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The Concept of Profit in British Accounting, 1760–1900

Published online by Cambridge University Press:  11 June 2012

G. A. Lee
G. A. Lee
Affiliation:
Senior Lecturer in Accounting, University of Nottingham
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Abstract

Dr. Lee analyzes the process whereby the relatively unsophisticated accounting practices of the eighteenth century were transformed, by the end of the nineteenth, into something resembling the more regular and consistent methods of today. He concentrates primarily on net asset valuation and profit determination but also on the development of costing techniques.

Type
Research Article
Information
Business History Review , Volume 49 , Issue 1 , Spring 1975 , pp. 6 - 36
Copyright
Copyright © The President and Fellows of Harvard College 1975

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References

1 Yamey, B. S., Edey, H. C., and Thomson, H. W., Accounting in England and Scotland: 1543–1800 (London, 1963)Google Scholar.

2 Pollard, S., The Genesis of Modern Management (London, 1965)Google Scholar, Ch. 6, “Accounting and Management.” The author has seen some of the accounts of Earl Fitzwilliam's collieries on the Wentworth Woodhouse estates, still kept in charge and discharge form in the 1840s.

3 A modern accountant deals with “incomplete records” by constructing a schematic set of double entry accounts, with trading, and profit and loss, accounts and closing balance sheet; but this technique was not known in the eighteenth century. See (e.g.) Lee, G. A., Modern Financial Accounting (London, 1973)Google Scholar.

4 A notable example is the annual account of Thomas Cullum, draper, of London, for the year ended 30th December 1648, in which the amount “gayned by trade & stock this year to Dec. 30th 1648,” £2,708.10. 8d., appears to have been inserted as a balancing figure; the total estate at the end was £32,078.10. Od. Yamey, B. S., “Some Topics in the History of Financial Accounting in England 1500–1900,” in Baxter, W. T. and Davidson, S., Studies in Accounting Theory (2nd edition, London, 1962)Google Scholar.

5 Yamey, Edey, and Thomson, Accounting in England and Scotland; B. S. Yamey in Baxter and Davidson, Studies, with particular reference to the ledgers of Richard Du Cane (1736–1744), Peter Du Cane (1754–1758), and William Braund (1758–1774). The last, by debiting household expenses direct to capital account, makes some advance towards modern practice. See also Malcolm, Alexander, A Treatise of Book-keeping (London, 1731)Google Scholar; Mair, John, Book-keeping Methodiz'd (Edinburgh, 1736)Google Scholar; and Hamilton, Robert, An Introduction to Merchandise (Edinburgh, 1788)Google Scholar (extracts in Yamey, Edey, and Thomson, Accounting in England and Scotland).

6 Annual balancing seems to have been little known before the eighteenth century, and not common until near the end of it. Of nine sets of merchants' books examined by Professor Yamey (one of the sixteenth, five of the seventeenth, and three of the eighteenth century), only three are annually balanced — those of Sir Robert Clayton (1669–1680), Peter Du Cane (1754–1758), and William Braund (1758–1774), and the first has no separate profit and loss account. Again, despite the insistence of textbook writers on the importance of the trial balance, or the balance account, as a proof of the double entry, agreement was not always achieved. Out of eight ledgers reviewed by Yamey, four exhibit writing off of differences or “cooking” of figures. Yamey, B. S., “Accounting and the Rise of Capitalism: Further Notes on a Theme by Sombart,” Journal of Accounting Research, II (Autumn, 1964)Google Scholar.

7 Yamey, “Accounting and the Rise of Capitalism,” and works cited in note 5. Mair states that unsold goods are to be “valued at the prime Cost;” if the stock balance is a mixed one, different goods must be distinguished and valued “at their own Price.” Mair, , Book-keeping (2nd edition, Edinburgh, 1741)Google Scholar, in Yamey, Edey, and Thomson, Accounting in England and Scotland. Hamilton (1788) contends for current (buying) prices: “For the design of affixing any value is to point out the gain or loss; and the gain is in reality obtained as soon as the prices rise, or the loss suffered so soon as they fall.” Malcolm (1731) had already rejected this argument: “Yet it seems more reasonable to value them [the goods] as they cost you; for otherwise you bring in Gain or 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.” Cited in Yamey, in Baxter and Davidson, Studies.

