Asset valuation, profit measurement and path dependence in Britain to 1800

Asset valuation, profit measurement and path dependence in Britain to 1800

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The British Accounting Review xxx (2014) 1e15

Contents lists available at ScienceDirect

The British Accounting Review journal homepage: www.elsevier.com/locate/bar

Asset valuation, profit measurement and path dependence in Britain to 1800 John Richard Edwards* Cardiff Business School, Colum Drive, Cardiff CF10 3EU, United Kingdom

a r t i c l e i n f o

a b s t r a c t

Article history: Received 1 August 2013 Received in revised form 3 April 2014 Accepted 15 October 2014 Available online xxx

The principal historical focus of this paper is the measurement procedures recommended for the use of merchants by accounting thinkers of the early modern period (1550e1800) and employed by them when constructing numerical illustrations intended to approximate the real world of commerce. A clear preference is shown for measurements based on historical cost both overall and when re-examined by author occupation and date of publication. The paper locates these findings within the broader development of accounting from the high Middle Ages through to 1800 to the extent that this is a feasible proposition given limitations of space and the current lack of knowledge about how accounting was actually done. The study draws on the notion of path dependence to help explain the demonstrated hegemony of historical cost through the ages. © 2014 Elsevier Ltd. All rights reserved.

Keywords: Accounting history Asset valuation Charge and discharge Double entry bookkeeping Path dependence

1. Introduction It is frequently asserted that accounting is as old as writing, but most discussion of accounting in Britain begins with the manorial and monastic estates of the thirteenth century (Oldroyd & Dobie, 2009). The charge and discharge-based system of accounting was devised around that time to enable the agent (e.g. the steward) to report to the principal (e.g. the lord of the manor). This is the origin of the term stewardship accounting which signifies, during this early period, a narrow version of accountability, namely to provide a check on the ability of the steward to render a complete and honest account of the resources entrusted to him. Unsurprisingly, the lord of the manor expected the steward to manage the estate efficiently as well as honestly, and there are numerous treatises on estate management testifying to this priority (Oldroyd & Dobie, 2009). Furthermore, there is evidence to show that a strictly cash-based system of charge and discharge accounting might be modified to achieve some of the attributes of accruals accounting, but such elaborations usually relate to later time periods (e.g. Baxter, 1980; Boyns & Edwards, 2013, chapter 4; Jones, 1991; King, 2010). More extensive claims have been made for the utility of record keeping as a consequence of the development of double entry bookkeeping (DEB). Yamey (1956, p. 7) identified the potential of DEB for providing a more comprehensive and orderly record of business transactions, for helping to confirm the accuracy and completeness of the ledger, and to facilitate the

* Tel.: þ44 (0)29 20 876658; fax: þ44 (0)29 20 874419. E-mail address: [email protected] http://dx.doi.org/10.1016/j.bar.2014.10.009 0890-8389/© 2014 Elsevier Ltd. All rights reserved.

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production of a periodic income statement and statement of financial position.1 Edwards, Dean, and Clarke (2009) have further shown that writers of treatises published in the early modern period (1550e1880) demonstrate the ability of DEB to generate relevant information to assess financial performance and position, and for decision making. 1.1. Scope, limitations, sources and structure One might imagine that the concern with decision usefulness during the early modern period would have resulted in a shift from cost to value as the recommended measurement basis for financial reports. Certainly this has happened in recent years as the focus on stewardship as the principal objective of financial reports published by joint-stock companies has been replaced by one of decision usefulness.2 A regulatory manifestation of this transition, in Britain, is that the Statement of principles for financial reporting (Accounting Standards Board, 1999, para. 6.6) recognises the following bases for valuing assets and liabilities as possible alternatives to cost: ‘entry value (replacement cost), exit value (net realisable value) or value in use (discounted present value of the cash flows expected from continuing use and ultimate sale by the present owner)’. The purpose of this paper is to improve our understanding of the history of asset valuation and profit measurement procedures by studying how accounting thinkers considered assets should be measured and reported during a period, 1550e1800, when the preparation of the income statement and the balance sheet was in its infancy.3 The accounting practices of merchants are the focus of this study and Mair (1736, p. 4) explains why their affairs dominated the literature4: Though this Method of Debitor and Creditor be of a very general Nature, and may be used to good Purpose in most kinds of Accompts; yet I propose to explain it here chiefly with a View to Merchant-Accompts; which as they are the most considerable in themselves, and therefore justly challenge our first Care, so they afford the greatest Variety of different Cases and Circumstances. This literature-based study also contributes to our understanding of accounting practice during the early modern period. It is not claimed that accounting theory, as exemplified by the early literature, can be equated with contemporary accounting practice. Nevertheless, the measurement procedures explained in the literature might be considered tolerable indicators of actual practice for two reasons. First, some writers and teachers claimed that they described existing business practice. Second, their students would have taken the accounting methods they had learnt with them into the work place. The findings from the study of DEB treatises are located within the broader development of measurement systems used in financial reports, based on formal systems of record-keeping,5 from the high Middle Ages through to 1800 to the extent that this is a feasible proposition given limitations of space and the current lack of knowledge about how accounting was actually done. In so doing, this study draws on the notion of path dependence to help explain the demonstrated hegemony of historical cost throughout this long time period. Research has been facilitated by the ready availability of early treatises in electronic form at Early English Books Online, Eighteenth Century Collections Online and Google Books.6 At the time of writing, electronic versions of 103 of the 126 bookkeeping texts identified in Edwards (2011) were available for study.7 Forty-one were excluded for a variety of different reasons,8 leaving 62 texts the subject of evaluation (Appendix 1). For the six authors with dual publications, the measurement procedures detailed and analysed in this paper were arrived at by combining relevant information from both treatises. The remainder of the paper is structured as follows. First, path dependence is introduced as a relevant theoretical lens for the purpose of explaining the history of asset valuation and profit measurement procedures up to 1800. Second, the main features of the periodic accounting reports which writers believed should be made available to merchants during the early modern period are described. The asset measurement procedures employed in early bookkeeping texts are next presented to elucidate the degree of support provided for identified alternatives and to discover whether the favoured methods can be

1 The terms commonly used to describe these statements in books published during the early modern period were profit and loss account and ‘balance’ or ‘ballance’, with the latter two terms sometimes linked with the words accompt or account. Other differences in terminology between today and the early modern period include the word ‘stock’ which was used to signify the balance on the capital account. Also, some terms which it is convenient to use here for ease of communication had no accounting significance during the period covered by this paper. For example, Parker (1994, p. 79) points out that the term ‘asset’ did not achieve accounting significance until the nineteenth century. 2 In his extensive study of the changing objectives of corporate reports Zeff (2013, p. 264) notes that, for much of the twentieth century, the purpose of stewardship reporting was to enable shareholders to assess ‘management's honesty in husbanding the enterprise resources’. During the twentieth century, in his estimation, the meaning was transformed into one of providing evidence of ‘management's efficiency in utilising’ shareholders' money and even, perhaps, towards providing a means for shareholders to assess whether management had earned a ‘suitable return’ on their investment. 3 Edwards et al. (2009), Yamey (1984) and Yamey et al., (1963) address the question of how early writers tackled measurement issues. None of these writings comprise a systematic study of the relevant literature. Nor do they reach the same conclusions that are presented here. 4 Occasionally texts on DEB focused on farming, where the activities undertaken gave rise to additional measurement issues, i.e. the creation of assets (crops and newborn livestock) and the transfer of assets between operating units (Edwards, in press). 5 Measurements of profits and capital prepared on an ad hoc basis, perhaps as the result of the proprietor carrying out an inventory of assets and liabilities, are outside the scope of this paper. 6 Available at: http://eebo.chadwyck.com/home; http://galenet.galegroup.com/servlet/ECCO?locID¼ucw_itc; http://books.google.com/. 7 In four cases later editions have been identified electronically for use in this paper: Clare, 1758, Dafforne, 1651, London, 1758 and Wise, 1757. 8 Fifteen because measurement issues were not addressed; eight were reworkings (under a new title) of previously published texts; 10 focused on farming operations, four on retailing, one each on domestic affairs and shipping, and one further text contains insufficient information to enable judgements to be made about the measurement procedures employed. No copy of Oldcastle (1543) survives.

