Accounting and financial history Essay
Accounting and financial history
Accounting and financial history
Many people have spent their entire lives doing research on the development of accounting and also the financial history. Economic sector is the stronghold of every country and that is why the research has been taken seriously. Accounting has taken different phases in its development and each phase have a significant meaning to the todays accounting process. The development has been influenced greatly by major economic, political and social events that affected the world in the past centuries. Different periods have also influenced the development of accounting, business and financial history. Every event that has been happening in the world has led accounting to another level in terms of development. Some of the events were negative while some were positive but they all influenced the development of accounting positively and that is what people enjoy accounting in the current time. Accounting and financial history is interconnected with events and periods and thus one cannot separate the two while studying this history. Different countries have different accounting history although there are some international events that had influenced more than one country and that means that they have the same accounting and financial history. The object of the paper is to discuss an event on accounting, business or financial history and its relevance for today.
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Recognition and development of accounting as a profession in United States (1900-1920)
In early 1895, there were many companies and corporations in the United States industry and they were both big and small. The market could not accommodate the big numbers of the corporations and companies and thus the only solution to this problem was to merge them in order to regulate their number. This process eventually happened form 1895 to 1900 where many companies merged and formed few big companies. A good example is the tube company which was formed after merging many companies that were producing tubes. The many tubes companies formed one large company which had a lot of operations in it and that is where the issue of accounting got involved (Charles, 1992 p.2).
While the companies were small, they were calculating their financial results manually without any level of professionalism. However, the process of merging those companies and corporations made the companies and corporations to have a lot of operations and they needed a professional system of accounting. They were in need of more auditors to work on the financial operations in those companies because the financial status of the companies had gone up and they could no longer depend on the manual or outdated methods of accounting. Some companies that were merging were from diverse locations and thus they were forced to open some branches where they could manage all the accounting processes and auditing of all financial statements for all the companies that were merging (Stephan, 2003 p. 200). Also the number of auditors was increased while some auditors operated on mobile bases, they could move from one company to another because the demand was very high.
Another change that occurred in accounting due to the merging of companies was the effect of the third party in the accounting operations. Some companies that had merged had holdings companies while others were under the control of banks. The introduction of the third party meant that there was another party which would be interested in the financial records of a company (Christopher, 2009 p. 40). Banks would send their auditor to calculate the financial records of the company under control and thus the accounting system in the company was improved in order to improve accuracy. Involvement of another party meant that there was more work in the accounting and it required a high level of professionalism, and that took the accounting system to another level. Some companies would elect other companies as holding and they were responsible of auditing the financial records of the company because they were stakeholders of the company. In 1909, the congress passed a law that abolished the income tax but it introduced franchise tax. Franchise tax law required companies to pay their income tax to the government; this meant that they were supposed to present their annual financial statements to the government. They were forced to calculate their expenses and their income in order to come up with the right amount which would be taxed. This regulation required the company to have a complex and well-established accounting system. The auditor’s from the governments were also required to calculate and evaluate the financial statements of those companies in order to ensure that they were true. This event took accounting to another level of professionalism.
After the introduction of franchise tax, there were no oppositions from the company owners because the tax had very low rate. The congress saw it as a success on their side and that is where they introduced a direct tax in 1913, this tax had higher rate than the franchise but it did not make an impact on organization and thus it was appropriate to companies. In this decade is where the First World War was fought, this war had a massive impact on the financial status of United States and thus they decided to raise the tax rate of companies. The new tax rates that were introduced by the congress required companies to give their excess profits to the tax unit. To determine the excess profits of a company required a more professional accounting system. The government would carry out the accounting processes but the companies would also use their auditors to evaluate their financial statements for transparency and accuracy in accounting. The article gives a clear history of the two decades that marked the recognition and the growth of accounting in United States (Frost, 1994 p. 75).
The events that happened shaped the accounting system of the United States, the current accounting system is out of those events and the way they influenced the accounting system. Currently, companies have a complex accounting system which ensures accurate financial statements of those companies. The historical event introduced an idea where a company had more than one auditor and that is what is there currently in companies. Companies especially the larger ones or the ones that merge employ more than one auditor, this is because they have many financial operations and there are more government’s regulations that require financial records of every company.
Companies currently are operating on diversified bases and thus they have inherited an accounting system where they have established accounting branches in different places. These branches are there for the purpose of accounting only. This idea was inherited form the historical event of accounting in United States. The branches are conducted by professional auditors from the high level accounts schools that were introduced in United States. However, there are some branches of accounting that are introduced by private agencies and thus they are not owned by any company. Some companies which do not have auditors or they figure employing auditors to be expensive than hiring, they prefer taking their financial statements to the accounting branches. Other companies prefer to employ private auditors to do their accounting operations. The decisions of these companies are influenced by the history of accounting.
Banks have been involved more on accounting operations in a greater way because of the influence during the 1900 to 1920 era. Banks have their auditors; this is because banks and companies have become one entity. Companies currently cannot operate without the assistance of banks. Companies require financial assistance and also accounting and financial advice from banks and in order to receive all that, banks must assess the financial status of the company and this is done through accounting process. This concept of accounting has helped many companies avoid serious financial problems but the original idea was from the 1900 to 1920 merging event. Government has also been influenced by this event where the tax system that was put in action during that time is still the same even today although some terms have been changed. The tax Unit in United States have established an auditors unit that is concerned with assessment of financial records of different companies in order to evaluate the tax rates and the financial stands of different companies. The whole concept of government involvement with the financial issues of companies is as a result of the 1913 events of company taxations. Currently, government has the responsibility of annual assessment of all companies’ financial records in order to determine the taxation criteria to use (Maher, 2001 p. 300).
In conclusion, accounting history of United States was greatly influenced by the political, social and economic situations in the country during the 1900 to 1920 era. The decision of companies to merge was the first step which marked professional recognition of accounting in United States, the issue of taxation during the same period marked the growth of accounting as profession in America. The two economic and political events influenced the current accounting system in a great way; the foundation of accounting system in United States was laid down by the two events that happened in 1900 and 1920. More research is being carried on to explore more on the accounting history in different countries.
Stephen A. Zeff. (2003). accounting profession in US: a review Article. Contemporary Accounting Research, 2(1), 189-205. doi:10.1111/j.1911-3846.1985.tb00607.
Charles W. Wootton & Carel M. Wolk. (1992). Development of “the big eight” accounting firms in the United States, 1900-1990.: a Review Article. Accounting And Business Research, 9(36), 2. doi:10.1080/00014788.1979.9729170
Christopher J. Napier. (2009) Accounting Historiography: A Review Article. Journal Of Accounting Research, 1(2), 30-49. doi:10.2307/2489857
Frost, C., & Pownall, G. (1994). Accounting Disclosure Practices in the United States and the United Kingdom. Journal Of Accounting Research, 32(1), 75. doi:10.2307/2491388
Maher, M. (2001). The Evolution of Management Accounting Research in the United States. The British Accounting Review, 33(3), 293-305. doi:10.1006/bare.2001.0170
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 19 October 2015
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