CHAPTER 1.

INTRODUCTION TO
ACCOUNTING THEORY
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Chapter 1 - Outlined
1.1 Historical Development of
Accounting
1.2 Accounting Theory Formulation

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Historical development of Accounting

Early history of Accounting (b)
Dating back 3000 BC
Chaldean-Babylonian, Assyrian & Sumerian civilization
Organized government, oldest government, oldest written language
Egyptian civilization pivots on which the whole machinery of the
treasury and others departments turned
Chinese civilizations, accounting playing a key & sophisticated role
during Chao Dynasty (1112 256 BC)
Greek civilization, Zenon introduce system of responsibility accounting.
Roman civilization law requires taxpayers to prepare statement of
financial position, civil right = property declare by them
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Contribution factors;

Invention of writing
Introduction of Arabic numerical & decimal systems
Algebra
Inexpensive writing materials
Rise of literacy

Littleton (6 preconditions, systematic bookkeeping )

The art of writing

Arithmetic
Private property
Money
Commerce
Capital

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The Italian Method

1340 i.e.. development of commercial republic of Italy, used
double entry bookkeeping method
Medieval (belonging to middle age) accounting i.e. tools for
management control as describes by Raymond de Rover;
Balancing of the books as primary objective
Developing cost accounting
Introducing reserves
Adjustments (accruals & differed items)
Audited financial statement
But little progress in analysis of financial statement
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Luca Pacolis Contribution

Franciscan monk, 1494 wrote the 1St book, Summa de Arithmetica
Geomatrica, Proportioni et Proportionalita (Review of Arithmetic,
Geometry & Propotions) (he didnt invent double-entry bookkeeping)
2 chapters, de Computis et Scripturis, describing double entry
bookkeeping,
Know as the method of Venice or the Italian method
He stated;
purpose of bookkeeping was to give the trader without delay information as to
his assets & liabilities
All entries has to be double entries, that is, if you make one creditor, you must
make someone debtor
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Not only was the name of buyer or seller recorded, as well as the
description of the goods with its weight, size or measurement, price and term of
payment
The receive or disburse, the record was shown of the kind of currency and its
converted value.

He advice the computation of periodic profit and the closing of

the book;
it is always good to close the book each year, especially if you
are in a partnership with others. Frequent accounting makes for long
friendship

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Development of accounting

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Pragmatic Accounting
18001955
General scientific period
theory based on observations of practice rather
than deductive logic that is critical in current
practice.
Overall framework to explain why accountants
account as they do
Wall Street Crash (1929), lead to creation of
Securities & Exchange Commission
Lead to improve financial regulation & reporting
1930s give rise to several notable accounting
publications (A Tentative Statement of Accounting
Principles affecting corporate reports)
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 In 1938 AICPA released A statement of Accounting

Principles
Development in accounting research, the theories
to explain practice become more detail and
complex
Normative accounting

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Normative Accounting
19561970 :
Normative period
norms for best accounting practice
what actually happen (less concerned)
vs
what should happen
Debate predominantly about measurement
rather than actual practice of recording &
reporting
Two groups exist: historical cost VS conceptual
framework
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Positive accounting
1970positive era
Specific scientific theory
dissatisfaction with normative theories
positive accounting theory sought to
provide fwk for explaining the practice
which were being observed
The objective is to explain and predict
(lead to hypothesis)
e.g. bonus plan hypothesis
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Important to explain the economic or wealth

effect of accounting & why accounting is
important to various parties such as
shareholders, creditors & managers.
Benefits from the research that is enable
regulators to assess the economic
consequence of the various accounting
practice they consider.
Failure of accounting info. to signal financial
catastrophes focus on accounting behavior
rather than on explanation after the event of
observe behavior
1930s after stock market crash
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Recent Development
Mix development because it is impossible to
develop a single theory, as human greed,
opportunism, future uncertainty, & degree
of naivety on the part of some shareholders
can never be capture in a theory of
accounting.
Academic focus on capital market, agency
theory & behavioral
Profession more focus on normative
approach
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Relevance of accounting history

Important to accounting pedagogy(method & instruction), policy &
practice.
Pedagogy
Educated the members to appreciate intellectual heritage
Advance in thought, major contribution to literature, & of crucial
study maybe lost, fragmented, or inadequately recognized in longer
term unless they are documented and incorporated by scholars
Incomplete or unjustified claim about the past

Policy
Better understanding on accounting problems & their institutional
context as well as the formulation of the public policy

Practice
Better assessment of the existing practice by a comparison method
used in the past.
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 betterto understand our present & to forecast or control

our future.
Accounting history is the study of the evolution in
accounting thought, practices & institutions in response to
changes in the environment & social needs. It also
considers the effect this evolution has worked on the
environment
Historical research, includes biography, institutional history,
development of thought, general history, critical theory,
taxonomic & bibliographic database.

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