Evolution of Accounting Theory

Accounting theory is mainly a modern concept when compared with theories

emancipating from mathematics or physics. Accounting developed as a set of tools to

record activities or transactions. Even Luca Pacioli’s treatise on double-entry

accounting (which provides the basis for modern double-entry booking system) was

about documenting the processes involved, not about explaining the underlying basis

for this method of recording. Unlike disciplines that have natural laws, accounting is

an instrument of human behaviour. It is developed and used for the specific purposes

of individuals who are preparing the information. Chambers (1963) summarized the

view that accounting has been developed in an improvised fashion rather than from a

structured theory as follows: “Accounting is frequently described as a body of

practices which have been developed in response to practical needs rather than by

deliberate and systematic thinking.” Many accounting prescriptions have been

developed to resolve problems as they arose. Hence, the theory underlying those

prescriptions also developed in a largely unstructured manner.

Before 1400s

Before the double-entry system was formalized in the 1400s, very little had been

written about the theory underlying accounting practices. The era before emergence of

double entry system has a certain historical interest but very little relevance to current

accounting issues. However, the record keeping, control and verification problems

encountered in the ancient world were many ways like of our own. In ‘Accounting

Evolution to 1900’ written by A.C. Littleton in 1966 lists seven preconditions that led

to the emergence of systematic bookkeeping as follows:

(1) Art of Writing (since booking is first of all a record);

(2) Arithmetic (since mechanical aspect of bookkeeping consists of a sequence of

simple computations);

(3) Private Property (since bookkeeping is concerned only the facts of property

and property rights);

(4) Money (i.e. a money economy – since bookkeeping is unnecessary except as it

reduces all transactions in properties or property rights to this common

denominator);

(5) Credit (i.e. incomplete transactions – since there would be little impulse to

make any record whatever if all exchanges were completed on the spot);

(6) Commerce (since a merely local trade would never have created enough

pressure [volume of business] to stimulate men to coordinate diverse ideas

into a system) and

(7) Capital (since without capital, commerce would be trivial and credit would be

inconceivable).