whole world.

Ok, this age can go on and on as the accounting profession is constantly evolving today, but I think I will stop here and leave the rest of it for history to tell.