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associated with date of publication or author occupation. Finally, the paper draws on the theoretical construct of path dependence to help explain the demonstrated hegemony of cost-based asset measurements from the high Middle Ages through to 1800. 2. Path dependence Sociological historians, following the lead of economic historians, ‘have suggested that many crucial social phenomena can be adequately explained only in terms of path dependence’ (Mahoney, 2000, p. 507). The idea of path dependence has been little applied to accounting despite arising out of studies of its ‘uncongenial twin’, economics (Boulding, 1977). It was during 1980s that the economic historian Paul A. David (1985, 1987) and the economist and technology thinker W. Brian Arthur (1988, 1989) published papers which supplied ‘the foundation of path dependency’ (Stack & Gartland, 2003, p. 487). Work began when David (1985) argued that inferior standards can persist simply because of the legacy they have built up. The QWERTY keyboard is presented as the classic manifestation of this phenomenon, representing a standard that was first to the market and, having become entrenched, was impossible to displace despite the creation of a superior alternative, namely the Dvorak Simplified Keyboard which had ‘long held most of the world's records for speed typing’ (David, 1985, p. 332). A common feature of the work of both David and Arthur was to question the efficiency assumptions of neo-classical economics. That is, they challenged the economists' assumption of rational choice between competing alternatives. As Liebowitz and Margolis (2000, p. 981) summed things up: ‘path dependence means that where we go next depends not only on where we are now, but also upon where we have been’. Or as Djelic (2008, p. 539.) puts it: ‘Contemporary behaviours are constrained and structured by the aggregation of past actions and decisions; innovation is “bounded”’. Choices about how to do this or that, made on the basis of transitory circumstances, can therefore persist long after those conditions no longer apply. In short, in the words of David (2001, p. 15) and others, ‘history matters’. David (1985, 1987) identifies three conditions which, together, lead to path dependence. First, the technical interrelatedness of a particular phenomenon which, in the case of QWERTY, could be found in the complementarity between keyboard layout and the training of typists. Second, the increasing returns (economies of scale) associated with the use of a product or technique due to the fact that ‘the more they are adopted, the more experience is gained with them, and the more they are improved’ (Arthur, 1989, p. 116), i.e. the value of a product or technique for each user rises as the total number of users increases. Third, the ‘quasi-irreversibility of investment’ (David, 1985, p. 334), which may be attributed to, for example, the durability of the investment in physical or human capital. A popular example here is the gauge of the railway track which has remained unchanged, not because the existing width between rails is technically perfect but because the life of the track exceeds that of the equipment that uses it. These conditions taken together lend persistence or stability to a specific path of outcomes, producing a ‘lock-in’ effect (Arthur, 1989; Liebowitz & Margolis, 1995) to a particular product or technique. This can itself be attributed to two interrelated perceptions. First, the cost of switching from the existing system to a potential alternative is considered prohibitive. Second, change is hindered by the existence of imperfect foresight,9 i.e. current users are unable to foresee a positive payoff, and this makes remedial action more difficult if not impossible. Consequently, many of the things that we do today are based on what appeared optimal or profit-maximising at some point in the past rather than on what might be the theoretically superior solution in the current conditions. The next section explains the form, content and purpose of a typical set of accounting reports recommended for use by the merchant of the early modern period. 3. Accounting reports during the early modern period Early writers did their best to present accounting systems which recorded and reported transactions that replicated realworld business situations. The format of treatises typically followed the approach employed by John Mellis (1588) which was, first, to supply a narrative explanation of the main books of account e memorial or waste book, journal and ledger e and, second, to work through one or more numerical examples which showed how the ‘theory’ might be applied in practice. Would-be merchants or clerks destined for the counting house, professional or public office, might receive instruction at teaching academies (Edwards, 2011) such as that run by John Cooke at the lower end of Charles-Street, St. James's Square, London. Cooke's treatise entitled The Compting-House Assistant (1764) is mainly devoted to two numerical illustrations focussing on the merchanting activities of Solomon Traffick. The accounting practices demonstrated in this didactic work, as in almost all others,10 involve closure within the ledger of what are today called nominal accounts to the ‘Profit and Loss’ account and real and personal accounts to the ‘Balance’ account (Figs. 1 and 2). Fig. 1 lists, first, a ‘Stock’ account which shows that Traffick's opening assets (‘Sundries’ detailed in the journal), debited separately to bespoke real and personal accounts, totalled £7450 15s 4d.11 Liabilities amounted to £692 12s 0d. The ‘Stock’

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It is acknowledged that imperfect foresight is a common condition. But not in Hamilton (1788a, p. 319) where the ‘Profit and Loss Sheet’ and ‘Balance Sheet’ are displayed as separate financial statements. The terms £ s d, often expressed as l s d, are the abbreviations for pounds (sterling), shillings and pence which was the pre-decimalisation (15 February 1971) currency in Britain. There were 12 pennies (‘old’ pence) in a shilling and 20 shillings in a pound. 10

11

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Fig. 1. ‘Stock’ account and ‘Profit and Loss’ account. Source: Cooke 1764, ledger B, p.1, ©The British Library Board, General Reference Collection DRT Digital Store 8504.aa.18.

account also reveals profits ‘gained by trade’ during the accounting period ended 18 October 1763 amounting to £2013 11s 7d, with the detailed build-up of that figure given in the ‘Profit and Loss’ account which reveals that the bulk of Traffick's increased capital arose from a legacy of £2000. The profit and loss account also shows that Traffick received agency commissions on sales, a gain on the disposal of some of his South-Sea Stock, and profits from the sale of various types of merchandise and from ‘Adventures’ that included a voyage ‘to Lisbon in company with Parsons and Lane’. Debits to the account comprise a loss after agreeing to a ‘Composition at 12s in the pound’ (Cooke, 1764, p. 99) with Paul Roberts, house expenses and the loss arising from an unsuccessful trading venture to Hamburg. The profit and loss account therefore brings together the results of Traffick's business activities together with other wealth increases and expenses deemed to have no future economic value. The ‘Balance’ account (Fig. 2) lists, as assets, cash, numerous types of merchandise, South-Sea Stock, investment in the Ship Neptune and various debts. Listed as creditors are amounts due to several individuals and the balance transferred from Traffick's Stock account ‘for the neat of my estate’. The next section describes and analyses the asset measurement procedures recommended by accounting thinkers during the period 1550e1800.

4. Asset measurement procedures Table 1 reveals that seven main classes of assets received attention in the treatises studied here, and that four distinctive measurement practices have been identified:  Cost, which sometimes included incidental charges (such as freight or carriage).  Market buying price or selling price.  Valuation, where the method of arriving at the figure often remained unstated. The precise rationale used to locate assets in this category is explained below.  ‘Arithmetical balance’, defined by Yamey, Edey, and Thomson (1963, p. 197) as where ‘the original cost [of the fixed asset] plus expenses less receipts is carried forward, with no entry to profit-and-loss account’. Please cite this article in press as: Edwards, J. R., Asset valuation, profit measurement and path dependence in Britain to 1800, The British Accounting Review (2014), http://dx.doi.org/10.1016/j.bar.2014.10.009

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Fig. 2. ‘Balance’ account. Source: Cooke 1764, ledger B, p. 30, ©The British Library Board, General Reference Collection DRT Digital Store 8504.aa.18.

