In all these primitive methods there was no thought of making records permanent. At that time all rec ords were of a temporary nature to be thrown away after the transaction was completed. Yet these crude records, or "tallies" formed the basis of an accounting system and were the first evidence of any precau tionary measures in record keeping.
4. Development of more modern methods.—Dur ing the latter part of the fifteenth century the Venetian traders gave to the business world the forerunner of our present bookkeeping systems. In the next cen tury, accounting, so far as it related to the keeping of permanent records of monetary transactions, was es tablished as indispensable to the conduct of business and the adjustment of business relations.
Both accounting and auditing, however, have de veloped far beyond the concepts of former times. Perhaps an idea of what accounting is now may best be conveyed by a description of the purposes to be served by a modern accounting system and the chief divisions of the accounting field. While there are many specific purposes to be served by accounting most, if not all, of them are included in the following classes.
5. As an expression of financial condition.—From the standpoint of expressing the financial condition of a business an accounting system presehts the fol lowing facts: (1) it affords a convenient record from which to set forth the financial condition of an enter prise at a given time ; (2) it shows the distribution of ownership or interest in this wealth among the various classes of creditors and its legal proprietors ; (3) it indicates the relationship between the claims upon the enterprise for the payment of funds in the near future, and the available funds in hand or in sight with which to meet these claims; (4) it discloses all other fac tors relating to the stability of the enterprise and its financial soundness or unsoundness.
6. Ascertaining the profitableness of an enterprise. —Altho the fundamental motives of industrial ac tivity are found in the production and distribution of goods or services with which to satisfy wants, our modern industrial organization transacts a large part of its business for immediate profit or gain. A de tailed discussion of profits and their nature is given in Chapter II. For the present we need only re
member that profits constitute the reward for which business is carried on. The business man wishes to know whether he has been making or losing money during any period of time—a month or a year—and the amount, but he wants to know more than this. If he is furnishing more than one kind of ar ticle or service he is interested in finding out whether each branch of his business is profitable and the degree of profit which it shows.
7. Basis for judging the economies and efficiencies of operation.—Any factor of operation may be ef fectively or ineffectively utilized. The working time of laborers may be used to advantage or wasted. The same is true of materials and supplies. It fol lows that the more efficiently all these and other op erating factors are utilized the greater will be the rate of output of product or service, the less the cost per unit of product or service, and therefore the greater the opportunity for profit.
By devising service units, compiling operating costs accordingly and comparing unit costs in one period with unit costs in another, the managers can ascertain the trend of operating efficiency in each part of the business. By scientific investigation and the estab lishment of ideal efficiency standards and the detailed comparison of actual with standard unit costs, it is practicable to ascertain the exact location of operat ing inefficiencies and to measure them. Then the causes of such inefficiencies can be investigated and eliminated.
8. Establishment of personal responsibility and promotion of honesty among officials and employes.— The proprietor himself cannot care for all the funds, materials and other possessions of his business but must put them in the care of officers and employes. If opportunities offer, some of these trusted persons may yield to temptation and convert a part of the funds or the goods to their own use. The responsibility of each trusted employe must be fixed, and it must be made difficult for him to be dishonest without im mediate discovery, not merely for the protection of the proprietor, but equally for the protection of the employe.