Ø 1) Read the heading and the subheadings and say what this text is about.

Ø 2) Skim the text (read it quickly) and say if these questions are covered in it:

a)how the principle of double-entry bookkeeping was formulated,

b)the name of the initiator of the Limited Liability Act 1855,

the reason for the appearance of a new trend in the development of accounting at the end of the 20th century,

c)the essence of management accounting,

d)access to large amounts of capital for the industrial expansion in the early part of the 19th century,

e)the new trend in accounting development in the 21st century.


The history of accounting reflects the evolutionary pattern of social developments and, in this respect, illustrates how much accounting is a product of its environment and at the same time a force for changing it. There is, therefore, an evolutionary pattern which reflects changing socio-economic conditions and the changing purposes to which accounting is applied.

From todays perspective, we may distinguish four phases which may be said to correspond with its developing social role.

Stewardship accounting has its origins in the function which accounting served from the earlier times in the history of our society of providing the owners of wealth with a means of safeguarding it from stealing and in the fact that wealthy men employ stewards to manage their property. These stewards rendered periodical accounts of their stewardship, and this notion still lies at the root of financial reporting today. Essentially, stewardship accounting involves the orderly recording of business transactions, and although accounting records of this type date back to as early as 4500 B.C., the keeping of these records, known as bookkeeping, remained primitive until fairly recent times. Indeed, the accounting concepts and procedures in use today for the orderly recording of business transactions have their origin in the practices employed by the merchants of the Italian City States during the early part of the Renaissance. The main principles of the Italian Method, as it was then known, were set out by Luca Aioli in his famous treatise Summa de Arithmetica, Geometrica, Proportioni et Proportionalita which was published in Venice in 1494. The Italian Method, which became known subsequently as double-entry bookkeeping was not generally used in Western Europe until the early part of the 19th century.

Financial accounting has a more recent origin, and dates from the development of large-scale businesses which were made possible by the Industrial Revolution. Indeed, the new technology not only destroyed the existing social framework, but altered completely the method by which business was financed. The industrial expansion in the early part of the 19th century necessitated access to large amounts of capital. This led to the advent of the joint stock company, which enables the public to provide capital in return for shares in the assets and the profits of the company.

An earlier experience of the joint stock form of trading which had resulted in a frantic boom in company flotation, culminating in the South Sea Bubble of 1720, had instilled public suspicion of this form of trading. Nevertheless, the Joint Stock Companies Act 1844 permitted the incorporation of such companies by registration without the need to obtain a Royal charter or a special Act of Parliament.

In 1855, however, The Limited Liability Act permitted such companies to limit the liability of their members to the nominal value of their shares. This meant that the liability of shareholders for the debts incurred by the company was limited to the amount which they had agreed to subscribe £1, and, once he had paid that £1, he was not liable to make any further contribution in the event of the companys insolvency.

The concept of limited liability was a contentious point in the politics of the mid-19th century. The Limited Liability Act 1855 made the disclosure of information to shareholders a condition attached to the privilege of joint-stock status and of limited liability. This information was required to be in the form of annual profit and loss accounts and balance sheets.

We may say briefly, however, that the former is a statement of the profit or loss made during the year of the report, and the balance sheet indicates the assets held by the firm and the monetary claims against the firm. Financial accounting is concerned with those two accounting statements as vehicles for the disclosure of information to shareholders in limited companies. The legal importance attached to financial accounting statements stems directly from the need of a capitalist society to mobilize savings and direct them into profitable investments. Investors, be they large or small, must be provided with reliable and sufficient information in order to be able to make efficient investment decisions. Herein lies one of the most significant social purposes of financial accounting reports. In a changing society, increased recognition that employees have a legitimate right to financial information is evident in the legislation passed or proposed in several European countries.

Management accounting is also associated with the advent of industrial capitalism, for the Industrial Revolution of the 18th century presented a challenge to the development of accounting as a tool of industrial management. In isolated cases there were some, notably Josiah Wedgwood, who developed costing techniques as guides to management decisions. But the practice of using accounting information as a direct way to management was not one of the achievements of the industrial revolution: this new role for accounting really belongs to the 20th century.

Certainly, the genesis of modern management with its emphasis on detailed information for decision making provided a tremendous impetus to the development of management accounting in the early decades of the 20th century, and in so doing considerably extended the boundaries of accounting. Management accounting shifted from recording and analyzing financial transactions to using information for decisions affecting the future. In so doing, it represented the biggest surge forward in seven centuries. The advent of management accounting demonstrated once more the ability and capacity of accounting to develop and meet changing socio-economic needs. Management accounting has contributed in a most significant way to the success with which modern capitalism has succeeded in expanding the scale of production and raising standards of living.