8 See note 7; in particular, R. Hamilton.

9 Pollard, Genesis of Modern Management, Ch. 6, “Accounting and Management;” and Pollard, , “Capital Accounting in the Industrial Revolution,” Yorkshire Bulletin of Economic and Social Research, vol. 15 (November, 1963)CrossRefGoogle Scholar, reprinted in Chatfield, M., Contemporary Studies in the Evolution of Accounting Thought (Belmont, Cal., 1968)Google Scholar. This section of the paper leans heavily upon Professor Pollard's seminal work.

10 The only partnership books considered by Professor Yamey are those of Sir Robert Clayton and his partner Morris (1669–1680), and these are in several respects atypical — a single “general [capital] account” for both partners, no separate profit and loss account, and household expenses of both partners debited to the general account. See the sources cited in notes 5 and 6.

11 Pollard, Genesis of Modern Management.

12 See, for example, the accounts of Thomas Griggs, extending from 1736 to 1760. Burley, K. H., “Some Accounting Records of an Eighteenth-Century Clothier,” Accounting Research, IX (January, 1958)Google Scholar.

13 Dodson, J., The Accountant (London, 1750)Google Scholar; Thompson, W., The Accountant's Oracle (York, 1777)Google Scholar; Solomons, D., “The Historical Development of Costing,” in Solomons, , Studies in Costing (London, 1952)Google Scholar.

14 Pollard, Genesis of Modern Management; McKendrick, N., “Josiah Wedgwood and Cost Accounting in the Industrial Revolution,” Economic History Review, 2nd Series, XXIII (1970)Google Scholar.

15 Josiah Wedgwood, in 1772, worked out the total unit costs, under fourteen heads, of thirty-one different products, mostly vases. Dr. McKendrick is of the opinion that the knowledge thus gained enabled the firm to weather the severe economic depression that set in later that year. McKendrick, “Wedgwood and Cost Accounting.”

16 It has just been made known that, by 1810 or earlier, the Charlton Mills, Manchester, were operating a system of cost accounts (not estimates) for their cotton cleaning, carding, and spinning processes, fully integrated into the double entry bookkeeping, and showing the flow of work from process to process, and back to the warehouse as finished “twist.” Overheads (including depreciation at around 5 per cent per annum, and interest on capital employed at 5 per cent) were allocated to fourteen departments, which thus became “cost centres” — a concept scarcely heard of before 1900. Transfers of output from carding rooms to spinning rooms, and thence to the warehouse, were charged out at internal prices, and a profit or loss shown at each stage! The existence of so sophisticated a layout would previously have been thought impossible before about 1880, and one wonders how many other textile mills had anything similar at the period of the industrial revolution. Stone, Williard E., “An Early English Cotton Mill Cost Accounting System: Charlton Mills, 1810–1889,” Accounting and Business Research, No. 13 (Winter, 1973)Google Scholar.

17 Wedgwood was at first unable to reconcile his costings with the actual results for the year, and then found that sales had been dishonestly suppressed by his head clerk, whom he dismissed. After that there was tolerable agreement between estimates and outturn. McKendrick, “Wedgwood and Cost Accounting.”

18 Cronhelm, F. W., Double Entry by Single (London, 1818)Google Scholar; Solomons, “Historical Development.” Cronhelm, in his illustration of a woollen cloth manufacturer's books, shows accounts for raw wool, work in progress, and finished goods — but in quantities only; his merchandise account is as described.

19 Copious examples of all these practices are given in Pollard, Genesis of Modern Management.

20 Ibid. The spread of rates given therein is: building, 2½–10 per cent; steam engines, 2½–15 per cent; machinery, 5–33⅓ per cent. In cotton mills generally the rates were 10–33⅓ per cent (as reported by the Factories Inquiry Commission in 1833), on account of the rapid rate of obsolescence in textile machinery — another factor to complicate an already confused situation.

21 Ibid. The fund was soon completely swamped by new capital expenditure and went into debit, forcing the company to consider more rational accounting methods.

22 Higgins, J. P. P. and Pollard, S. (eds.), Aspects of Capital Investment in Great Britain 1750–1850 (London, 1971)Google Scholar.

