The emergence of Accounting: its history and human development

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From Mesopotamian clay tokens to Pacioli's double entry, Brazil's Law 6,404/76 and IFRS: how Accounting was born and evolved to this day.

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The evolution of Accounting: from prehistory to international standards

Accounting was born before writing

When we think of Accounting, we usually picture spreadsheets, computers and balance sheets. However, the need that gave rise to it is much older than writing itself.

Long before the invention of written numbers, money and alphabets, human beings already needed to keep track of what they owned. Imagine a shepherd around 9,000 years ago. He hands part of his flock over to another shepherd to look after. How can he make sure he will get the same number of animals back? How can he prove who the owner is? How can he record a debt?

With no paper, no writing and no numbers, another form of control had to be created. That is how clay tokens came about. Archaeologists have found them at sites in Mesopotamia, Syria, Turkey, Iran and Israel. They were small clay objects shaped by hand and hardened by fire, usually 1 to 3 centimetres in size, in shapes such as spheres, cones, discs and cylinders. The oldest date from around 8000 BC, and hundreds of them have been found at sites such as Jarmo, in Iraq.

What the clay tokens looked like
What the clay tokens looked like

Each token shape stood for a type of good: a sheep, a measure of grain, a jar of oil. Much later, around 3500 BC, the tokens of a transaction began to be kept inside sealed clay envelopes called bullae, which worked as a "receipt" or contract: whoever received the goods could break the envelope and check that the quantity delivered was the one agreed. To avoid having to break it, people began to mark the contents on the surface of the envelope — and those marks are among the forerunners of cuneiform writing, which emerged around 3200 BC.

In other words, a form of control over property already existed. It was not accounting as we know it today, but there were already records of goods, their owners, debts and transfers.

That is why researchers such as archaeologist Denise Schmandt-Besserat argue that the need to keep track of property helped create writing and numbers — in other words, that record-keeping lies at the very root of civilisation.

What were the Mesopotamian bullae used for?

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Answer: They were sealed clay envelopes that held the tokens of a transaction, like a receipt — by breaking the envelope, one could check the agreed quantity. The marks made on their surface, not the bullae themselves, are among the forerunners of writing.

The evolution of counting

Counting evolved in three major phases.

1. One-to-one correspondence

The first phase consisted of matching a sign (for example, a bone or a shell) to one unit of a good (a ram, a measure of grain, a coconut), repeating the sign for each additional unit. Ten rams, ten shells.

2. Concrete counting

In the second phase, concrete counting, tokens or words came to represent quantities, but always tied to a specific kind of thing. Some expressions, such as "a brace" or "a pair", meant the number two, but could only be used for certain objects. The notion of cardinality (the number of elements in a set, without reference to order) emerged in this phase. This kind of counting, however, was limited to small quantities.

3. Abstract counting

The last phase was marked by the development of numerical symbols, which freed counting from any specific set of things: "three" could now be used for three sheep, three jars or three days. With general numbers, Accounting gained speed and precision.

Using the same word 'three' for three sheep, three jars or three days is the hallmark of which phase of counting?

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Answer: Abstract counting — the number comes to exist separately from the things counted. In concrete counting, the word or token was still tied to a specific type of object.

The birth of double-entry bookkeeping

For centuries, trade was limited. Between the 12th and 15th centuries, however, Italian cities such as Venice, Genoa, Florence and Pisa became major trading centres, selling goods to many countries. Loans, trading partnerships, investments and financing multiplied.

Simply writing down sales was no longer enough. Merchants needed to control who owed money, who was owed money, how much cash and stock there was and what the profit was. That is how the double-entry method was born; the oldest known records using the complete method come from merchants and from the public administration of Florence and Genoa, from the late 13th century and the first half of the 14th century. Its principle is still used today.

“Every accounting event has two sides.”

- Double entry

Each accounting event is recorded in at least two accounts: the amount debited to one (or more) accounts is credited, in the same total, to another (or others). That is why total debits = total credits. Always.

