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By: Janice BandickPublished On: March 9, 2015
Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business. Accounting, which has been called the “language of business”, measures the results of an organization’s economic activities and conveys this information to a variety of users.
Today, the vast majority of accounting is done electronically, and it is difficult to imagine completing the complex and time-consuming tasks associated with accounting by hand. Despite this difficulty, there is evidence of accounting systems as far back as 12,000 years ago. Early systems of accounting even predate some systems of writing and arithmetic.
Remnants of ancient accounting systems have been found all over the world, from the Middle East to Africa. People documented their property, history, and other achievements as more advanced forms of writing and communication became available. The early development of accounting was closely related to developments in writing, counting, and money.
Once currencies became widely used, some of the earliest accounting careers took shape. Tradesmen and merchants did not always want to take responsibility for maintaining their records themselves, so they would hire outside contractors. Records kept by these individuals often took the form of single-entry ledgers until an Italian by the name of Luca Pacioli popularized the double-entry ledger’still used today’with the publication of his bookkeeping textbook (A Review of Arithmetic, Geometry and Proportion).
According to Pacioli, good accounting practices were essential to maintaining a successful business. Pacioli taught that keeping a business’s credits and debits in separate columns would be a more organized way to make sure the books were balanced. He also taught the importance of keeping detailed records of every single transaction, including the amount of the transaction, who the transaction took place with and other relevant information.
This practice, known as double-entry bookkeeping, is defined as
“any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form.”
The historical origin of the use of the words “debit” and “credit” in accounting goes back to the days of single-entry bookkeeping, when the primary objective was to keep track of amounts owed by customers (debtors) and amounts owed to creditors. Debit in Latin means “he owes” and credit in Latin means “he trusts”.
Without Pacoli’s work in the fifteenth and sixteenth centuries, the economy as we know it today could not exist. Pacioli’s description of double-entry bookkeeping led to the rise of modern accounting, accurate record keeping, and the overall growth of industry, trade, and commerce.
The development of joint-stock companies (a business entity where different stakes can be bought and owned by shareholders), built wider audiences for accounting information, as investors without firsthand knowledge of their operations relied on accounts to provide the relevant information. This development resulted in a split of accounting systems for internal (managerial accounting) and external (financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent verification of accounts by auditors. Managemerial accounting provides information to people within an organization while the purposed of financial accounting is to provide information for those outside an organization, such as shareholders or potential investors. Financial accounting is required by law while managerial accounting is not.
Today, standardized accounting practices are in use across the globe, helping companies around the world to stay afloat, attract investment, and keep the world economy running.