Formerly, when credit was a considerably less important factor than now in commercial transactions, book-keeping was frequently limited to an account of receipts and payments of money; and in early times, before money was in use, to an account of the receipt and issue of goods of different kinds. Even now what may be called the “cash system” of accounts is almost exclusively used by governments, local authorities, and charitable and other institutions; but in business it is equally necessary to record movements of credit, as a mere statement of receipts and payments of money would show only a part of the total number of transactions undertaken. As for practical purposes some limit must be placed upon the daily record of transactions, certain classes show only a record of cash receipts and payments, which must, when it is desired to ascertain the actual position of affairs, be adjusted by bringing into account those transactions which have not yet been completed by the receipt or payment of money. For instance, it is usual to charge customers with goods sold to them at the date when the sale takes place, and to give them credit for the amount received in payment upon the date of receipt (thus completely recording every phase of the transaction as and when it occurs); but in connexion (say) with wages it is not usual to give each workman credit for the services rendered by him from day to day, but merely to charge up the amounts, when paid, to a wages account, which thus at any date only shows the amounts which have actually been paid, and takes no cognisance of the sums accruing due. When, therefore, it is desired to ascertain the actual expenditure upon wages for any given period, it is necessary to allow for the payments made during that period in respect of work previously performed, and to add the value of work performed during the current period which remains unpaid. In the majority of businesses those accounts which deal with various forms of standing expenses are thus dealt with, and in consequence the record, as it appears from day to day, is pro tanto incomplete. Another very important series of transactions which is not included in the ordinary day-to-day record is that representing the loss gradually accruing by reason of waste, or depreciation, of assets or general equipment of the business; proper allowance for these losses must of course be made whenever it is desired to ascertain the true position of affairs.

The origin of book-keeping is lost in obscurity, but recent researches would appear to show that some method of keeping accounts has existed from the remotest times. Babylonian records have been found dating back as far as History. 2600 B.C., written with a stylus on small slabs of clay, and it is of interest to note (Records of the Past, xi. 89) that these slabs or tablets “usually contain impressions from cylinder seals, and nail marks, which were considered to be a man’s natural seal,” thus showing that the modern method of identifying criminals by finger prints had its counterpart in Babylonia some 4500 years ago. Egyptian records were commonly written on papyrus, and contemporary pictures show a scribe keeping account of the quantities of grain brought into and removed from the government store-houses. It will thus be seen that some form of book-keeping existed long before bound books were known, and therefore the more general term accounting would seem to be preferable—the more so as the most modern developments are in the direction of again abandoning the bound book in favour of loose or easily detached sheets of paper or card, thus capable of being rearranged as circumstances or convenience may dictate. Most of the earlier accounting records are in the nature of a mere narrative of events, which—however complete in itself—failed to fulfil the second requirement of an adequate system of book-keeping already referred to. Prior to the use of money nothing in this direction could of course well be attempted; but for a long time after its employment became general money values were recorded in Roman figures, which naturally did not lend themselves to ready calculation.

At the present-time it may be generally stated that all book-keeping records are kept in three distinct columns, dealing respectively with the date of the transaction, its nature, and its money value. The earliest extant example of accounts so kept is probably a ledger in the Advocates’ library at Edinburgh, dated 1697, which, it is of interest to note, is ruled by hand. Prior to that time, however, double-entry book-keeping had been in general use. The exact date of its introduction is unknown; but it was certainly not, as has been frequently stated, the invention of Lucas de Bergo, in or about 1494. This, however, is the date of the first issue (at Venice) of a printed book entitled Everything about Arithmetic, Geometry and Proportion, by Luca Paciolo, which contains inter alia an explanation of book-keeping by double-entry as then understood; but in all probability, the system had then been in use for something like 200 years. It is perhaps unfortunate that from 1494 until comparatively recent times the literature of accounting has been provided by theorists and students, rather than by practical business men, and it may well be doubted, therefore, whether it accurately describes contemporary procedure. Another illusion which it is necessary to expose in the interests of truth is the value attached to Jones’s English System of Book-keeping by Single or Double Entry, published at Bristol in 1796. Before publishing this book, E.T. Jones issued a prospectus, stating that he had patented an entirely new and greatly improved system, and that subscribers (at a guinea a copy) would be entitled to a special licence empowering them to put the new invention into practice in their own book-keeping. With this bait he secured thousands of subscribers, but so far as can be gathered his system was entirely without merit, and it is chiefly of interest as indicating the value, even then, of advertising.

