I have been reading a book recently on the history of the London Underground. It’s called Underground to Anywhere by Stephen Halliday and I actually bought it in the London Transport museum, on Covent Garden. Of course the tube is 150 years old this year, and you will find more about that here.
Reading the book I was quite surprised by how much accounting was in there. Two things stand out from the early days of the tube which related to accounting. First, the financing seemed to be quite precarious. As each line was built by private companies, private finance was raised. And when results proved less than expected, it seems quite a bit of creative re-financing went on. The author actually notes that without the somewhat suspect and complex financing, London’s Underground may not have grown to what it is today.
The second thing was the fares structure in the early days. Before lines were connected, the fares seemed to have been standard at say 2 pence. However, the author notes that the various companies started to raise and lower fares and certain times, or lower fares overall to increase passengers numbers and revenue- a classic cost, volume profit (CVP) scenario.
I recently have been lucky enough to study accounting records at a company over a period spanning from about 1870 to today. It was a truly great experience, and history is not really one of my favourite topics. But having seen accounting techniques that we still apply today develop over time, it really gave me an appreciation for where present day accounting came from. The other thing that struck me was the level of detailed communication that went on between the accountants and various other parts of the organisation in the past. At the particular archive I was working in, volumes of typed-out reports and many hand-written ledgers, memos and other reports provided a wonderful picture of accounting over more than a century. What really struck though was how bad we are today at leaving a similar trail of history. Most accounting information is now electronically stored, which may be a problem in itself for any future researchers of accounting history. But a bigger problem is more likely to be the dispersal of information across modern organisations. While the main accounting records may be stored in an electronic, but archivable format, there’s normally vast amounts of related information stored in emails, documents and spreadsheets all across a company. This may make it impossible for any future business/accounting historians to follow the story of accounting within organisations today. So if you are an accountant, future accountant or a manager, why not think about how centralised your important accounting information is. It not only makes sense that important information be available to all now (and thus centralised), but it also leaves a more complete picture for the business itself to look over historic records – and of course makes it easier for future story-tellers/researchers.
I read a piece in CIMA’s Insight e-zine last February, which mentioned a discussion on the CIMA website about cost accounting. It prompted me to remind myself (and you the reader) about the origins and sometimes forgotten simple basics of management accounting.
The history of cost accounting – which was the precursor to what we now broadly call management accounting – dates back to the Industrial Revolution on the 1700’s. As the steel, textile and pottery industries grew in England, economies of scale were realised. Around 1770, an economic depression occurred and many businesses failed. Those that survived were ones who had a handle on how much it cost to make their products.
The Wedgwood pottery firm is one often cited example of a successful firm of the time. At this time, firms like Wedgwood had no choice but to develop their own internal accounting systems as the accounting profession as such did not exist. Firms like Wedgwood used what were relatively advanced accounting techniques at that time, including cost control, overhead accounting, and standard costing. These techniques, although with shortcomings, helped firms to make decisions like dropping unprofitable products.
While any student, accountant or business owner might have a reasonable knowledge of these basic cost accounting techniques, I can’t help but think have some forgot the basics of cost accounting. Okay, I am writing this from an Irish perspective, but we are not the only economy where boom times seem to have led to a somewhat remiss attitude towards the basic ideas of cost accounting and cost control. Is it not interesting that firms like Wedgwood survived depressions (which were more frequent back then) by focusing on cost reporting? Of course, business nowadays is much more complex, but that doe snot mean we should forget the basics and keep costs under control. I cannot help but think about many Irish businesses who took on costs ways beyond their long term capability (e.g. high rents) who are now either struggling or gone out of business. Focusing on costs is not the only thing a businesses needs to do of course, but this very important task should not be forgotten about. So cost accounting is still very relevant in my opinion.
BBC Radio 4 are this week (Mar 8th, 2010) and next broadcasting a short history of the double entry system of accounting. Here’s a link. There are 10 episodes, each day Monday to Friday, at 15:45.