How did Successive Stages of capitalism change the UK’s accounting and financial reporting processes?

How did Successive Stages of capitalism change the UK’s accounting and financial reporting processes?


According to Bryer, (1998a, 1998b) accounting is a practice whose social foundations are objective and systematic. Its history embraces the social upheavals in the commercial revolution of the sixteenth century and the British Industry Revolution (BIR) that followed. (Bryer, 2000) Financial reporting which is the externally communicated form of accounting has been moulded by successive developments in capitalism. The overall changes in it are relatively apparent since the BIR. (Arnold & McCartney, 2008) It should have a high priority on the research agenda of accounting historians to analysis the accounting for the transition to capitalism. Edwards’ ‘A History of Financial Accounting’ is argues that the most recent ‘leap forward’ in accounting, which states the ‘change in emphasis from record keeping to financial reporting’ with the transition to capitalism.

In this article, the accounting history will be brief stated at first. The stage in accounting development which main follows Edwards will be provided. After then the article discuss the definition, the transition from feudalism to capitalism and Double-entry booking which related firmly to the accounting. The relationship between accounting and Marx’s theory will be stated which focus on the transition to capitalism in England and has many debated. (Bryer, 2000). The next two main parts provide capitalist during the BIR and the two main industries: canal and railway industry. A conclusion will be given at the end of article.

The accounting history:

The history of the transition to capitalism is around the history of accounting. (Bryer, 2000) According to Parker (1984: 5) the accounting history is ‘The study of the evolution of accounting thought, practices and institutions in response to changes in the environment and the needs of society, and of the effect of this evolution on the environment’. There are three main theories contribute to the history of the transition to capitalism: Neo-classical economics in the tradition of Adam Smith; Marx’s theories; and Max Weber and Werner Sombart’s idea of calculative mentality. Sombart and Weber state accounting practice and capitalism is linked first. (Cohen 1981: XVIII) All explanations of the differences between past and current accounting provide a theory of the transition to modern capitalism. Traditional accounting historians usually mirror neo-classical economic explanations of the transition (Miller & Napier, 1991; Napier, 1998). The theme of the accounting history seeks to regard accounting as both a product and a producer of changing socio-economic realities (Miller, Hopper, & Laughlin, 1991). The modes of accounting have strong relationship with organizations and society. (Hopwood 1983: 287, 301) The organizational and social realities are integral parts to understand accounting.

The stages in accounting development:

The development of accounting is usually divided into four periods (Edwards 1989: 9): the pre-capitalist period, commercial capitalism, industrial capitalism and financial capitalism. However, Sombart (1930) divides three stages in the development of capitalism (early capitalism, full capitalism and late capitalism

Pre-capitalist period, 4000 BC–1000 AD.

The need for record keeping initially stemmed from the extensive trade which grew up around the Mesopotamian valleys in this period. The feature of this period is that wealth tended to accrue to the people who held political, religious or military power.

Commercial capitalism, 1000–1750.

Money was invested in stock-in-trade and, when sold for cash, the proceeds were used to acquire more stock is regarded as the core of this period. During this period of commercial capital little was invested in what may be broadly described as fixed assets or productive equipment, except perhaps in the shipping and mining industries. It foreshadowed the BIR of the eighteenth century. (Chatfield: 33)

Industrial capitalism, 1760-1830.

In this period the most important issue is the BIR. It was the use of machines and development of the factory system which marked the emergence of this stage. The industrialists have two accounting systems: single entry and double entry.

Financial capitalism, 1830 to date.

The emergence of this stage is dated from 1830 in which year the Liverpool and Manchester Railway was opened. Financial reporting procedures developed in a substantially unregulated economy and the management was free to choose the methods.

The definition of capitalism:

The word “capitalism” is first written by Louis Blanc in his ‘Organisation du Travail’ in 1850 to distinguish between capital and capitalism. (cited in Deschepper 1964: 153) Proudhon (cited in Braudel 1979: 276) provides a definition of capitalism which puts emphasis on certain ownership system: “Economic and social regime in which capital as a source of income does not generally belong to those who implement it in their own work”. Weber (1991: 297) provides another which refer to the condition for the existence as: “The most universal condition is, for all large lucrative businesses supplying our daily needs, the use of a rational capital account as standard”. In addition, as ‘profit assumes capital’ (Marx 1981: 1022), where we find capital is the basic of bourgeois society and profit is the accounting sign for capitalism. (Weber 1992: 17) It is believed that modern capitalism is dominated by individual capitalists (e.g. Dobb 1946: 18; Gerth & Mills 1948: 68; Hilton 1976: 145; Holton 1985: 66; Kriedte 1980: 9; Mandel 1981: 76; Steedman 1977: 16).