Information about measurement procedures is often found, in early treatises, within both the narrative discussion and the numerical illustrations of accounting practice. Instruction on measurement practices, when addressed in the narration, increasingly took place under the heading ‘balancing the ledger’ (e.g. Cooke, 1764, p. xx) or equivalent terminology. It has often proved necessary to weigh up all the available textual evidence in the endeavour to reach a ‘justified’ (Napier, 2002, p. 136) conclusion concerning the favoured measurement procedure. For example, the numerical

Table 1 Measurement bases by asset class. Asset class e total authorsa

Measurement bases

Merchandise e 54

no % no % no % no % no % no % no % no %

Ships e 27 Voyages e 22 Estates and land - 10 Houses e 16 Household furnishings, movables and valuables e 17 Securities and annuities e 6 Total a

Cost

Market price

Valuation

Arithmetical balance

Total methods

51 82.3% 23 76.7% 22 84.6% 1 9.1% 12 63.2% 10 55.6% 4 57.1% 123 71.1%

10 16.1% 0 0.0% 4 15.4% 0 0.0% 0 0.0% 0 0.0% 3 42.9% 17 9.8%

1 1.6% 6 20.0% 0 0.0% 9 81.8% 4 21.1% 8 44.4% 0 0.0% 28 16.2%

0 0.0% 1 3.3% 0 0.0% 1 9.1% 3 15.8% 0 0.0% 0 0.0% 5 2.9%

62 100.0% 30 100.0% 26 100.0% 11 100.0% 19 100.0% 18 100.0% 7 100.0% 173 100.0%

Figures given are not necessarily the sum of numbers in each row as some authors recognise the use of multiple measurement bases.

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illustration which Dilworth provides clearly accounts for merchandise on the basis of historical cost despite the following advice given earlier in the text: ‘each Particular [asset] is Dr. to Stock [Account] for its respective Quantity and Value’ (Dilworth, 1777, JaneFeb ledger fo. 10, emphasis added). Similarly, Donn's fictitious merchant states, on a number of occasions, that ‘I value’ the asset, whereas cost price is clearly used for illustrative purposes (Donn, 1765, ledger fos 6e7). Thus, for these and some other authors, the term value appears to be used as a synonym for cost. Sometimes the information provided is insufficient to reach a ‘justified’ conclusion concerning how assets are measured. For example, Hamilton (1735, p. 13) states: Accounts of Estates, Houses and Ships, lies on the Debit Side, the first Cost, with Charges of Improvements, Reparations [repairs], Outriggs, &c. on the Credit … if not sold, it is Creditor by Balance for the Value, and then shut up with Profit and Loss for the Difference. For estates and ships, the inconsistency between ‘first Cost’ and ‘Value’ cannot be resolved by reference to the numerical examples contained in Hamilton's text, and these items do not, therefore, feature in Table 1. The remainder of this section reviews the measurement of particular categories of asset.

4.1. Merchandise The valuation of goods traded by merchants naturally receives most attention, with 54 out of 56 authors indicating the procedure(s) to be used. Overwhelming support (82.3%) is provided for historical cost, with 43 (79.6%)12 of the 56 authors recognising it as the only acceptable measurement basis. They include the author of the earliest surviving text, James Peele (1553), who, in a later work, refers to ‘Wares nowe remayninge valewed as the cost the first penie’ (Peele, 1569, n.p.). For many, the focus is on prime cost: ‘when only part of the Goods are sold … the goods must be Credited by Balance for those remaining at prime cost’ (Cooke, 1764, p. xx). The exclusion of incidental costs is explained as follows: ‘The other accompts, such as Charges of merchandize,13 House-expences, &c. as they are disbursements from which no return can be expected, are all balanced by Profit and Loss’ (Cooke, 1764, p. xx). Support for prime cost is by no means unanimous with Dodson (1750, p. v14) favouring full cost: ‘When Charges are paid on any particular Species of Goods; let the Account of those Goods be made Debtor; and the Account of Cash, Creditor. For those Charges are only an Addition to the Prime Cost.’ Advocates of historical cost sometimes explain their choice. Drummond (1718, p. 3) acknowledges the fact that ‘Some [merchants] in their Inventary value Goods as they do desire to sell them’ and continues: ‘but I know no Reason for this, but to make a Man appear rich by his Inventary, and, at balancing, his Gain appear little’. Clearly, Drummond does not favour recognition of ‘holding gains’15 and consequential diminished operating profits when realisation takes place. Eight authors consider both cost and market (buying or selling) price to be acceptable measurement bases. They include: Malcolm (1731, p. 89), who suggests that ‘you may value the Balances of Goods as they cost you, or according to the current Rates’; and Fisher (c. 1735, p. 211) who states that ‘if any [goods] remain Unsold, value them as they cost you, or according to the present Market Price, ready Money’.16 Hayes (1739, p. 79) implies the widespread use of market price when commenting that merchants value ‘Goods that they have by them at the Market Price they then go at, at the Time of their balancing; but some do not so’. If Hayes is right, common practice contrasted starkly with the measurement procedures recommended by most writers of bookkeeping treatises during the early modern period, but the likelihood is that it did not. Dodson (1750, p. v) recognises the effect on the proprietor's wealth where closing inventories are worth more than they cost: ‘Hence, altho’ the Goods be not actually sold, yet if their Value or Market-Price be increased, or diminished; Stock is likewise affected thereby. But Dodson's numerical illustration of inventory measurement procedures is based squarely on historical cost. Just two authors are unequivocal advocates of market price (Table 1). The ‘accomptant’ Hustcraft Stephens (1735, p. 63), on finding 20 pieces of linen unsold at the end of the year which ‘according to the current Price at present is worth 200l.’ then continues: ‘wherefore I place such Sum, together with 20 Pieces of Holland Linen on the Creditor side’ of the stock account. Robert Hamilton who, at the time of writing held the post of Professor of Philosophy in the Marischal College, Aberdeen, uses the words: ‘affix a moderate value to each article, according to the current prices at the time; such value as the owner would be willing at present to buy for’. He also explains why market buying price should be used:

12 This is less than Yamey's (1940, p. 337) assertion that: ‘At least nine-tenths of the writers before 1840 advocated the valuation of stocks at cost, or, as it was sometimes called, at “prime cost”’. However, if we add in the eight authors who considered both cost and market price to be acceptable measurement bases, the proportion becomes 94.4%. 13 Covering items such as: ‘postage of Letters, Custom, Freight, &c. also Warehouse-rent, Clerks wages, and the like’ (Cooke, 1764, p. vii). 14 For a practical application of full costing, see Collins (1653, n.p.; also: Hawkins, 1689, ledger fo. 18, raisins; Malcolm, 1718, ledger fo. 2, claret wine; Scruton, 1777, p. 12) where ‘Capers of Tholoon’ are reported at cost plus customs and other charges. 15 Edwards and Bell (1961) presented the first systematic treatment of replacement cost accounting, with recognition of holding gains now standard practice in, for example, International Accounting Standard 39, Financial instruments: recognition and measurement. 16 See also: Mather, 1737, p. 294; Postlethwayt, 1755, p. 214; Society of merchants, 1763, p. 92; Woolgar, 1766, p. 202; Anonymous 1800, p. 125.

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It is much more proper to value the goods on hand in conformity to the current prices, than at prime cost: For the design of affixing any value is to point out the gain or loss; and the gain is in reality obtained so soon as the prices rise, or the loss suffered as soon as they fall (Hamilton, 1788a, p. 285).

