[OPE-L:3133] accounting notes

Michael Perelman (michael@ecst.csuchico.edu)
Wed, 25 Sep 1996 17:17:46 -0700 (PDT)

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Here are some of my notes on the history of accounting:
Chandler, Alfred D. Jr. 1977. The Visible Hand: The Managerial
Revolution in American Business (Cambridge, Ma.: The Belknap
134: "Railroad competition presented an entirely new business
phenomenon. Never before had a very small number of very large
enterprises competed for the same business. And never before had
competitors been saddled with such high fixed costs. In the
1880s fixed costs ... averaged two-thirds of total cost. The
relentless pressure of such costs quickly convinced railroad
managers that uncontrolled competition of through traffic would
be 'ruinous.' As long as a road had cars available to carry
freight, the temptation to attract traffic by reducing rates was
always there. Any rate that covered more than the variable costs
of transporting a shipment brought extra income. [A weak road
that succumbed to bankruptcy would have competitive advantage.]
It no longer had to pay the fixed charges on its debt. Since
American railroads were financed largely through bonds, these
charges were high. To both the railroad managers and investors,
the logic of such competition would be bankruptcy for all". Thus
they set up 'territorial strategy'. Alliances with connecting
roads cemented by purchasing securities in feeder lines.
Competing lines agreed to make excessive use of agents to drum up
business." [see reference Hadley below]
111: problems of capital accounting. Railroads distinguished
between operating account and construction account, but charging
operating expenses to construction accounts. This helped to
inflate stock. Once a railroad was built, construction account
was closed. Problem, how to account for depreciation. railroad
had higher o.c.c than factory and capital depreciated slower.
[Think about the economics of railroad literature; Lardner]
279: Well into the 20th Century, firms estimated their profits
by the difference between their receipts and their expenses. No
account of depreciation was taken. Capital goods were treated as
expenses at their time of purchase. see also pp. 421-2.
Chatfield, Michael. 1977. ”A History of Accounting Thought•
(Huntington, NY: Robert E. Krieger).
96: Vitruvius, the Roman writer on architecture estimated that
a masonry wall depreciated by 1/8 during each year of its life.
102: The eighteenth century attributed overhead costs to
unproductive labor, not engaged in transforming raw materials,
and thus did not add to the value of the finished products.
96: Before the Industrial Revolution, fixed assets were
relatively unimportant. British tax authorities did not allow
depreciation until 1878.
101: During the Industrial revolution cost accounting was
valued more for aiding in setting rational prices than in
controlling production.
94: Railroads were the first industrial enterprises to reflect
the whole range of asset valuation problems.
94: Most railroad capital goods -- stations, trains, rails had
long lives.
94: The usual approach was to relate depreciation to asset
maintenance, assuming that originally invested capital was
permanently maintained by expenditures for repairs and renewals.
Thus, fixed assets were never depreciated. Replacement and
repairs were charged as current expenses.
95: This approach made railroads attractive investments by
maximizing reported profits during the early years of the life
cycle, when they most needed capital.
94: During the boom of the 1840s, many railroads paid large
dividends out of capital, creating a windfall for short-term
speculators at the expense of long term investors and
speculators. In the wake of these scandals, some lines adopted
cost-based depreciation, but in many cases they abandoned it when
they found that depreciation provisions were inadequate to
replace fixed assets.
161: The first modern book on cost accounting was Captain Henry
Metcalfe's The Cost of Manufactures (1885). He ran the Army
95: Half the track mileage constructed in the US before 1900
was ultimately placed in receivership.
95: "Railroad asset valuation policies had two conflicting
purposes: to attract investors .... , while at the same time
accumulating funds to replace equipment."
125: After the Civil War, a rapidly industrializing economy
attracted large amounts of European (particularly British)
capital. Scots and English chartered accountants would visit the
US to check for fraud and the value of American properties for
clients that invested here.
126: They transplanted British accounting practices to the US.
96: Creditors wanted to be sure that capital was maintained
intact. Management needed a cash reserve for replacements.
Stockholders wanted accurate statements of the income available
for dividends.
97: Until the 20th century most American firms made no specific
provision for depreciation. Those which did typically wrote it
off directly.
164: Beginning around 1900, accountants began to pay serious
attention to the overhead element of cost.
233: Bankers were the most influential readers of account
books. Conservatism offered them security against inflated asset
136: Coster and his brother stole about $2.9 from McKesson &
238: After the 1929 stock market crash, investors realized that
market prices of a corporation depend more on its earning power
than on the value of its assets. Asset valuation became less
important than the calculation of expense conversions from the
balance sheet to the income statement.
Brief, Richard P. 1965. "Nineteenth Century Accounting Error."
Journal of Accounting Research, 3: 1 (Spring): pp. 12-31.
12: Max Weber. 1961. ”General Economic History• (NY: Collier
Books): p. 207 described how rational capitalist book keeping
practices were. Schumpeter. 1962. Capitalism, Socialism, and
Democracy, 3rd. ed. (Harper and Row): pp. 123-4 also described
accounting as a triumph of rationality.
14: " The oldest assumption on which accounting practices were
based implies that the value of fixed tangible assets remains
constant if they are maintained in working order."
15: "Under replacement accounting, all expenditures on
maintenance, repairs and renewals were charged directly to
expense. Expenditures on additions and betterments, i.e,,
capital expenditures, made with funds provided from the proceeds
of stock and bond issues were capitalized." "the recognition of
depreciation associated with the original plant is delayed until
those assets are replaced." "the distinction between
replacements and additions has a profound influence on profits."