Modern capitalism begins when the English monopoly trading companies, and dates from the joint-stock companies when they change the systems of accounting. Capitalism has an important meaning: “in the capacity to think in the universe of figures and to transform these figures into a well-knit system of income and expenditure” (Sombart 1915: 125). All these are based on the accounting actions and the existence and development of capitalism is precondition for the concentration of monetary wealth as the capitalist mode of production presupposes production for trade (Marx 1981: 444). The another condition for its existence is precondition for our daily need are supplied by all large lucrative businesses and a rational capital account as standard is used (Weber 1991: 297). Scientific, mechanistic technology is widely applied in the full capitalism period (Sombart 1992: 25). The double-entry bookkeeping (DEB) employed to calculating the rate of return on capital is regard as the signature for the social character of capital (Bryer, 1993). Once DEB was completely developed, it became a necessary for the rational capitalism of the second period and established historical a milestones.

Accounting for feudalism and capitalism:

Accounting is to be viewed as a mechanism of accountability within particular social relations of production. The key to understanding the feudal mode of production is that peasants possessed their means of production in Marx’s viewed. In terms of accounting, the implications are clear: the feudal landlord and merchant, pursuing the direct appropriation of surplus labor, will keep income and expenditure accounts. On the other hand the capitalist, pursuing the rate-of-return on capital employed in production by extracting surplus value from the sale of commodities or services produced by wage labor, will keep balance sheets and profit and loss accounts (Bryer 2005: 28) Marx views capitalism as the outcome of the pursuit of monetary wealth within feudalism and appears after peasants became ‘‘free’’ wage workers and faced ‘‘free’’ capital (Marx 1973: 505). It shares same idea with Weber, who explains “rational organization of free labour” as a central factor of capitalism.

Harnessing the merchant’s rate-of-return mentality to the farmer’s mentality of exploiting labor in production gave us the capitalist mentality of pursuing the rate-of-return on capital employed. (Bryer 2005: 30) Driving the social, technological and organizational innovations that gathered pace in the “industrial revolution” of the late-eighteenth century was “the capitalist mentality and the social relations of production it idealized and imposed using factories, machines and accounts” (ibid.: 62). The different power relationships under feudalism and capitalism should be the obvious different forms of accountability according to Bryer (1994). Weber’s theory in the transition of capitalism is also the central idea in modern accounting. The appearance of capital accounting is for Weber a precondition of modern capitalism. Its techniques provide him with an objective representation of its economic ethic and its spirit. It is accepted that accounting could be a prime source of evidence of the calculative mentalities of sixteenth and seventeenth century businessmen (Holton 1985: 116). Accounting became the incarnation of rationality inch by inch, corresponding to the new source of legitimacy provided under high capitalism and is be viewed as a hallmark of modern capitalism. (Chiapello, 2007) The transition from feudalism to capitalism is made visible in accounting calculations.

Double-entry Bookkeeping:

In the eleventh century the single entry is the main original record keeping systems. The single entry were accidental used to prepare the charge and discharge based stewardship report broke down. Trading activity became more dynamic and the number of transactions increased at a rate of geometric progression with the development of the times. In addition, it is argued that unsystematic records limited the size of a business because, beyond a certain point of growth, increasing disorder caused owners to lose control of distant operations. Accounting innovation resulted in the creation of double entry bookkeeping (Sombart 1992: 21).

In 1494 brother Luca Pacioli published his treatise, considered “the first scientific system for DEB in which all previous empirical discoveries were theorized into a coherent, comprehensive representation” (ibid, p. 21) Development of DEB: “each entry is recorded in two accounts, as a debit in one, as a credit in the other. This is the fundamental principle of DEB. Through this system, an enterprise’s accounts are inextricably linked, tightly bound together like a bundle of sticks.” (ibid.: 20) Sombart declares that capitalism and DEB are indissociably interconnected and they are absolutely indissociable, their relationship to each other is that of form to content. (ibid.:23) Weber the distinctive spirit of modern capitalism only came to life by harnessing DEB to the rational organisation of labour in production for profit. He views DEB as a `technical’ precondition of capitalism. (Weber 1964: 195) Both Sombart (1916) and Max Weber share thought that the invention of DEB was essential to the birth of capitalism.

