Accounting was only ‘officially’ recognized as a profession less than 150 years ago, so it’s a relatively new profession, right? Not quite–the history of accounting dates back more than 7,000 years!
Today’s article might be reminiscent of your high school history class. The stories I’m about to tell you are the origins of best practices and techniques you still use in your job today.
Circa 5000 BCE: Earliest evidence of primitive accounting methods
The earliest known evidence of accounting practices comes from Mesopotamia, though accounting records from the same era have also been found in Sumer, Assyria, and Babylon.
Accounting documents from this time period show that people recorded goods that they sold, purchased, or (more likely) traded for. These accounting methods were also used to keep track of crops and herds in order to determine if a surplus was achieved for the season—the very first profit and loss statements, which are still integral to accounting today.
In fact, accounting arose in conjunction with the advent of other civilization-based developments such as writing, counting, and the concept of money. For example, early Mesopotamian accounting played a role in the advancement of counting by enabling the transition from concrete to abstract counting.
One small concept, one giant leap for mankind!
4000 – 1000 BCE: Expansion of commerce and bookkeeping
Over the next few thousand years, commerce and business expanded, and the accounting role needed to evolve. Some civilizations created rudimentary record-keeping and inventory systems, such as using tokens to denote quantities of goods that were stored in buildings, and sometimes including images specifying what was kept there.
The invention of Phonecians’ phonetic alphabet is thought to be for bookkeeping purposes. On a micro level, many individuals kept their own ledgers that documented barter transactions.
On a more macro level, governments kept track of debts, taxes, and so forth. As currencies became more widespread and business accounting became more complex and intangible, merchants and business owners began outsourcing the task to bookkeepers (read: math nerds). This set the stage for the eventual creation of the accounting profession that we know today, and many business owners still prefer to focus on business while an accountant handles the numbers.
At this time, a basic single-entry bookkeeping system was used. All expenditures and received payments were listed in a single column, accompanied by dates and descriptions of the financial transactions. This system was a definite step up from using tokens, but it required arduously reading each line to determine whether to add or deduct the amount for a profit and loss assessment—the concept of using a plus or minus sign with each entry was not yet in use.
500 BCE – 450 CE: Evolution of accounting during the Roman Empire
The Roman government under the leadership of Emperor Augustus notably maintained records of public spending and revenue—and then shared these records with the Roman people. These documents contained detailed information about expenditures including grants to military veterans, treasury subsidies, the building of temples, and funding for theater shows and gladiator events. They also tracked public revenues and the amount of cash in the treasury at any given time.
Additionally, the Roman army kept a detailed record of cash, provisions, and business transactions. Private estates also implemented their own accounting systems, often in tiered systems that could be compiled and summarized into one master account statement.
The Romans used all of these detailed accounting records to inform their decisions—these were among the earliest recorded instances of using data-driven decision-making techniques!
Circa 800: Muhammad ibn Musa al-Khwarizmi introduces the double-entry bookkeeping system
Muhammad ibn Musa al-Khwarizmi was an Islamic mathematician who is often credited with introducing the double-entry bookkeeping method, as he included a chapter on the technique in his early-ninth-century book, “The Compendious Book on Calculation by Completion and Balancing.”
This system arose out of necessity, as a way to handle complicated Islamic inheritance issues.
In the double-entry bookkeeping system, there are two equal and corresponding sides: debits and credits. Every transaction affects one account as a debit and one as a credit, and the debit and credit amounts are equal.
A little reminiscent of revenue recognition principles, no?
Double-entry bookkeeping helps bookkeepers avoid errors and allows them to more easily detect fraud or any errors that do occur. Over 1,200 years later, double-entry bookkeeping is still the standard for these reasons.
1494: Luca Pacioli’s book popularizes the double-entry bookkeeping system
After al-Khwarizmi published his book, the double-entry bookkeeping technique slowly made its way around the world, eventually becoming the standard method in European banking. Fibonacci included the technique in his book “Liber Abaci” and it became popular with well-educated merchants and bankers.
But, it wasn’t until Luca Pacioli, a Franciscan friar, published a book in Italian vernacular that double-entry bookkeeping became accessible to the common merchant. His “Summa de Arithmetica, Geometria, Proportioni et Proportionalità” contained a detailed explanation of the method and its benefits and was the first known printed book to contain plus and minus signs—another huge accounting advancement that plays a role in every transaction to this day. He included instructions for how to record barter transactions as well as how to deal with a variety of currencies.
Previously, many accounts of how to use double-entry bookkeeping had been written in Latin, Greek, or other languages that an everyday merchant wasn’t likely to be able to read. By using a common language and thanks to promotional efforts by Pacioli’s close friend Leonardo da Vinci, the book became extremely popular and widely read and taught. It remained in print for almost 400 years, cementing Pacioli’s place as “the father of accounting.”
1800s – Present: Creation and professionalization of modern accounting
Accounting as recognized today made its first appearance in what would eventually become the United States as European colonists created business outposts and new enterprises there, but for many years bookkeeping tasks remained in the hands of business owners themselves.