23 Pollard, Genesis of Modern Management; McKendrick, “Wedgwood and Cost Accounting.”

24 Babbage, C., On the Economy of Machinery and Manufactures (London, 1832)Google Scholar; quoted in extenso in Solomons, “Historical Development.”

25 Jones, Haydn, “A Nineteenth Century Welsh Iron Company” (unpublished paper, University of Wales Institute of Science and Technology, written 1973)Google Scholar. Mr. Jones's permission to cite this paper is gratefully acknowledged.

26 Ibid.

27 Pollins, H., “Aspects of Railway Accounting Before 1868,” in Littleton, A. C. and Yamey, B. S., Studies in the History of Accounting (London, 1956)Google Scholar. The author is deeply indebted to Mr. Pollins for the main material in this part of the paper.

28 Ibid.

29 Ibid.

30 Ibid.

31 It is to be feared, however, that such methods lead to inflated carrying values in the earlier years, before the full effect of maintenance costs is felt, and that this error does not correct itself, once the fixed assets cease to expand rapidly. See Brief, R. P., “Nineteenth Century Accounting Error,” Journal of Accounting Research, III, (Spring, 1965)Google Scholar.

32 The Accountant, 25th August 1877; 5th October 1878; 14th November 1885; quoted in Brief, “Accounting Error.”

33 Regulation of Railways Act, 1868, First Schedule.

34 H. C. Edey and P. Panitpakdi, “British Company Accounting and the Law 1844–1900,” in Littleton and Yamey, Studies in the History of Accounting.

35 Joint Stock Companies Act, 1856, Table B, Arts. 64, 65, 69–84; quoted in Edey and Panitpakdi, “British Company Accounting.”

36 Edey and Panitpakdi, “British Company Accounting.”

37 21 Ch. D, 519.

38 (1887) 12 App. Cas. 409.

39 (1889) 41 Ch. D. 1.

40 [1894] 2 Ch. 239.

41 [1902] 1 Ch. 239.

42 B. S. Yamey, “The Case Law Relating to Company Dividends,” in Baxter and Davidson, Studies in Accounting Theory (2nd edition, 1962).

43 Stacey, N. A. H., English Accountancy 1800–1954 (London, 1954)Google Scholar.

44 Solomons, “Historical Development.”

45 Garcke, E. and Fells, J. M., Factory Accounts in Principle and Practice (London, 1887)Google Scholar.

46 Manufacturers were little concerned with the conventional formula, “cost or lower market price” (i.e. lower of cost or selling price, or lowest of cost, selling price, or current replacement cost), generally applied to merchants' inventories at the year-end. Its origins are obscure. It may have come into common use before 1870, but the conditions of the long depression must have greatly stimulated its adoption as a measure of prudence.

47 Solomons, “Historical Development;” Garner, S. Paul, Evolution of Cost Accounting to 1925 (University of Alabama, 1954)Google Scholar.

48 Matheson, E., The Depreciation of Factories, Mines and Industrial Undertakings, and their Valuation (London, 1884; 2nd edition, 1893)Google Scholar.

49 Finance Act, 1842; Customs and Inland Revenue Act, 1878 (cited in Matheson, Depreciation).

50 Thus, the Hull Street Tramways Co. (a parliamentary company), operating from 1875 to 1896 with a total capitalisation of over £100,000, put to “depreciation reserve” less than £4,000 all told — and that was eroded by losses before the company was forced into liquidation in 1889. The final price paid by Hull Corporation was £12,500, plus an unknown amount for the horses, cars, etc., from a contractor who ran the system until it was superseded by electric traction in 1899. The shareholders and the unsecured creditors recovered nothing, and the debenture-holders were not repaid in full. This was admittedly a hard case but, as to the minimal provision for capital consumption, probably quite typical. Lee, G. A., “The Tramways of Kingston upon Hull: A Study in Municipal Enterprise” (unpublished Ph.D. thesis, University of Sheffield, 1968)Google Scholar.

51 Dicksee, L. R., Auditing (London, 1892)Google Scholar.

52 Ibid.; see also Dicksee's, Depreciation, Reserves and Reserve Funds (London, 1903)Google Scholar. Kitchen, J., “Lawrence Dicksee, Depreciation, and the Double Account System,” in Edey, H. and Yamey, B. S., eds., Debits, Credits, Finance and Profits (London, 1974)Google Scholar.

53 Dicksee, Auditing.