The specific advantages of double entry method are the greater care and correctness it demanded from clerical staff; the increased difficulty of falsifying the books to conceal fraud or theft, particularly where duties were divided among a number of personnel; and the arithmetic check provided by periodically balancing the books and extracting a trial balance. Little use was made of double entry as the basis for preparing financial statements, and surviving examples of profit calculations are few and far between. The operations of capital are inextricably linked between capitalism and one kind DEB practice. Another stage comes up to close the ledger accounts with the introduction of the capital account and a profit and loss account. This is the core of DEB which “can without a doubt be summed up in this objective: keeping track of every movement throughout the company’s capital cycle, quantifying it and recording it in writing” (Sombart 1992: 21). In Britain, the use of double entry became more and more extensive with the growth of trade during the seventeenth century (Edwards 1989:11). From this point the DEB system had already developed in a mature way in the early capitalism period. (Sombart 1992: 23)

Marx and Accounting:

It is impossible to write a history without mention a whole range of concepts linked with Marx’s thought though he had hardly ever mentioned accounting in all his works. (Foucault 1980: 53) Marx tried to define the particular characteristics of capitalism. The links would remain implicit and indistinct how the capital account as standard can require a wage-earning class if without Marx. Sombart and Weber relatively share the same idea with Marx when they describe the capitalist system, especially when they produce a criteria definition. Marx never or hardly mentions accounting, unlike Sombart or Weber, certainly knows more about the accounting practices of his time than other sociologists who were to follow him. The most important fact is that analysis and understanding of the accounting practices of the second half of the ninetieth century played a structuring role in Marx’s thought, which led to the concept of capitalism that was to serve as a basis for Sombart’s proposal on the relationship between capitalism and DEB. Highlighting the conceptual links between accounting and the concept of capitalism, as it originated almost directly from Marx’s theories, opens new horizons concerning the contribution of accounting concepts to the production of economic concepts.

Capitalist during the BIR:

Britain Industrial Revolution (BIR)

In Britain, the nascent capitalism began to come up between 1000 and 1300. The commercial revolution began with a flourish of socialized capital in exploration and privateering in the sixteenth century. It helps England dominate the world since the seventeenth century. Accounting is very popular by archival research into the history of management accounting during that period (e.g., Edwards, 1989; Edwards & Newell, 1991; Fleischman & Tyson, 1993; Fleischman & Parker, 1997). Britain experienced an industrial revolution between around 1760 to 1850 in common viewed (Ashton, 1948; Landes, 1969; Mathias, 1983). It is argued that some kind of ‘revolution’ occurred that changed the trajectory of world economic growth though probably did not achieve a particularly rapid increase in overall economic growth rates during that period (Crafts, 1976, 1985; McCloskey 1994: 243; Mokyr 1999: 2). Britain taught Europe and the world how the miracles of technological progress, free enterprise, and efficient management can break the shackles of poverty and want (Mokyr 1999: 127).

Depreciation accounting

The modern concept of profit maximization is regarded as the tractive force of capitalism (Pollard 1965: 236). The depreciation accounting was introduced by McConnel & Kennedy in 1811. The purpose of it is to hold management accountable for using up the fixed capital the capitalist control. Jones (1985: 159) finds evidence consistent with annual percentage depreciation in the records of the Stanley Smelting Company for 1788/89, and its use by Crawshay in the 1790s. Oldroyd (1996: 7-8) shows that when the Grand Allies collieries calculate the projected unit costs and profits in the early eighteenth century the unit profit was taken depreciation into account, as the capital costs of the mine were apportioned in proportion to output over its estimated useful life.