The social welfare viewpoint of accounting is an entirely new phase in accounting development which owes its birth to the social revolution which has been underway in the Western world in the end of the 20th century. One aspect is social responsibility accounting which widens the scope of accounting by considering the social effects of business decisions as well as their economic effects. The demand for social responsibility accounting stems from an increasing social awareness of the undesirable by-products of economic activities, and in this connection, one may point to the attention given to environmental problems over the last years. Increasingly, management is being held responsible not only for the efficient conduct of business as expressed in profitability, but also for what it does about an endless number of social problems. Hence, with changing attitudes, the time-honored standards by which performance is measured have fallen into disrepute. There is a growing consensus that the concepts of growth and profit as measured in traditional balance sheets and profit and loss accounts are too narrow to reflect what many companies are trying, or are supposed to be trying, to achieve.


Ø 3) Give your own examples to the main ideas expressed in the text.

Ø 4) Make up a brief outline of the text.




Ø 1) Look at the heading and the words in the table in the text and say what this text is about. Have you ever come across any of these ideas in your profession or life?

Ø 2) Match the concepts and their definitions:

Concepts Definitions
1. assets 2. liabilities 3. capital 4. revenue 5. expenses 6. profit 7. transactions a) the excess of assets over liabilities b) events which require recognition in the accounting records c) things of value which are possessed by a business d) results from the total revenue of a business for a certain period e) the amounts owned by the business f) expenses g) money earned by a business

Ø 3) Answer the questions:

a)What do the assets of a business comprise?

b)What assets are not mentioned in balance sheets?

c)When do liabilities arise?

d)What is the difference between revenue and profit?


The establishment of concepts is very important to the development of a theoretical framework. Accounting concepts are used to describe the events that comprise the existence of business of every kind. For this reason accounting is often characterized as the language of business. The basic concepts listed in the table below provide the essential material of accounting theory.


Basic concepts Accounting conventions   Accounting procedures
Assets Liabilities Capital Revenue Expenses Profit Transactions Entity Money measurement Going concern Cost Realization Accrual Matching Periodicity Consistency Prudence Recording transactions Classifying transactions Summarizing transactions Reporting transactions Interpreting reports


Assetsare things of value which are possessed by a business. In order to be classified as an asset the money measurement convention demands that a thing must have the quality of being measurable in terms of money. The assets of a business comprise not only cash and such property as land, buildings, machinery and merchandise, but also money which is owed by individuals or other enterprises (called debtors) to the business.

Often the major asset of a highly successful firm is the knowledge and skill created as a result of teamwork and good organization. This asset will not appear in the accounts, since the firm has paid nothing for it, except in terms of salaries which have been written off against yearly profits. So, the value of the human assets of the firm is not mentioned in balance sheets. However, it is universally recognized that the firms human assets are its chief source of wealth. Yet, it is only recently that accountants have begun to recognize this fact, and efforts are now being made to find ways in which information on the value of human assets may be most appropriately presented.

There are other important assets of which no mention is made in financial accounting statements, for example, the value of the firm on the market and the value of the firms own information system, which affects the quality of its decisions.

Liabilities are the amounts owned by the business. Most firms find it convenient to buy merchandise and services on credit terms rather than to pay cash. This gives rise to liabilities known as trade creditors. Liabilities arise also when a firm borrows money as a means of supplementing the funds invested by the owner. The reason why amounts of money owed to the creditors by a business are known as liabilities is that the business is liable to them for the amounts owed.

Capitalis the excess of assets over liabilities and represents the owners investment in the business. The assets of a business must always be equal to the liabilities and the owners capital. This is the result of double-entry bookkeeping, whereby each transaction has a two-fold effect.

Revenue is earned by a business when it provides goods and services to customers. Whereas a trading business will derive revenue mainly from the sale of merchandise, a business which renders services, such as a solicitor, will derive revenue as a result of charging for the service. It is not necessary for a business to receive cash before recognizing that revenue has been earned. The accrual convention recognizes revenue which arises from the sale of goods or services on credit.

Expensesare incurred in earning revenue. Examples of expenses are wages and salaries paid to employees and rent paid to the landlord. If expenses are not paid when they are incurred the amount is recorded as a liability.

Profit results when the total revenue of a business for a certain period, such as a year, exceeds the total of the expenses for that period. Profit accrues to the owner of the business and increases his investment. The increase is reflected in the owners capital, being a liability due to him.

Transactionsare events which require recognition in the accounting records. They originate when changes in basic concepts are recorded. A transaction is financial in nature and is expressed in terms of money.

Accounting conventions determine the rules which are applied to accounting procedures. Accounting conventions are continually being adapted to meet the changing demands of business, and at any point in time there may be more than one accepted way of treating a particular class of transaction. A thorough knowledge of these conventions is necessary for a complete understanding of financial statements.

If accountants as a group wish to change some of their conventions, they are free to do so. The term accounting conventions serves to underline the freedom accountants have enjoyed in determining their own rules.



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