Early Business Development

The first leg (этап, часть пути) of our journey takes us to the first dynasty of Babylonia (2285-2242 BC), a rich farming area located between the Tigris and Euphrates rivers in what is now the country of Iraq. Babylonia is ruled by the Code of Hammurabi, which requires that a merchant selling goods must give the buyer a sealed memorandum quoting prices, or the trade is not legally enforceable. However, there is one problem – most of the citizens of Babylonia are illiterate.

Assume you are a merchant in Babylonia. How will you conduct business? You are operating as a sole proprietorship, that is, a business owned by one person, and your personal belongings are at risk if your business fails. You also are operating as a merchandising company, that is, a company that obtains and distributes goods to consumers, so you must find a supplier of and a buyer for your goods. Since the chances are very good that all of you are illiterate, how will you record your business transactions?

First, you must find a scribe who is probably sitting outside the city gates. Next, you explain to him your agreed-upon transaction and he records it in a small mound of clay (глина). Then, since neither you nor your buyer can read or write, you affix your signatures to the agreement by impressing your signature amulet on the clay document. This holds both parties accountable for the transaction.

The clay record is allowed to dry in the sun, or, if the transaction must be carried out quickly, the records can be kiln-dried (высушивать в печи). Obviously, the scribe's integrity is crucial. This scribe is the predecessor to the 20^th century accountant.

Venture Trading

The next stop on our journey is the trading centers of medieval Italy, which developed partly as a result of the Crusades from the 11^th to the 13^th centuries. Literacy is more widespread, Arabic numerals are beginning to be used, an international banking system exists, and the use of credit is prevalent. Banks are also business enterprises operating as service firms, which exist to provide services such as loaning money and performing other services for their customers.

At this time, it is commonplace for a partnership to be formed for a single venture. A partnership is a business owned by two or more individuals who agree to share both the risks and rewards of the business. How would you conduct business in such an environment? First you must find a partner. Then, each of you would contribute goods to be traded with others in foreign countries. Note that your personal belongings are still at risk if the business fails, but now you share this risk with one or more additional individuals.

Next, you hire an agent to ship the goods to the foreign land. When the ship returns from trading, it is loaded with goods of the foreign land, which you and your partner divide between yourselves. How do you determine the proper allocation of the goods acquired? You need a partnership agreement, which stipulates (оговаривать) the rights and obligations of each partner and describes how to divide the goods (partnership profits).

Then, your accounting system provides the information to help you determine your individual share of the goods received by the partnership. The accounting system also reflects the information to hold the trading agent accountable for making a profitable trade. However, your accounting records do not distinguish between business and personal affairs, so at the end of each individual trading venture, it is necessary to terminate (прекращать, завершать) the business and divide the goods between the partners.

Growth of Commerce

Gradually, such one-venture partnerships gave way to business organized with the idea of continuing for more than one venture. In addition, businesses grew in size and became more geographically dispersed as the population became more mobile. At that time accounting systems were required to (1) measure each partner's share of the ongoing business and (2) control business in remote locations.

At this point, we begin to see the development of two very important accounting concepts (theories): (1) the business entity concept and (2) the going concern concept. The business entity concept requires that an accounting system reflects information that identifies and summarizes only those economic events that pertain to a particular entity. That is, business and personal affairs should be kept separate. This concept is particularly important so that each partner can receive the correct share of the business's profit.

The going concern concept assumes that, absent any information to the contrary, the business will continue into the foreseeable future. That is, the business does not terminate at the end of a venture. This concept is important because it allows business records to continue from one venture and time period to another.

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