4.2. Ships It was common practice for merchants to invest in ships used to transport goods abroad, and their accounting treatment features prominently it the dataset (Table 1). Malcolm (1718, p. 148) draws attention to the fact that such vessels could be rented out to produce ‘freight’ revenue that might be transferred from the ship account to the profit and loss account after deducting associated costs and charges. Alternatively, merchants might ‘trade in her’, i.e. undertake a voyage in their own vessel. In such a case Malcolm (1718, p. 148) explains how, presumably for performance assessment purposes, the merchant could split the overall profit from ship ownership between the opportunity cost of using rather than renting, on the one hand, and the profit or loss on merchandise sold, on the other: ‘you may … charge the Freight upon your own Goods, as you would take from others, to keep the Accompt of your Merchandize and its Product, distinct from that of your Ship’. The authors of twenty-three texts recognise, as acceptable, cost-based measurement practices, while six acknowledge the possible use of some kind of valuation procedure to measure the closing balance on the ship account. These comprise, respectively, 76.7% and 20% of the 30 measurement bases (Table 1) that feature in the 27 texts which deal with ship valuation. Examples of the valuation approach include Monteage (1675, ledger fo. 9) whose ⅛th share17 in Ship Bonadventure is stated at £250 at the beginning of the year, whereas the year-end balance is annotated as follows: ‘I value my part e £225’. Crosby's fictitious merchant John Thompson initially held a ⅛th share in Ship Success but later purchased a further ⅛th share to give a ¼ share at the year-end. Ship Success is stated at the same figure at the end of the year as at the beginning, with the merchant lamenting: ‘for ¼ part now worth but’ £190 (Crosby, 1749, ledger fo. 20).18 For Booth (1789, p. 164): ‘In transferring the loss or gain on ships, for instance, it is sufficient to leave a balance equal to their present estimated value, and whatever surplus appears on either side of the account, should then be transferred to Profit and Loss’. As with many of the other assets entered in the ‘Valuation’ column of Table 1 (see further comment below), the way in which the figure is computed remains unstated. The most likely candidates are estimated market selling price or current replacement cost, but the present value of future cash flows (see recommended valuation methods for estates and land below) is a possibility that cannot be ruled out. Two authors recognised multiple measurement bases. Mair (1736, p. 79) considers it appropriate to state ships at ‘what they cost at first, or are valued at’, though his merchant's ¼ share in Ship Britannia is measured at cost. Focussing on ships and houses, Malcolm acknowledges the use of three different period-end accounting treatments: cost, valuation and arithmetical balance. Comparing their merits, he concludes: ‘but the first Method I think the best’ (Malcolm, 1731, p. 90).

4.3. Voyages Where merchants transported goods to another country, authors recommend that the merchandising transactions be recorded in a separate voyage account. Of the 22 authors who focus on this measurement issue, 18 prescribe the use of historical cost. The issues involved, when balancing the ledger, are neatly summarised by Dowling (1765, pp. 33e34): The Debit shews the Cost and Charges of the Cargo, the Credit shews the neat Proceeds as by the Account of Sales. 1st, If the Account of Sales be not as yet come to Hand, credit the Account by Balance for the Amount of the Debtor Side. 2d, If the neat Proceed be ready entered, close the Account with Profit and Loss for the Gain or Loss. 3d, If it be a general Account of Voyages, 1st, credit the Account by Balance for the Cost and Charges of those Cargos of which you have had no Account of Sales, in as many Lines as there remain such Voyages, and 2d, close the Account with Profit and Loss for the Gain or Loss on the rest. Some authors comment on the treatment of the closing balance of merchandise assigned to a voyage when dealing with the measurement of merchandise in general, including one of four writers who consider it appropriate to value goods in transit at either cost or market price: When not all [goods or goods on voyages are] sold (as you may see by comparing the debtor and creditor-side of the ledger) Dr ballance to the said goods or voyage, for the quantity unsold, which value at the prime cost or market-price; and credit the said goods or voyage by ballance (Postlethwayt, 1755, p. 214).

17 18

It was quite usual to take a share (typically ¼, ½ or ⅛th) in a ship to spread risk among the partners in what were often hazardous ventures. See also Hamilton (1788a, p. 315; 1788b, pp. 210e211).

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4.4. Estates, land and houses In the case of estates, land and houses, there is far more evidence of the use of measurements other than cost, although this might be attributable to the fact that such assets were purchased some years prior to the introduction of a system of DEB with the consequence that a figure for historical cost was either unavailable or, being well out of date, considered unlikely to provide the merchant with ‘a fair Prospect of your Estate’ (Crosby, 1749, p. 2). Of the nine authors who base the initial record of estates and land on a ‘valuation’, seven specify a multiple of the rental commanded by such assets on the open market. In those cases, the valuations continue in use at subsequent year-ends, i.e. continuous revaluation did not take place. Drummond (1718, p. 3) offers the general rule that ‘Land-Estate’ should be valued ‘at the Number of Years purchase it is worth’. Practical application is given to this idea by James Scruton (1777, p. 16) whose ‘estate of Frankfield, renting yearly 220l. net, [was recognised] at 25 years purchase’, i.e., £5500 0s 0d.19 Hamilton (1788a), in contrast, believes that an estate, in his example the Providence Plantation, Barbados, should be revalued at the end of an accounting period because: ‘It is necessary to know the value of the plantation in its present state of improvement, in order to determine the gain or loss’ (Hamilton, 1788a, p. 410). Booth (1789) acknowledges the possible use of the ‘arithmetical balance’ to produce a year-end value, but the degree of support for this measurement basis remains uncertain. While the closing balance of an ‘Estate in Jamaica’ consists of the opening balance plus associated costs, less the proceeds from the sale of cotton, elsewhere Booth insists that estates should be measured at ‘present estimated value’ (Booth, 1789, p. 94, p. 164). Turning to houses: cost is a measurement method recommended or employed by ten of the 16 authors. Two others consider cost or valuation as acceptable alternatives, including Drummond (1718, pp. 2e3) who recommends ‘valuing them as they cost; or, according to the Estimate put on them’. An example of a conscious decision to substitute value for cost is found in Mellis (1588, ledger fo. 4), which states that the ‘dwelling house here in London, in saint Clementes lane, which cost me in readie money CCrrr.li. [£230] … which I doe there esteeme to be worth CClrrr.li. [£280] as in the said Inventorie’, but, as suggested above, this figure may have been created to enable a meaningful figure to be recorded in the books when embarking upon a system of DEB. Malcolm (1731, p. 90) acknowledges possible use of the arithmetical balance method, ‘which means the Value of the Thing will appear less and less at every balancing, till it's nothing’, but, as in the case of ships, considers it inferior to ‘first Cost’. Two other authors demonstrate use of the arithmetical balance method, including Carpenter (1632, pp. 118e119; see also Colinson, 1683, ledger A, fo. 4) who records a mansion house at cost plus ‘reparations’ (i.e. repairs), minus rent received.