With the advent of the American railroad network and the creation of large corporations, the need arose for dedicated bookkeepers and accountants who could provide cost estimates, create financial statements and production reports, and generally use financial metrics to determine whether maximum efficiency was being achieved.
The railroads also allowed for goods, money, and information to be transported much faster than before, and led to the standardization of timekeeping across the country—no doubt all left-brained accountants rejoiced!
As the worldwide economy continued to grow and investing in stocks became more commonplace, accountants were increasingly called upon to create financial statements that could be used to encourage people to invest. These balance sheets, income statements, and cash flow statements served as ‘proof’ of a company’s ability to turn a profit.
In 1854, The Institute of Accountants in Glasgow, Scotland petitioned the queen to create an official chartered accountant position. Then in 1887, the American Association of Public Accountants (AAPA) was established, and the profession of the certified public accountant (CPA) formally was created in 1896. These early professional accountants functioned similarly to present-day forensic accountants, often providing independent financial reviews of companies.
Just 17 years later, demand for CPAs in the United States went through the roof when the government began collecting federal income tax.
When IBM’s first computer was released in 1952, accounting was among the very first uses. Now, nearly all aspects of bookkeeping and accounting can be automated thanks to modern technology. This allows accountants to work faster, more accurately, and with less tedious manual number-crunching.
What can we learn from the history of accounting?
As the accountancy profession has evolved over the last several thousand years, a few key goals have emerged: achieving maximum efficiency, eliminating errors, creating a consistent financial system, and generating reports that can be used to make wise business decisions.
One of the primary ways to achieve these goals is to embrace and use the latest and greatest technology available, whether that was the clay token system of millennia ago or a fully automated billing automation platform today.
This type of full-service billing software is still ledger-based and uses the double-entry system, but current technology provides so many extra perks on top of simple accounting functions. It’s safe to say that an automated billing platform would blow Luca Pacioli’s mind, as well as those of all the early accountants and bookkeepers that came before him!
Quick FAQs about Accounting Practices
Q: What is the earliest known evidence of accounting practices?
The earliest known evidence of accounting practices dates back more than 7,000 years to ancient Mesopotamia. Records from this era have also been found in Sumer, Assyria, and Babylon, indicating that people recorded goods they sold, purchased, or traded, as well as kept track of crops and herds to determine seasonal surpluses.
Q: How did accounting evolve alongside other civilization developments?
Accounting arose in conjunction with the advent of writing, counting, and the concept of money. For instance, early Mesopotamian accounting played a significant role in the development of abstract counting, transitioning from concrete methods.
Q: What role did the Phoenician alphabet play in accounting history?
The Phoenician alphabet is believed to have been developed for bookkeeping purposes. This advancement allowed for more sophisticated record-keeping and inventory systems, which were essential for managing the increasing complexity of trade and commerce.
Q: How did the Romans contribute to the development of accounting?
The Romans made significant contributions by maintaining detailed records of public spending and revenue under Emperor Augustus. These records included expenditures on grants to military veterans, treasury subsidies, and public entertainment, as well as tracking public revenues and treasury cash levels.
Q: Who introduced the double-entry bookkeeping method?
The double-entry bookkeeping method is often credited to the Islamic mathematician Muhammad ibn Musa al-Khwarizmi, who included a chapter on the technique in his early-ninth-century book, “The Compendious Book on Calculation by Completion and Balancing.” This method, which involves recording each transaction with equal debits and credits, became the global standard.
Q: How did double-entry bookkeeping become popular in Europe?
Double-entry bookkeeping became popular in Europe through the works of Luca Pacioli. His book, “Summa de Arithmetica, Geometria, Proportioni et Proportionalità,” written in Italian vernacular, detailed the double-entry system and its benefits, making it accessible to common merchants and widely taught.
Q: What advancements did the Roman army and private estates make in accounting?
The Roman army kept detailed records of cash, provisions, and business transactions, while private estates implemented tiered accounting systems that could be compiled into master account statements. These practices were among the earliest examples of data-driven decision-making.
Q: How did the American railroad network influence the accounting profession?
The American railroad network created a need for dedicated bookkeepers and accountants to provide cost estimates, create financial statements, and ensure maximum efficiency. This period marked the rise of professional accounting in the United States, leading to the establishment of the certified public accountant (CPA) profession.
Q: What was the significance of Luca Pacioli’s contributions to accounting?
Luca Pacioli’s contributions were pivotal as he wrote the first detailed explanation of double-entry bookkeeping in a common language, making it accessible to everyday merchants. His book also introduced the plus and minus signs in financial records, which are still used today.
Q: How has modern technology transformed the accounting profession?
Modern technology, particularly the advent of automated accounting and billing software, has revolutionized the accounting profession. These tools allow for faster, more accurate work with less manual effort, continuing the profession’s long-standing goals of maximum efficiency, error elimination, and data-driven decision-making.
