Accounting as a social science

Ø 1) Read the heading and the subheadings and say what this text is about.

Ø 2) Skim the text (read it quickly) and say if these questions are covered in it:

a) how the principle of double-entry bookkeeping was formulated,

b) the name of the initiator of the Limited Liability Act 1855,

the reason for the appearance of a new trend in the development of accounting at the end of the 20^th century,

c) the essence of management accounting,

d) access to large amounts of capital for the industrial expansion in the early part of the 19^th century,

e) the new trend in accounting development in the 21^st century.

The history of accounting reflects the evolutionary pattern of social developments and, in this respect, illustrates how much accounting is a product of its environment and at the same time a force for changing it. There is, therefore, an evolutionary pattern which reflects changing socio-economic conditions and the changing purposes to which accounting is applied.

From today’s perspective, we may distinguish four phases which may be said to correspond with its developing social role.

Stewardship accounting has its origins in the function which accounting served from the earlier times in the history of our society of providing the owners of wealth with a means of safeguarding it from stealing and in the fact that wealthy men employ “stewards” to manage their property. These stewards rendered periodical accounts of their stewardship, and this notion still lies at the root of financial reporting today. Essentially, stewardship accounting involves the orderly recording of business transactions, and although accounting records of this type date back to as early as 4500 B.C., the keeping of these records, known as “bookkeeping,” remained primitive until fairly recent times. Indeed, the accounting concepts and procedures in use today for the orderly recording of business transactions have their origin in the practices employed by the merchants of the Italian City States during the early part of the Renaissance. The main principles of the Italian Method, as it was then known, were set out by Luca Aioli in his famous treatise “Summa de Arithmetica, Geometrica, Proportioni et Proportionalita” which was published in Venice in 1494. The Italian Method, which became known subsequently as “double-entry bookkeeping” was not generally used in Western Europe until the early part of the 19^th century.

Financial accounting has a more recent origin, and dates from the development of large-scale businesses which were made possible by the Industrial Revolution. Indeed, the new technology not only destroyed the existing social framework, but altered completely the method by which business was financed. The industrial expansion in the early part of the 19^th century necessitated access to large amounts of capital. This led to the advent of the joint stock company, which enables the public to provide capital in return for “shares” in the assets and the profits of the company.

An earlier experience of the joint stock form of trading which had resulted in a frantic boom in company flotation, culminating in the South Sea Bubble of 1720, had instilled public suspicion of this form of trading. Nevertheless, the Joint Stock Companies Act 1844 permitted the incorporation of such companies by registration without the need to obtain a Royal charter or a special Act of Parliament.

In 1855, however, The Limited Liability Act permitted such companies to limit the liability of their members to the nominal value of their shares. This meant that the liability of shareholders for the debts incurred by the company was limited to the amount which they had agreed to subscribe £1, and, once he had paid that £1, he was not liable to make any further contribution in the event of the company’s insolvency.

The concept of limited liability was a contentious point in the politics of the mid-19^th century. The Limited Liability Act 1855 made the disclosure of information to shareholders a condition attached to the privilege of joint-stock status and of limited liability. This information was required to be in the form of annual profit and loss accounts and balance sheets.

We may say briefly, however, that the former is a statement of the profit or loss made during the year of the report, and the balance sheet indicates the assets held by the firm and the monetary claims against the firm. Financial accounting is concerned with those two accounting statements as vehicles for the disclosure of information to shareholders in limited companies. The legal importance attached to financial accounting statements stems directly from the need of a capitalist society to mobilize savings and direct them into profitable investments. Investors, be they large or small, must be provided with reliable and sufficient information in order to be able to make efficient investment decisions. Herein lies one of the most significant social purposes of financial accounting reports. In a changing society, increased recognition that employees have a legitimate right to financial information is evident in the legislation passed or proposed in several European countries.

Management accounting is also associated with the advent of industrial capitalism, for the Industrial Revolution of the 18^th century presented a challenge to the development of accounting as a tool of industrial management. In isolated cases there were some, notably Josiah Wedgwood, who developed costing techniques as guides to management decisions. But the practice of using accounting information as a direct way to management was not one of the achievements of the industrial revolution: this new role for accounting really belongs to the 20^th century.

Certainly, the genesis of modern management with its emphasis on detailed information for decision making provided a tremendous impetus to the development of management accounting in the early decades of the 20^th century, and in so doing considerably extended the boundaries of accounting. Management accounting shifted from recording and analyzing financial transactions to using information for decisions affecting the future. In so doing, it represented the biggest surge forward in seven centuries. The advent of management accounting demonstrated once more the ability and capacity of accounting to develop and meet changing socio-economic needs. Management accounting has contributed in a most significant way to the success with which modern capitalism has succeeded in expanding the scale of production and raising standards of living.

The social welfare viewpoint of accounting is an entirely new phase in accounting development which owes its birth to the social revolution which has been underway in the Western world in the end of the 20^th century. One aspect is social responsibility accounting which widens the scope of accounting by considering the social effects of business decisions as well as their economic effects. The demand for social responsibility accounting stems from an increasing social awareness of the undesirable by-products of economic activities, and in this connection, one may point to the attention given to environmental problems over the last years. Increasingly, management is being held responsible not only for the efficient conduct of business as expressed in profitability, but also for what it does about an endless number of social problems. Hence, with changing attitudes, the time-honored standards by which performance is measured have fallen into disrepute. There is a growing consensus that the concepts of growth and profit as measured in traditional balance sheets and profit and loss accounts are too narrow to reflect what many companies are trying, or are supposed to be trying, to achieve.

Ø 3) Give your own examples to the main ideas expressed in the text.

Ø 4) Make up a brief outline of the text.

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