4.5. Household furnishings, movables and valuables Identifying the precise accounting treatment of this class of asset proved particularly challenging, with classification issues resolved as follows. 1. Where an author places a valuation on this class of asset for the purpose of initial recognition, but reports subsequent purchases at cost in the period-end accounts, his work is allocated to the cost column of Table 1. The justification for this treatment is as follows: the accounting treatment of post-formation acquisitions shows that historical cost is the favoured measurement procedure, so one might reasonably conclude that an initial valuation is used either due to the absence of a figure for original cost or to provide a more meaningful asset value when installing a formal system of DEB. For example, Carpenter (1632, pp. 97e98, p. 112, p, 116) clearly places valuations on ‘household-stuff’ jewels and plate, presently owned when carrying out an inventory prior to opening the books. But none of these items are revalued at the end of the year to May 24, 1631, and purchases made during the year are accounted for at cost. 2. Authors located in the valuation column of Table 1 mainly find themselves there for either of two reasons. First, where figures included in the opening inventory, which are not identified as cost-based, remain unchanged at the end of the accounting period. Second, where a gifted asset requires financial recognition. An example of the former appears in Malcolm (1718, waste book, no. 1) where the opening balance of ‘Household-furniture is [stated] at present worth’. An illustration of the latter appears in Stephens (1735, pp. 81e82) where household goods accrue in the form of a legacy that requires valuation as a pre-requisite for asset recognition. Little attention is paid to the treatment of household assets in treatise narratives. An exception is Gordon (1765, vol. II, p. 52) who believes that household furniture and jewellery should be measured at ‘what they cost, or are valued at’. Turning to the numerical examples, cost again appears to be the measurement procedure most commonly adopted.

19 See also: London (1758, Part II, 16) who uses 22 years rental; Fitzgerald (1771, p. 72, 80), 21 years purchase; Monteage (1675, n.p.), 20 years purchase; Peele (1569, n.p.), 20 years purchase for freehold land.

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4.6. Securities and annuities Six authors tackle the accounting treatment of securities and annuities (Table 1). The economist,20 Malachy Postlethwayt (1755, p. 214), considers both cost and market price to be acceptable measurement procedures. Dilworth is a consistent supporter of historical cost accounting except in the case of annuities, with both the ‘Bank-Annuity’ and the ‘Old South-Sea Annuity’ recognised at market price resulting, in each case, in the ‘Abatement of its Price’ during the year being written off (Dilworth, 1777, MarcheDec ledger fos. 9e10).21 Three authors use only historical cost including Cooke (1764, JaneApril ledger fo. 10) who reflects on the role of accruals accounting in providing relevant information for decision making. The merchant Solomon Traffic had earlier paid compensation of £2 10s 0d for failure to exercise an opportunity to buy South Sea Stock. That amount is debited to a ‘Refusal of bargains account’. When the stock is eventually purchased, £2 10s 0d is transferred to the South Sea Stock Account and the treatment explained as follows: ‘by which method the goods will be charged with their whole cost’ so that the merchant will be ‘less liable to a mistake in the sale of them, and the gain or loss arising thereon appear in its proper place’ (waste book A JaneApril fo., 12, fo. 13). Cooke also points out that some would debit the initial bargain cost immediately to ‘profit and loss’, by which method, ‘tis plain, the goods are undercharged, and consequently liable to be undersold; nor will the true gain or loss, arising from the sale of them appear by the accompt’ (fo. 13). 4.7. Miscellaneous measurement issues It has been shown that a decline in the worth of a non-current asset is sometimes recognised through the use of the valuation basis of asset measurement where the new figure is lower than the old. Occasionally, explanations for accounting treatments that are akin to today's notions of impairment and systematic depreciation accounting may be found. Mellis' latesixteenth century treatise reports ten guineas written off ‘Implementes of housholde’ because ‘so much as I doe finde at this day to be consumed and worn’ (Mellis, 1588, ledger fo. 6). The corresponding entry in the profit and loss account is captioned: ‘so much lost by decay of household stuff’ (ledger fo. 15). Monteage (1675, n.p.) describes the accounting treatment of a lease as follows: ‘Lease of a Farm called Grange, in the County of &c, ... for which I paid 300l. Fine to take off 20l. per Year’. The yearend residual balance of £280 is described as ‘its present value’, with the thinking implicit in the systematic amortisation of the asset over its useful economic life expressed as follows: ‘In the Account of [opening] Stock this Lease was valued at 300l. but now a year being elaps'd, it is fit it should be valued at less’. The collectability of receivables attracts more attention. The accomptant Hustcraft Stephens gives the matter consideration when reflecting on how best to account for three debts that might ‘become dubious … either from the Persons themselves absconding, or otherways being incapacitated from paying their respective Debts’ (Stephens,1735, p. 37). This matters to Stephens (1735, p. 37) because: ‘it's plain, that in regard to the Manner of my Estates consisting, it differs from what it was before’. Stephens does not wish to lose track of the debts by removing them from the ledger as attempts to collect them continue. The solution is to transfer the amounts outstanding to a ledger account captioned ‘Desperate Debts’,22 so that ‘I am informed of the true Nature and Quality of the Debts’ (Stephens,1735, p. 38; see also Macghie,1718, p. 29). Hamilton (1788a, p. 334) similarly grasps the importance of appropriate disclosure so as to avoid misleading the merchant about how much he is worth. A merchant should be careful not to overvalue his [capital] stock; and therefore, when a debt becomes desperate, it should either be thrown out of the books altogether, or distinguished in such manner, that it may not mislead him in estimating the amount of his property.

4.8. In sum Historical cost is comfortably the favoured measurement method for most classes of asset displayed in Table 1. However, we have seen that some authors put forward arguments for the use of market price which, together with the often undefined ‘valuation’ label, reveal non-trivial support for reporting assets at estimations of current worth. For estates and land, a ‘valuation’ is recommended in 81.8% of the cases, though this proportion is almost certainly boosted by the need to construct a figure for initial recognition in a newly installed system of DEB. Unequivocal support is provided for stating securities and annuities (42.9% of the recommended treatments of these assets) and merchandise (16.1%) at market price. Given the problematic character of the ‘valuation’ category, recalculations which exclude that measurement basis show support for merchandise accounting on the historical cost basis increasing to 83.6% and for all asset categories it becomes 84.8%. If the authors who equivocate on the choice between cost and market price are also omitted, support for historical cost further rises, respectively, to 95.6% and 91.7%.

20 In the mid-eighteenth century the term economist might refer to an expert in managing (financial) resources within the domestic realm or, in the more modern sense, the production, distribution, consumption, and transfer of wealth (OED online, 2013). Postlethwayt (Groenewegen, 2004) fell into the latter category. 21 A treatment that is in line with today's International Accounting Standard 39 which requires financial assets held for trading to be recorded and reported ‘at fair value through profit and loss’. 22 London (1758, ledger fo. 15) recommends the caption ‘Debts bad and desperate’.

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Table 2 Asset measurement bases through time. Time period 1553e1683 (11 books) 1689e1735 (11 books) 1735e1758 (12 books) 1760e1774 (11 books) 1776e1800 (11 books) 1553e1800 (56 books)

no % no % no % no % no % no %

Cost

Market price

Valuation

Arithmetical balance

Total

24 72.7% 22 71.0% 31 68.9% 28 80.0% 18 62.1% 123 71.1%

0 0.0% 2 6.5% 8 17.8% 3 8.6% 4 13.8% 17 9.8%

7 21.2% 5 16.1% 6 13.3% 4 11.4% 6 20.7% 28 16.2%

2 6.1% 2 6.5% 0 0.0% 0 0.0% 1 3.4% 5 2.9%

33 100.0% 31 100.0% 45 100.0% 35 100.0% 29 100.0% 173 100.0%

The next section interrogates the database in the endeavour to elucidate patterns of measurement through time and by occupation.