16: If the asset is considered to be an addition, the influence
of depreciation is delayed.
16: Railway Times (Britain), 30 October 1841 warned, "some
companies, we rear, are running out their perishable stock,
therefore exhibiting an appearance of a low scale expenditure,
and a rate of dividend not warranted by the profit really made,
and thus leaving a succeeding set of proprietor to make up from
their income the replacing of the exhausted stock."
16: The ”Railway Journal• (US) in 1843 wrote: "Great errors
have been committed by overlooking the fact that the progress of
wear is rarely ascertained or at least appreciated until the rail
is destroyed.... There is not now to be found a single road
which has renewed its iron out of the proceeds of
17: Some US and British railroads began to practice some form
of depreciation accounting, but the practice died out.
17: Harold Pollins. 1956. "Aspects of Railway Accounting Before
1868." in A. C. Littleton and B.S. Yamey (eds.) Studies in the
History of Accounting (Homewood, Ill.: Richard D. Irwin, p. 349
says that depreciation accounting in the late forties "was a
reaction to the scandals of the mid-forties, as well as a desire
to keep dividends stable. That they did not last long was due to
the increase in traffic in the fifties and sixties, when
companies found their past allocations to depreciation were
Levenstein, Margaret. 1991. "The Use of Cost Measures: The Dow
Chemical Company, 1890-1914." in Peter Temin, ed. Inside the
Business Enterprise: Historical Perspectives on the Use of
Information (Chicago: University of Chicago Press): pp. 71-112.
78: "from 1892 to 1898, the design of the accounting system of
the Midland Chemical Company [forerunner of Dow Chemical] was
essentially mercantile .... [I]t was designed to keep track of
transactions with outsiders to the firm."
Johnson, H. Thomas. 1991. "Managing by Remote Control: Recent
Management Accounting Practice in Historical Perspective." in
Peter Temin, ed. Inside the Business Enterprise: Historical
Perspectives on the Use of Information (Chicago: University of
Chicago Press): pp. 41-66.
42: Until about 40 years ago firms used accounting information
to plan the extent and financing of the firm as whole. They used
non-accounting information, both financial and non-financial to
direct the work of individuals and production units.
42: The financial information consisted of cost and margin
information derived primarily from data about work processes.
43: The use of this information arose before World War I when
firms merged and companies internalized transactions. The firms
attempted to simulate market prices.
41: In the 1950s, firms began to use accounting information for
the latter two purposes. This is known as management accounting.
see Johnson and Robert S. Kaplan. 1987. Relevance Lost: The Rise
and Fall of Management Accounting (Boston: Harvard Business
School): pp. 140-2.
43: Before 1920, the people who own the firm tended to manage
it. They understood the business and its customers.
44: With the increasing importance of outside funding, firms
needed accounting information for their financial backers.
48: Before the 1920s, management information systems and
financial accounting systems could operate independently.
49: Wall, Joseph Frazier. 1970. Andrew Carnegie (NY: Oxford
University Press): p. 337 says that Carnegie was obsessed with
ways to decrease costs. But, p. 350 "Carnegie insisted ... that
he be provided with a quality product to sell, for he knew that
one adverse comment on his rails ... could offset a dozen
testimonials." Also, p. 348 "There was not a railroad president
or purchasing with whom he was not personally acquainted."
49: Alfred Sloan, chair of General Motors, "The chairman's job
is to control the purse strings, not guide the hands of the
50: He describes Lyman Mills. "The mill cost reports paid no
attention to so-called fixed costs. Consequently, the mill
manager had no incentive to produce output for output's sake."
51: Before 1920, Du Pont's plant managers had targets dealing
with operating costs, timeliness of deliveries, product quality,
plant safety, consumption of labor, power and materials. By
1925, they were being judged on the basis of returns on
54: A. H. Church, a contemporary of Frederick Taylor, advocated
including overhead costs for products produced by a firm.
55: Church's methods were to costly and were abandoned after
World War I.
55: Around 1914, hardware and metal-working companies began
costing for full product lines, which was easier than attributing
overhead costs to specific products.
55-6: Larger companies restructured into multidivisional
organizations with separate books for each division.
56: "Presumably, it was less costly in the 1920s to restructure
than it was to implement a Church-style costing system."
Johnson, H. Thomas and Robert S. Kaplan. 1987. Relevance Lost:
The Rise and Fall of Management Accounting (Cambridge: Harvard
Business School Press).
37: "The railroads did not account ... for the total amounts
invested in plant and equipment. The cost of equipment
originally put into service was kept on the balance sheet, with
all subsequent modifications or renewals charged to current
income. Only replacements of equipment were capitalized and then
only the excess of the new asset's value over the replaced
asset's original cost. Nor did the railroads record systematic
charges for depreciation."
Johnson, H. Thomas. 1981. "Towards a New Understanding of
Nineteenth-Century Cost Accounting." Accounting Review, 56: 3
(July): pp. 510-8.
511: Chatfield 1974, p. 101, "investing in fixed assets did not
seem very different from buying inventories."
515: Carnegie cut costs ruthlessly during recessions, putting
pressure on the competition. During expansions, he joined the
others in raising prices.
515: Chandler. Visible Hand, 267-8 says that Carnegie did not
take fixed costs into account.
515: Carnegie's method made sense if demand for his product
were infinite. [Wrong].
Pollard, Sidney. 1965. The Genesis of Modern Management
(Cambridge: Harvard University Press).
250: "the methods [of accounting] were copied to a large extent
from those of the bankers and merchants; in fact, just as more
and more capital was diverted from commerce to industry, so
industry, so the methods of commerce were applied to industry."
Lord, John. 1923. Capital and Steam-Power, 1750-1800 (London:
P.S. King).
"No manufacturer at the time had accounts that dealt with fixed

Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 916-898-5321 E-Mail michael@ecst.csuchico.edu