Example: goods that cost R$ 400.00 (Brazilian reais) are resold for R$ 600.00 in cash. The entries are:

  • Cash (Asset): debit of R$ 600.00 — money received;
  • Sales Revenue (Income statement): credit of R$ 600.00 — the sale is recorded;
  • Cost of Goods Sold — COGS (Income statement): debit of R$ 400.00 — cost of the goods that left;
  • Merchandise Inventory (Asset): credit of R$ 400.00 — inventory reduced at cost.

Debits: 600 + 400 = R$ 1,000.00. Credits: 600 + 400 = R$ 1,000.00. In the end, total debits always equal total credits — and the difference between revenue and cost (R$ 600.00 − R$ 400.00) shows the gross profit on the sale, R$ 200.00.

Goods that cost R$ 700.00 are sold on credit for R$ 1,000.00. What is the entry for the sale (not counting the inventory write-off)?

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Answer: Debit Customers and credit Sales Revenue, R$ 1,000.00 — since the sale was on credit, what increases is the receivable (Customers), not Cash. The cost of R$ 700.00 goes into a second entry (debit COGS, credit Inventory), and the R$ 300.00 profit appears in the income statement, not in an account of its own in the entry.

Luca Pacioli and the consolidation of Accounting

Although the method was already used by Italian merchants, it was the mathematician and Franciscan friar Luca Pacioli who described it in an organised way and published it in 1494, in Venice, in the treatise Particularis de computis et scripturis, part of his work Summa de Arithmetica, Geometria, Proportioni et Proportionalità. Thanks to the printing press, the book circulated throughout Europe. That is why Pacioli is known as the Father of Modern Accounting. It is important to stress that he did not invent double entry: his merit was to systematise and spread the method.

What was Luca Pacioli's contribution to Accounting?

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Answer: He described in an organised way and spread through a printed book the method Italian merchants already used — there are double-entry records older than the 1494 Summa. Saying he invented the method is the most common mistake.

The Industrial Revolution

From the second half of the 18th century (around 1760), the Industrial Revolution transformed Accounting. Large factories appeared, with thousands of employees, machines, huge inventories and investors.

Accounting began to provide information to run companies, calculate costs, control inventories and measure profits. Cost Accounting was born in this period.

The modern accounting profession has its roots in Scotland in the mid-19th century. In 1853 and 1854, accountants in Edinburgh and Glasgow petitioned Queen Victoria for a Royal Charter that would recognise the profession and distinguish it from the law, alongside which Scottish accountants had long worked. The Society of Accountants in Edinburgh received its charter in 1854, and the Institute of Accountants in Glasgow in 1855. Their members began to use the title chartered accountant (CA), a designation that still carries legal weight in several countries today.

The Glasgow petition was signed by 49 accountants and argued that accountancy had long existed in Scotland as a distinct profession of great respectability, and that the number of practitioners was growing rapidly. It also highlighted the many skills required of an accountant: besides mathematics, he had to know the general principles of law, because he was often called by the courts to give evidence on financial matters — as still happens today in forensic accounting.

The evolution of Accounting in Brazil

During the colonial period, Brazil followed Portuguese rules. Records were simple and their main purpose was to control the collection of taxes for the Crown. When the Portuguese Royal Family arrived in 1808, an administrative reorganisation began: the Royal Treasury (Erário Régio) and the Treasury Council were created, and a royal decree that year required the Treasury's books to be kept by double entry.

Throughout the 19th century, the first commercial classes and schools appeared, along with the first professionals specialised in commercial bookkeeping.

The Commercial Code of 1850

An important milestone was the Brazilian Commercial Code (Law No. 556/1850), which made bookkeeping mandatory for merchants, with compulsory books — the Journal and the Letter Copy Book — plus auxiliary books. The General Ledger, although already used in practice, only became legally mandatory much later, for tax purposes (Law No. 8,218/1991). Today, the obligation to keep books is set out in the Civil Code (Law No. 10,406/2002, articles 1,179 to 1,195) and, for most companies, it is fulfilled digitally through the ECD (Escrituração Contábil Digital, the digital bookkeeping filing of SPED, the federal Public Digital Bookkeeping System).