It is impossible here to describe fully all the improvements that have been made in methods of accounting during recent years, but it is proposed to deal with the more important Modern methods. of these improvements, after the general principles upon which all systems of book-keeping are based have been briefly described.

The centre of all book-keeping systems is the ledger, and it may be said that all other books are only kept as a matter of practical convenience— hence the name “subsidiary books” that is frequently applied thereto. Inasmuch, however, as the transactions are first recorded in these subsidiary books, and afterwards classified therefrom into the ledger, the names books of entry or books of first entry are often employed. Subsidiary books which do not form the basis of subsequent entries into the ledger, but are merely used for statistical purposes, are known as statistical or auxiliary books. In the early days of book-keeping the ledger comprised merely those accounts which it was thought desirable to keep accessible, and was not a complete record of all transactions. Thus in many instances records were only kept of transactions with other business houses, known as personal accounts. In the earliest examples transactions tending to reduce indebtedness were recorded in order of date, as they occurred underneath transactions recording the creation of the indebtedness; and the amount of the reduction was subtracted from the sum of the indebtedness up to that date. This method was found to be inconvenient, and the next step was to keep one account of the transactions recording the creation of indebtedness and another account (called the contra account) of those transactions reducing or extinguishing it. For convenience these two accounts were kept on opposite sides of the ledger, and thus was evolved the Dr. and Cr. account as at present in general use:—

Dr.A.B. Contra.Cr.
Date.Narrative.Amount.Date.Narrative.Amount.
£ s. d. £ s. d.

In this form of account all transactions creating indebtedness due from the person named therein to the business—that is to say, all benefits received by that person from the buisness—are recorded upon the left-hand, or Dr. side, and per contra all transactions representing benefits imparted by him, giving rise to a liability on the part of the business, are recorded upon the Cr. side. The account may run on indefinitely, but as a matter of convenience is usually ruled off each time all indebtedness is extinguished, and also at certain periodical intervals, so that the state of the account may then be readily apparent.

A mere collection of personal accounts is, however, obviously a very incomplete record of the transactions of any business, and does not suffice to enable a statement of its financial position to be prepared. So at an early date other Single-entry accounts. accounts were added to the ledger, recording the acquisition of and disposal of different classes of property, such accounts being generally known as real accounts. These accounts are kept upon the same principle as personal accounts, in that all expenditure upon the part of the business is recorded upon the Dr. side, and all receipts upon the Cr. side; the excess of the debit entries over the credit entries thus showing the value placed upon those assets that still remain the property of the business. With the aid of personal and real accounts properly written up to date, it is possible at any time to prepare a statement of assets and liabilities showing the financial position of a business, and the following is an example of such a statement, which shows also how the profit made by the business may be thus ascertained, assuming that the financial position at the commencement of the current financial period, and the movements of capital into and out of the business during the period, are capable of being ascertained.

State of Affairs as at 31st December 1906

   Liabilities. Assets.
Trade Creditors£4,961100Fixtures, Furniture, &c.£1,26943
Bills Payable2,620184Stock on hand5,751310
Balance, being excess of Trade Debtors3,84279
 assets over liabilities Bills Recievable7,468143
 (or “Capital”) at this Cash at Bank4,16955
 date carried down14,91874
£22,500156 £22,500156
Amount of Capital Balance brought down£14,91872
 on 1st Jan. 1906£15,01017
Balance, being net Amount drawn out of
 profit for the year  business during year
 ended this date1,40857 ended this date1,50000
£16,41872 £16,41872