5. Measurement bases through time and by occupation The 56 texts are divided into five roughly equal-sized groups arranged chronologically in Tables 2 and 3. The first subperiod of 130 years encompasses 11 treatises; the rate of publication then speeds up with 1760e1774 the shortest period to witness the publication of 11 new texts on DEB.23 As early as 1719, Webster (1719, Preface) comments: ‘Booksellers shelves are already loaded with Treatises on this Subject’. The eventual slow-down in the number of new books published towards the end of the eighteenth century might indicate that enough advice on merchant accounting was by then available as Britain rapidly became The first industrial nation (Mathias, 1969).24 Cost is the dominant measurement method in each of the five time periods (Table 2). In the first three of these, the proportion of treatises supporting the use of historical cost is around 70%, and this figure rises to 80% in the period 1760-1774. The final phase, covering the last quarter of the eighteenth century, shows a decline to 62.1%. Overall, historical cost accounts for 71.1% of the recommended measurement procedures. Among the four measurement bases used for the purpose of constructing Table 2, the greatest variation, over time, occurs in the support provided for market price; a measurement basis which first features in Alexander Malcolm's second book (Malcolm, 1731). Table 3 reveals historical cost to be even more dominant when attention is confined to merchandise. The first book to recognise a measurement approach other than historical cost is Monteage (1675), then there is then a gap which continues through to Malcolm's (1731) text. Those authors who recognise market price as a possible basis for valuing merchandise usually do so as an alternative to cost, and sometimes as the inferior option. Reflecting on the relative merits of the two measurement bases, Malcolm (1731, p. 89) offers the following opinion: Yet it seems more reasonable to value them as they cost you; for otherwise you bring in Gain and Loss into your Accounts, which has not yet actually happened, and may, perhaps, not happen; because you may not dispose of them at those Rates. Turning to measurement methods analysed by author occupation (Table 4), the vocations of the 56 authors were as follows: teacher, 26: accountant, 11; merchant, 7; gentleman, 4; economist, 1; rector, 1; unknown, 6.25 Each of these occupational groups offers substantial backing for the cost basis, but there is a great deal of variation in the level of their support. The ‘gentlemen’ favour cost-based accounting statements with the single exception of Carpenter's (1632) preference for reporting a mansion house using the arithmetical balance method. Merchants are most eclectic in terms of the favoured method of financial measurement and, given that they were the user group at which these treatises were principally directed, this finding perhaps best indicates the type of data judged useful for decision making purposes during the early modern period. Four of the 11 accountants26 and five of the 26 teachers support the possible use of market price, while the 31.3% weighting attached to market price by authors in the ‘other’ category is driven by the use of this method to report three types of asset by the economist Malachy Postlethwayt (1755). A focus on merchandise measurement by occupation (Table 5) reveals, as in the case of measurement over time, an even stronger emphasis on historical cost. All four gentlemen favour the

23

There will of course have been further editions of the numerous existing texts published in this, as in other, sub-periods. Certainly Sedger's first attempt to achieve publication failed because too many books were already on the market (Sedger, 1777, p. 2). 25 Authors describing themselves as accountant and businessman are classified as accountants, and those styling themselves as writing masters are included in the teacher category. 26 Stephens (1735) favours its use for the measurement of merchandise whether in stock or allocated to a voyage. 24

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Table 3 Merchandise measurement bases through time. Time period 1553e1683 (11 books)

no % no % no % no % no % no %

1689e1735 (11 books) 1735e1758 (12 books) 1760e1774 (11 books) 1776e1800 (11 books) 1553e1800 (56 books)

Cost

Market price

Valuation

Total

10 90.9% 10 83.3% 11 73.3% 11 84.6% 9 81.8% 51 82.3%

0 0.0% 2 16.7% 4 26.7% 2 15.4% 2 18.2% 10 16.1%

1 9.1% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 1 1.6%

11 100.0% 12 100.0% 15 100.0% 13 100.0% 11 100.0% 62 100.0%

Table 4 Asset measurement bases by occupation. Occupation Accountants (11) Gentlemen (4) Merchants (7) Teachers (26) Other (8) All (56)

no % no % no % no % no % no %

Cost

Market price

Valuation

Arithmetical balance

Total

25 73.5% 7 87.5% 18 60.0% 62 72.9% 11 68.8% 123 71.1%

5 14.7% 0 0.0% 2 6.7% 5 5.9% 5 31.3% 17 9.8%

4 11.8% 0 0.0% 8 26.7% 16 18.8% 0 0.0% 28 16.2%

0 0.0% 1 12.5% 2 6.7% 2 2.4% 0 0.0% 5 2.9%

34 100.0% 8 100.0% 30 100.0% 85 100.0% 16 100.0% 173 100.0%

Table 5 Merchandise measurement bases by occupation. Occupation Accountants (11) Gentlemen (4) Merchants (7) Teachers (26) Other (8) All (56)

no % no % no % no % no % no %

Cost

Market price

Valuation

Total

10 71.4% 4 100.0% 5 71.4% 24 92.3% 8 72.7% 51 82.3%

4 28.6% 0 0.0% 1 14.3% 2 7.7% 3 27.3% 10 16.1%

0 0.0% 0 0.0% 1 14.3% 0 0.0% 0 0.0% 1 1.6%

14 100.0% 4 100.0% 7 100.0% 26 100.0% 11 100.0% 62 100.0%

cost basis, but it is the large cadre of teachers that are mainly responsible for its hegemony. Twenty-three favour cost while Hamilton (1788a) supports market price and Malcolm (1731) judges either measurement method to be acceptable.27 The final section focuses, first, on new knowledge arising from the systematic study of texts on DEB and, second, argues that the notion of path dependence helps us to understanding why historical cost remained the dominant asset measurement procedure through to 1800. 6. Discussion and concluding remarks The purpose of this study is to improve our understanding of the history of asset valuation and profit measurement procedures. In terms of uncovering new knowledge, particular attention has been devoted to examining and analysing how accounting thinkers during the early modern period (1550e1800) believed these things should be done. Many writers saw it as the key issue which needed to be addressed when ‘balancing the ledger’, thereby enabling the preparation of a profit and

27

Nicholas (1711) does not tackle the measurement of merchandise.