Fleischman and Parker state that depreciation in product cost and cost saving calculations was not very common until in 1800 the use of depreciation accounting (Edwards & Newell 1991: 52). According to them, most firms were conscious of depreciation (wear and tear) cost, though wear and tear was often amalgamated with interest on capital (1997: 87, 91). Other leading textile firms also used current costs and values in depreciating certain assets at certain times during the first half of the nineteenth century (Fleischman & Parker 1997: 92). On the other hand, Jones (1985: 158) research into early Welsh industrial accounts shows the uses of depreciation are nowhere. He also finds out wear and tear become more familiar as terms in accounting records in the early nineteenth century (Jones 1985: 165). From the 1850s the charge for wear and tear meant the cost of recovering irreparable use-values consumed in production (Bryer, 1991, 1993, 1998).

Standard costs and the integration of financial accounting and cost accounting

Full capitalist accountability arrives with integrated financial and management accounts based on standard costs that reach down to the shop floor. The arrival of several such systems from the 1790s to provide routine data for performance assessment and control, suggests the capitalist revolution was in full swing (Edwards & Newell 1991: 53). Later evidence of large BIR firms employing production and costing standards is abundant and it is after then very common operating (Fleischman & Parker 1997: 42).

The canal and railway industry and the evolution of financial capitalism:

The Canals

The canals were the first industry to utilize the mechanisms of “financial capitalism”. The construction of the canals during seventeenth century and eighteenth century increases the length of the inland navigation system in England and Wales. (Had?eld, 1981, p. 208) The canal companies lay the financial basis of future industrial development through issuing the sale of equity shares, bonds and debentures. Baskin and Miranti argue that the great economic expansion which changed corporate finance in fundamental ways starts in the last quarter of eighteenth century. (Baskin and Miranti 1997: 127; Bagwell and Lyth 2002: 12)

Arnold & McCartney (2008) address the theorizations part of the canal companies’ financial accounting practices response to the transition to financial capitalism. A particularly sophisticated DEB system was introduced by the Birmingham Canal. It involved a wide array of ledgers and registers and including a nominal ledger from which a trial balance was extracted and audited before each shareholders’ meeting (Broadbridge 1974: 126). In 1800, the Rochdale Canal’s made a “State of the Accounts” which consisted of two horizontal accounts and jointly headed “Stock” on the debit side and “Disbursements” on the credit. Kennet and Avon in 1817 provides a “General Account”, as an early example of the General Balance Sheet, although this seems to exaggerate the range of information it contains (Edwards 1985: 30). All of these operating statements in the canals provide the evidence of movement towards accruals-based accounting (Arnold & McCartney, 2008).

The Railways

In 1830, the Liverpool and Manchester Railway opened for business, in which year the ‘financial capitalism’ comes out (Arnold & McCartney, 2008). The railways are mainstay industry in nineteenth century economy. They are treated as most important place in accounts of the evolution of financial reporting (see also Bryer 1999: 687, 2000: 158). Railways company need for large quantities of capital investment, much of which was externally financed, was similar to canals. According to a study of the ten largest UK railway companies’ evolution of the financial reporting in the period from 1840 to 1855, there are some evidences of adjustments in the conceptual basis of the accounts (from cash to accruals), even though in a “gradual, piecemeal and inconsistent manner” (McCartney and Arnold 2002: 413). Edwards (1989) stress the railways act an important role in the transition to ‘financial capitalism’ and stand for the start of industry-wide ‘financial capitalism’.


This article offers the relationship between capitalism and UK’s accounting and financial reporting processes. As shown above, DEB acts an important role in the transition of the capitalism. DEB is the control and ideal synthesis of the process. It becomes the more necessary the more the process assumes a social scale and loses its purely individual character (cited in Miller 2000: 9). In view of the eminent position occupied by the concept of capitalism in both past and present intellectual and political debates and current analyses of economic modernity, the fascinating role played by accounting craft in the birth of this concept certainly merits attention.

Dick Edwards argues that financial reporting emerged with the transition from “industrial” to “financial capitalism” from an agency precept (cited in Arnold & McCartney 2008). Accounting did not develop into its present state in a straightforward and orderly fashion. Major changes have usually been achieved as the result of numerous pragmatic adjustments to new circumstance. Sometime the change in accounting does not necessarily mean progress. For instance, the financial reports published by companies in the 1920s became more secretive and obscure than had previously been the case. More recent events, computerization and rapid inflation also raise new problems for accountancy and the accountant. All of these push the accounting change its process.