The Evolution of Accounting

business-861323_640Any lingering stereotypes of accountants lurking in back rooms all day dealing with numbers on paper are out the window. Modern accountants are taking a much more active role in the company and contributing across all departments. They are very often the leaders heading up the business. While the tech and marketing whiz kids are making the numbers, someone has to keep a keen eye on the figures and financial health of the enterprise.

Modern accountants rely heavily on technology and perform a range of functions in an organization. It is a far cry from the first days of the profession. The history of accounting goes back further than money itself. Early bookkeepers, pre-2000 BC, kept written records of trades conducted under the barter system. They used a ledger system to record transactions in a narrative form with details of the goods exchanged along with the relevant dates.

Ledgers with Numbers

With the growth of currencies, it was possible to express trades and transactions in numerical form. In the early days, merchants and tradesmen were not numerically literate. As a result, bookkeepers were employed to keep track of bills and IOUs. Initially, everything was recorded in a single-entry bookkeeping system using a single column. This clearly made adding things up and working out differences rather cumbersome and slow.

Improvement and Innovation

This practice continued until the late 1400s. The biggest early innovation came from an Italian monk named Luca Pacioli. He laid the foundation for modern accounting by separating resources and any claims on them. The result was similar to what we now use as a balance sheet with credits and debits. The system became much more efficient, and it was easy to see the financial health of a company at a glance. At the time, this was only for the owner’s benefit as the records were not yet available to the public or the government.

It took a long time to develop and implement the ground-breaking accounting software packages and modern ERP financial software we have today, but things were starting to take shape. As companies were still comparatively small and the owners’ were hands on, the system remained simple with basic data entry and simple calculations. Once large corporations started to emerge, and we witnessed the rapid growth of the railroad, there was a need for more complex accounting practices. Financial statements, operating ratios, production reports, cost estimates, and numerous other calculations and data were required. Business was transacted faster and over greater distances; and as trade became more complex, information was needed for decision-making, planning, and control.

The Need for Financials

As companies grew and invested in factories, machinery, and other supplies to aid their growth, they needed additional capital to fund it; and they sought investors. This led to the need for proper financials such as an income statement, balance sheet, and cash flow report.

Before these were available, investing was a game of insider knowledge, luck, or a bit of both. People had no financial data upon which to base their decisions. When investment started coming from outside the company, there was a new pressure on business owners and management to keep shareholders happy. As shareholders could not blindly believe everything reported, the need for an independent financial assessment of the company arose.

A Profession is Born

At this stage, accountants were vital to attract investors. They were becoming important for establishing investor confidence. By 1896, a law was passed requiring that candidates had to pass state examinations as well as complete three years of experience before being granted the title of certified public accountant (CPA). Less than 20 years later, the US government started charging income tax to fund the war efforts, and the demand for CPAs grew exponentially.

The practice of accounting has evolved alongside developments in technology. Although the fundamentals are still very much the same as they were a few hundred years ago, the tools have changed dramatically. Modern devices and software enable accountants to devise amazing solutions not only for basic accounting functionality, but also to integrate with other departments and produce complex, useful, and insightful reports and forecasts that are invaluable in running a modern business.

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