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loss account and a balance sheet that yielded relevant information for purposes of performance assessment and decision making (Edwards et al., 2009; Yamey, 1956).28 Historical cost accounting was, overall, the measurement system of choice for most accounting thinkers who played a part in moulding ideas and practices between the sixteenth and eighteenth centuries. It was not unusual for authors to assert, robustly, the need to implement a particular measurement practice. Others adopted a more measured approach which caused them to acknowledge alternative procedures and, sometimes, to explain why a particular option was favoured. The evidence presented in this paper reveals at least a degree of support for the full range of measurement bases recognised in the Statement of principles for financial reporting (Accounting Standards Board, 1999). We therefore discern a degree of variety in accounting measurement throughout an era when the preparation of the profit and loss account and balance sheet was in its infancy and accounting choice was unconstrained either by regulation or the need to report objective and verifiable information to external stakeholders, which became priorities following the creation of the joint-stock company by registration under the Companies Act 1844. The findings presented in Sections 4 and 5 above add significantly to our knowledge of pre-1800 ideas about how accounting measurements should be made. The most comprehensive prior study of early accounting treatises was mounted by Yamey et al. (1963) who identified the use of three measurement bases: cost, valuation and the arithmetical balance. Those authors did not explore the variety in recommended valuation methods which this study shows to have included replacement cost, selling price and, in the case of estates and land, valuations based on expected future rental income. Nor was any attempt made by Yamey et al. to assess the relative popularity of the different measurement bases. In contrast, the current study reveals overwhelming support for historical cost accounting and negligible advocacy of the arithmetical balance approach. Another well-known study of early measurement practices in Britain was mounted by Brief (1966, p. 6, p. 7) who asserts that, except for companies (e.g. railways) employing the cost-oriented double account system, ‘Historically, the process of valuing assets was analogous to taking an inventory’ so that profit was defined as ‘the change in the “value” of net assets in two successive periods’. Georgiou and Jack (2011, p. 311), in their study of the history behind fair value accounting, draw on Brief's work to argue that the ‘episodic legitimacy’ of historical cost is confined to the period 1940e1970. However, Brief's assertion was not based on the examination of published financial reports. The principal authority offered for Brief's (1966, p. 7) claim concerning the currency of the ‘inventory method’29 is Littleton (1933, p. 225) who in turn quotes Mair (1757) as representative of eighteenth-century texts (Littleton, 1933, p. 224). So these assertions concerning practice possess a fairly limited foundation. Nor is it a sound foundation. Mair (1757, p. 84), as in his earlier text studied here (Mair, 1736), states that ‘Ships, Houses and other Possessions’ should be brought into the books at ‘what they cost at first, or are valued at’, but it is quite possible that a valuation is required only in the absence of a cost figure so as to enable those assets to be initially recognised in the accounts. Certainly, the numerical illustration that he supplies reports the merchant's share of the Ship Britannia at cost and, when turning his attention to merchandise, unambiguously insists that it should be stated at ‘prime Cost’ (e.g. Mair, 1736, p. 77). It is of course impossible to be sure whether writers were adopting a descriptive or normative stance when advising their audience how to do accounting. Certainly the majority of the authors had business backgrounds, and some of them explicitly claimed to describe existing practice. Reviewing the content of these early texts, Yamey (1940, p. 336) offers the following general assessment: Considering, however, the striking unanimity revealed by the textbooks, the fact that not a few writers were business men and that in some cases the examples illustrating the text were taken from practice it may be confidently assumed that if there was any divergence between teaching and practice, it lay more in the form than the substance. If these assessments are correct, we might infer that businesses operating a system of DEB during the early modern period would have been likely to measure assets principally at historical cost. If so, why was this the case? It is not argued here that the dominance of accounting based on cost, within formal systems of record keeping, is prima facie evidence of its utility for the purpose of fulfilling contemporary objectives of accounting. That is, a market forces explanation for accounting choice is not put forward. Indeed, given that the accounts were expected, at least by some of the authors, to fulfil performance assessment and decision making purposes, one might have expected that accounting values of one sort or another would have been preferred to historical cost. Here it is contended that a plausible explanation for the continued primacy of historical cost up to 1800 may be found in the notion of path dependence despite acknowledged differences of opinion concerning its precise nature and significance (see David, 2001). Scapens (2006; see also Mouck, 1995; Kanamori, 2009) is one of the few researchers who have applied the idea of path dependence to accounting, where his particular focus is on management accounting change. Scapens' (2006, p. 17) conclusion is that the concept undoubtedly possesses explanatory potential: Change is likely to be evolutionary, and path dependent, as the existing routines are likely to create inertia which can limit the possibilities for change. This leads us to the notion of lock-in … which … occurs when current actions are constrained by past actions.

28 The fact that DEB was often used to maintain a record of transactions, but not to enable the preparation of final accounts (Yamey, 1956), is acknowledged. 29 In this writer's estimation, the inventory method of profit measurement is more likely to have been employed by proprietors wishing to establish profit and financial position in the absence of a formal system of record keeping.

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The primary purpose of accounting qua bookkeeping in the period covered in this paper, as remains the case today, was to provide a reliable record of amounts owing and owed. When the system of charge and discharge was developed to create a record of accountability from the agent (e.g. steward) to the principal (e.g. lord of the manor), it typically comprised a summary of receipts and payments over an agreed period of time and in a format designed to reconcile and explain changes in the cash balance. It is generally agreed that DEB developed among the Italian City States in the thirteenth and fourteenth century, but it is not known how the new system was formulated. One plausible hypothesis is that it emerged by a process of adaption and innovation out of charge and discharge accounting (or some other system of single entry bookkeeping) which proved inadequate to meet expanding business requirements (Lee, 1976, pp. 6e13). One of the preconditions for the development of DEB identified by Littleton (1933, p. 12) is the existence of a credit economy. Once goods were supplied on credit it was important to maintain a careful record of the amounts involved. Such information enables an entity to keep track of its financial obligations and helps to ensure that the correct amount is paid when a liability falls due. Within the system of DEB, a record is retained of the amount paid, as a debit entry, after the creditor liability has been discharged. During the time DEB was developed and, indeed, for some time afterwards, the available evidence suggests that it was principally used to provide a record of amounts owing and owed and to enable the accuracy of the bookkeeping system to be monitored. Certainly there is no evidence that it was much used, initially, to prepare financial statements in the form of an income statement and a balance sheet. The development of double entry bookkeeping nevertheless extended the accounting record to include non-cash assets and liabilities and it enabled a distinction to be made between capital and revenue transactions when the practice of preparing an income statement and balance sheet did begin to emerge. Given the availability of figures for the cost of assets and liabilities, which may be seen as a ‘chance element’ within the nomenclature of path dependence (David, 1985, p. 132), it was convenient to use them for financial reporting purposes.30 As Puffert (2014) observes: The theory of path dependence assumes, generally, that people optimize on the basis of their own interests and the information at their disposal, but it highlights ways that earlier choices put constraints on later ones, channeling the sequence of economic outcomes along one possible path rather than another. In his pioneering paper on path dependence, David (1985, p. 336) concluded: ‘Outcomes of this kind (QWERTY) are not so exotic. For such things to happen seems only too possible in the presence of strong technical interrelatedness, scale economies, and irreversibilities due to learning and habituation’. It has been argued, above, that the technical interrelatedness between bookkeeping and accounting reports, within a formal system of record keeping, has been a powerful factor in ensuring that the initial record of transactions required for the former purpose, being readily available and capable of fulfilling the contemporary stewardship objectives of accounting reports, should also be used for the second purpose. On the issue of scale economies, as Mahoney (2000, p. 508) points out, ‘an institutional pattern e once adopted e delivers increasing benefits with its continued adoption, and thus over time it becomes more and more difficult to transform the pattern or select previously available options, even if these alternative options would have been more “efficient”’. This dynamic can become irreversible with, in the context of this study, record keepers who have developed their jurisdiction (Abbott, 1988) based on the operation of an historical-cost based measurement regime likely to resist changes which might damage the value of their specialist skills. A relatively modern parallel occurred when, in E. Kenneth Wright's31 estimation, ‘the great inflation debate [of the 1970s] collapsed e simply because the backwoodsmen got up and said “too fast, too far, too soon!” (in respect of the Exposure Draft 18 on “Current Cost Accounting”)’ (Mumford, 2007, p. 46). Once historical cost had become the conventional measurement practice, something fairly dramatic needed to happen to outweigh the costs associated with accounting change. On the demand side uncertainty or ignorance existed concerning the possible superiority for decision making purposes of alternative measurement procedures. On the supply side, the notion of path dependence helped ensure that accounting, as a technology, was locked into a measurement basis which was perfect for record keeping purposes, well understood by accounting functionaries, and which provided readily available and reliable figures for stewardship reporting purposes. But Arthur (1989, p. 127) warns: ‘Where we observe the predominance of one technology or one economic outcome over its competitors we should thus be cautious of any exercise that seeks the means by which the winner's innate “superiority” came to be translated into adoption’. Whether historical cost was the right choice throughout the period reviewed and whether it continued to be the right choice over much of the two centuries which followed are appropriate subjects for study.

Acknowledgements I am grateful to the anonymous referees, Peter Morgan, Christopher Nobes, Robert H. Parker and those attending presentations at the University of Exeter Business School (January 2012) and at the at the 35th EAA Annual Congress, Ljubljana, Slovenia (May 2012) for comments on earlier versions of this paper.

