The Importance of Accounting throughout History
The importance of accounting in the world’s past, present, and future is unmatchable. Everyone from the large corporations that line Wall Street to the guy who sells collectibles on eBay use accounting on a regular basis—and for a number of reasons. We are going to discuss how early businesses saw the need for accounting and how it helped both personal and business fortunes stabilize and even grow!
Let’s start of by discussing exactly what “accounting” is. Accountancy, or bookkeeping, is the practice of recording financial information in the form of statements. These statements help business managers, and in some cases stockholders, track financial trends and transaction “cause and effect”. Keeping account books basically helps a person or company see which decisions and transactions caused a benefit or detriment to their funds.
Businesses have been keeping accounting records of some sort as far back as 7,000 years ago—and that’s only as far as our records go. Who knows how many businesses before this time kept accounting statements? Rudimentary records—usually in the form of scribbled account information, spending, and available funds—have been used since well before the 1300’s, but they weren’t necessarily for the benefit of investors or shareholders. This type of record was mainly kept by the owner of the business, or his financial expert if he was a man of considerable wealth and importance. It would simply serve as a way to gauge how much money was going out of his funds and what the money was spent on. Eventually he would have been able to discern which expenses were worthwhile and which could be cut off without considerable loss.
Even people who didn’t own a “business”, per se, would use this same sort of bookkeeping technique. Members of the aristocracy (“titled” people) were especially aware of the importance of accounting because it would help them gain a clearer picture of their gains and losses as related to estate business, as most Lords had entire villages financially dependent upon them. They would also use bookkeeping to determine which crops and livestock seemed to generate the most money. When cows were “out” and sheep became the new “in” thing, a Lord could tell by his books which one was the most financially beneficial and arrange to raise more sheep and fewer cows. Farmers eventually began to do the same.
As the business world grew over the years, savvy people outside of the business world began to want a “slice of the cake”, so to say, and began investing in other peoples’ businesses. As you could imagine, the accountancy required to keep track of the money given by investors, how much said investors’ “take” would be on any profits, and what share of the profits were truly owned by the company, became pretty confusing. It is suspected that around the 14th century, in Northern Italy, a new type of accounting system was developed to help handle all of the figures that accompanied dealings with more than one investor. One person—or group, if the company was large enough—would be in charge of handling the so-called internal accounting while another person or group would handle external accounting.
Accounting has progressed quite a lot since the 14th century, so much so that owners sometimes stake an entire business based on the recommendations of the company’s accountant(s). Accounting is now used to relay business information to a company’s owners, managers, and employees as well as to keep current stock shareholders up to date on the company dealings and to even tempt future shareholders into investing.
As you can see, accounting is a vital component of any business. Not only does it allow people and companies to track their own debits and credits, but it can actually help move a company forward as a powerful tool of persuasion for investors. What would the world be like if we underestimated the importance of accounting?