A brief history of accounting and financial statements

Financial statements are papers with numbers composed on them, yet it is necessary to likewise consider the real assets that underlie the numbers. If you comprehend how and also why bookkeeping started, and also just how financial statements are used, you can much better picture what is taking place, as well as to why accounting information is so vital.

Hundreds of years ago, people (or households) were self-contained in the sense that they gathered their own food, made their very own clothing, and built their own shelters. Then the field of expertise started-- some people came to be good at making pots, others at making arrowheads, others at making clothing, and so on.

As specialization began, so did trading, at first in the form of barter. At first, each craftsman worked alone, and trade was strictly regional. Ultimately, however, master craftsmen established little factories and also utilized employees, cash (in the form of clamshells) started to be used, as well as profession increased past the town. As these developments occurred, a primitive kind of financial began, with rich vendors providing profits from past ventures to resourceful manufacturing facility owners who needed capital to broaden or too young traders that required money to buy wagons, ships, and also merchandise.

When the very first car loans were made, lending institutions can physically evaluate consumers' assets and judge the likelihood of the finance's being settled. Eventually, though, lending ended up being a lot more complicated, customers were developing larger factories, traders were acquiring fleets of ships and wagons, and also car loans were being made to develop remote mines and also trading posts. Then, loan providers might no longer personally check the properties that backed their lendings, and they needed some method of summing up consumers' possessions. Additionally, some financial investments were made on a share-of-the-profits basis, and this meant that profits (or income) needed to be determined. At the same time, manufacturing facility proprietors, as well as huge merchants, required records to see exactly how effectively their own enterprises were being run, and governments needed info for use in analyzing tax obligations. For all these reasons, a requirement arose for financial statements, for accounting professionals to prepare those statements, and also for auditors to verify the accuracy of the accountants' job.

The financial system has actually expanded immensely because it's beginning, as well as audit, has actually become much more complicated. Nevertheless, the initial factors for financial statements still apply: Bankers and also various other investors require accounting details to make intelligent decisions, management/directors require it to operate their companies successfully, as well as legal authorities need it to analyze tax obligations in an affordable way. It must be without effort clear that it is hard to translate physical properties into numbers, which is what accountants do when they prepare financial statements. The numbers shown on balance sheets typically stand for the historic costs of assets. Nevertheless, inventories might be ruined, out-of-date, and even missing; fixed assets such as machinery and also buildings might have higher or reduced worth than their historical prices, and balance due may be uncollectable.


Additionally, some liabilities such as obligations to pay retirees' clinical expenses might not even show up on the balance sheet. Similarly, some expenses reported on the profit or loss account may be underrated, as would be true if a plant with a useful life of ten years were being depreciated over 40 years. When you take a look at a set of financial statements, you must remember that a physical reality exists behind the numbers, as well as you must also understand that the translations from physical assets to “correct” numbers are much from specific.


As mentioned formerly, it is essential for accounting professionals to be able to generate and prepare the financial statements, while others involved in the business need to understand just how to interpret them. Particularly, finance managers need to have a working understanding of the financial statements and what they expose to be reliable. Spreadsheets offer finance managers a powerful and reputable tool to conduct financial analysis, as well as several different sorts of spreadsheet models are given with the text. These models demonstrate how financial principles are applied in practice. Viewers are encouraged to utilize these models to obtain further insights right into various concepts and also treatments.