30 The situation is of course entirely different where no systematic record of assets and liabilities has been maintained. In such circumstances, readily available knowledge of value is likely to take the form of current market prices and these numbers are known to have been used. 31 Kenneth Wright was senior partner in Dearden Farrow (now part of BDO) (Mumford, 2007, p.29).

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Appendix 1. Treatises included in study of measurement practices (alphabetical order)

Author

Date

Publication

Anonymous

1747

Anonymous Booth, Benjamin Brodie, Alexander

1800 1789 1722

Browne, Thomas Browne, Thomas By a society of merchants and tradesmen Carpenter, John

1670 1680 1763

The universal library of trade and commerce; or, a general magazine for gentlemen, ladies, merchants, tradesmen … containing … the Italian method of book-keeping made plain and easy. London. The complete young man's companion. Manchester. A complete system of book-keeping, by an improved mode of double-entry. London. A new and easy method of book-keeping, or, instructions for a methodical keeping of merchants accompts, by way of debitor and creditor. London. The accurate-accomptant:, or, London-merchant: containing … merchants accompts. London. The infallible, most accurate, and most concise method of merchants accompts. London. The compleat compting-house companion. London.

Chamberlain, Robert Colinson, Robert

1679 1683

Collins, John Cooke, John

1653 1764

Crosby, Thomas Dafforne, Richard Dafforne, Richard Dilworth, Thomas

1749 1640 1651 1777

Dodson, James Donn, Benjamin Dowling, Daniel Drummond, John Fisher, George Fitzgerald, Edmund Gordon, William Hamilton, Robert Hamilton, Robert Hamilton, William Hatton, Edward Hawkins, John

1750 1765 1765 1718 c. 1735 1771 1765 1788a 1788b 1735 1695 1689

Hayes, Richard Hodson, Thomas

1739 1800

Hutton, Charles

1771

King, Thomas Lazonby, Thomas London, John Macghie, Alexander Mair, John

1717 1757 1758 1718 1736

Malcolm, Alexander

1718

Malcolm, Alexander Mather, William

1731 1737

Mellis, John Monteage, Stephen Nicholas, Abraham Peele, James

1588 1675 1711 1553

Peele, James Perry, William Petri, Nicolaus

1569 1774 1596

Postlethwayt, Malachy

1755

Quin, Matthew Roose, Richard

1776 1760

1632

A most excellent instruction for the exact and perfect keeping merchants bookes of accounts by way of debitor and creditor. London. The accomptants guide, or, Merchants book-keeper. London. Idea rationaria, or The perfect accomptant, necessary for all merchants and trafficquers; containing the true forme of book-keeping, according to the Italian methode. Edinburgh. An introduction to merchants accounts. London. The compting-house assistant; or, book-keeping made easy: being a complete treatise on merchants accompts, 2nd edn. London. The book-keeper's guide … containing … the Italian manner by a double entry into the ledger. London. The apprentices time-entertainer accomptantly. London. The merchants mirrour: or, directions for the perfect ordering and keeping of his accounts, 2nd edition. London. The young book-keeper's assistant: shewing him, in the most plain and easy manner, the Italian way of stating debtor and creditor, 7th edn. London. The accountant, or, the method of book-keeping, deduced from clear principles. London. The accountant and geometrician [containing] An essay on book-keeping by double entry. London. A compleat system of Italian book-keeping. London. The accomptant's pocket-companion. Edinburgh. The instructor: or, young man's best companion, containing … Also, merchants accompts. London. An epitome of the elements of Italian book-keeping. Whitehaven. The universal accountant and complete merchant, vol. II. Edinburgh. An introduction to merchandise [containing] book-keeping in various forms, 2nd edn. A short system of arithmetic and book-keeping. London. Book-keeping new modelled: or, a treatise on merchants accounts. London. The merchant's magazine, containing … book-keeping. London. Clavis commercii: or, the key of commerce. Containing an exact, and most concise method of merchants accompts, after the Italian manner. London. Modern book-keeping: or, the Italian method improved, 2nd edn. London. The accomplished tutor; or, complete system of liberal education: containing … stock-holding and merchantsaccompts. London. The school-master's guide: or, a complete system of practical arithmetic, and book-keeping, both by single and double entry, 3rd edn. Newcastle. An exact guide to book-keeping by way of debtor and creditor. London. Merchants accounts: or, the Italian method of book-keeping. York. A compleat system of book-keeping, after the Italian method, 3rd edn. London. The principles of book-keeping explain'd. Edinburgh. Book-keeping methodiz'd: or, a methodical treatise of merchant-accompts, according to the Italian form, 2nd edn. Edinburgh. A new treatise of arithmetick and book-keeping. Containing … the admirable method of accompts by debtor and creditor. Edinburgh. A treatise of book-keeping or merchants accounts. London. The young man's companion, containing … a short and easy method of shop and book-keeping, merchants-accompts, 15th edn. London. A briefe instruction and maner how to keepe bookes of accompts after the order of debitor and creditor. London. Debtor and creditor made easie. London. The young accomptant's debitor and creditor, 2nd edn. London. The maner and fourme how to kepe a perfecte reconyng after the order of the moste worthie and notable accompte, of debitour and creditour. London. The pathe waye to perfectnes, in th'accomptes of debitour, and creditour. London. The man of business, and gentleman's assistant: containing … book-keeping by single and double entry. Edinburgh. The pathway to knowledge conteyning … the order of keeping of a marchants booke, after the Italian manner. London. The universal dictionary of trade and commerce, translated from the French of the celebrated Monsieur Savary … with large additions and improvements, vol. 2. London. Quin's rudiments of book-keeping. London. An essay to make a compleat accomptant … containing … a treatise of book-keeping according to the true Italian method. London.

Please cite this article in press as: Edwards, J. R., Asset valuation, profit measurement and path dependence in Britain to 1800, The British Accounting Review (2014), http://dx.doi.org/10.1016/j.bar.2014.10.009

J.R. Edwards / The British Accounting Review xxx (2014) 1e15

15

(continued ) Author

Date

Publication

Scruton, James Sedger, John

1777 1777

Snell, Charles Snell, Charles Stephens, Hustcraft Stevenson, William Taylor, William Turner, Rev. Richard Webster, William Weston, William

1701 1709 1735 1762 1783 1794 1719 1754

Wicks, John Harris Willsford, Thomas Woolgar, William

1797 1660 1766

The practical counting house; or, calculation and accountantship. Glasgow. Sedger's rudiments of book-keeping; wherein the invention of applying and opposing the terms debtor and creditor, according to the Italian method, is explained. London. Merchants accompts, in the true Italian method. London. A guide to book-keepers according to the Italian manner: now in general use. London. Italian book-keeping, reduced into an art. London. Book-keeping by double entry. Edinburgh. A complete system of practical arithmetic with … book-keeping by single and double entry. Birmingham. A new introduction to book-keeping, after the Italian method by debtor and creditor, 3rd edn. London. An essay on book-keeping, according to the true Italian method of debtor and creditor, by double entry. London. The complete merchant's clerk: or, British and American compting-house … contains a system of book-keeping, according to the Italian form of debtor and creditor by double entry. London. Book-keeping reformed: or the method by double entry. London. The scales of commerce and trade [containing] merchants accounts by debitor and creditor. London. Youth's faithful monitor [containing] merchants accompts, or, the best method of book-keeping, 3rd edn. London.

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Please cite this article in press as: Edwards, J. R., Asset valuation, profit measurement and path dependence in Britain to 1800, The British Accounting Review (2014), http://dx.doi.org/10.1016/j.bar.2014.10.009