It was one of the first steps towards the professionalisation of Brazilian Accounting.

The regulation of the profession in Brazil

Another major step came in 1946, when Decree-Law No. 9,295 created the Federal Accounting Council (CFC, Conselho Federal de Contabilidade) and the Regional Accounting Councils (CRCs) and officially regulated the profession. Today, only those registered with a CRC may practise accounting — and since Law No. 12,249/2010, registration requires passing the CFC's Proficiency Exam (Exame de Suficiência).

The Corporations Law

In 1976, Law No. 6,404, the Brazilian Corporations Law (Lei das Sociedades por Ações), was published and revolutionised Brazilian Accounting. Its contributions include the structure of the financial statements, rules for measuring assets and liabilities, mandatory disclosure of the statements and greater transparency for investors. It remains in force, with several amendments, and is still the main legal reference for corporate accounting in Brazil.

Convergence with international standards (IFRS)

Until the early 2000s, each country in practice followed its own accounting rules, which made it hard to compare companies from different countries. Imagine comparing a Brazilian company with a Japanese one if each used completely different criteria to measure inventories, property and revenue. To solve this problem, the IASB (International Accounting Standards Board), created in 2001 from the former IASC of 1973, began issuing the international standard known as IFRS (International Financial Reporting Standards), adopted by the European Union from 2005 and today required or permitted in the vast majority of countries.

Its goal is to create a common accounting language for the world.

Law 11,638/2007

In Brazil, the big change came with Law No. 11,638/2007 (supplemented by Law No. 11,941/2009), which profoundly amended the Corporations Law. The main changes include bringing Brazilian standards closer to IFRS, new rules for assets and liabilities, impairment testing of assets, the replacement of the Statement of Sources and Uses of Funds (DOAR) by the Statement of Cash Flows, and greater transparency and disclosure in the financial statements.

This law marked Brazil's definitive entry into the international convergence process.

The Accounting Pronouncements Committee (CPC)

In 2005, CFC Resolution No. 1,055 created the Accounting Pronouncements Committee (CPC, Comitê de Pronunciamentos Contábeis), which has a very important role: translating and adapting international standards (IFRS) to the Brazilian context. These standards are called CPC Technical Pronouncements.

Once issued, the pronouncements are adopted by Brazilian regulators, such as the Securities and Exchange Commission of Brazil (CVM), the Federal Accounting Council (CFC, which publishes them as Brazilian Accounting Standards, the NBC TG), the Superintendence of Private Insurance (SUSEP) and the National Supplementary Health Agency (ANS). The Central Bank of Brazil adopts some of them for financial institutions, which also follow rules of their own.

What is the role of the Accounting Pronouncements Committee (CPC) in Brazil?

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Answer: Translating and adapting IFRS to the Brazilian context, in pronouncements that regulators make mandatory — IFRS are issued by the IASB, and the profession is supervised, and the exam run, by the CFC/CRC system.

How the Brazilian accounting system works today

Brazilian Accounting today follows an integrated structure:

  1. IFRS — international standards, issued by the IASB;
  2. CPC — Brazilian pronouncements that translate and adapt IFRS;
  3. Regulators (CVM, CFC, SUSEP, ANS, Central Bank) — make the pronouncements mandatory for the entities they regulate;
  4. Companies — apply the standards when preparing their statements.

This allows Brazilian and foreign investors to read financial statements using practically the same accounting language.

Why does this matter to managers?

Modern managers do not need to master every accounting entry, but they do need to understand the information Accounting produces in order to make decisions.

From the financial statements, they can answer strategic questions such as:

  • Is the company making a profit or a loss?
  • Is there enough cash to meet its obligations?
  • Is debt under control?
  • Are inventories excessive?
  • Does the company generate a sufficient return for its investors?
  • Is this the time to expand or to scale back operations?

In other words, Accounting is no longer just a record-keeping system: it has become one of the main tools for management, governance and decision-making in organisations. That is the approach taken throughout this course: using Accounting as a tool to understand the economic and financial position of companies and to support well-founded management decisions.

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