Lesson notes Lesson 1: Introduction to Accounting Learning Objectives 1. Understand the concepts of economic man and nature of firm from the perspective of economic man. 2. Appreciate the trust issue and the unique role of accounting in trust building and maintaining. 3. Comprehend the concept of Economic Darwinism and its implication and the selection of trusting mechanism. 4. Understand the origin and development of accounting discipline. Teaching Hours Students major in accounting 3 hours Other students 3 hours Teaching contents This lesson comprise of three major issues, that is, the nature of the firm(preliminary issue), value of accounting(core issue), and origins and evolution of accounting(core issue). It follows the logic array in the sections below: First, a question is raised: were there such positions as accountants at the Mountain Liang? Why did accounting exist even in the brotherhood of the Mountain Liang, where friendship and loyalty despised the material richness? There lies a problem of human nature, on which we base our discussion of the nature of the firm, introducing the trust issues relating to the efficiency of the firm’s operations. Then with the thoughts of Economic Darwinism, we explore the value of accounting, which is proved a lower-cost device of trust. Now that accounting is interwoven with human trust, the discussion on the origins and evolution of accounting becomes an easier task. The instructor may use the background knowledge of history, anthropology or even the novelty in Ming and Qing dynasties, illustrate the connection between the progress of accounting and that of technology and economy. In the course of this lesson, we adopt the concept of REMM, however, the instructor need pay extra attention to leading the students to a correct understanding of the Economic Man view, thus formulating a rational and wise view of life in a joint effort of civil ethical education, therefore integrating the personal value with social values, personal fate and social destinations. For instance, the nature of an Economic Man demands the maximization of personal interests, thus realizing this maximization by respecting the interests of other people and the society. No maximization of personal interests can be achieved without the premise that the interests of others and the society are first satisfied, which is illustrated in an old saying, “To give goes first than to take”. This view is also applied in the in-class discussions. Nature of the Firm Nature of Human Beings The opening question is why the society needs accounting? In the view of Economic Darwinism, if accounting can create value to the society, the society will need no accounting. What is the value of accounting? To convert an abstract issue into a concrete one, we ask this question, instead, in an alternative way, that is, were there such positions as accountants at the Mountain Liang, and why accounting was needed there? While lecturing, the instructor can adjust these questions according to his/her own reading, for instance, who was the accountant in the Jia’s Family and why did they need this role (adopted from the reading of the Dreams in the Red Mansions)? Of course, some discussion in this lesson might serve as a prelude to the later lectures on the internal controls, for example, why did accounting fail its functions both at the Mountain Liang and at the Red Mansions? Along with the discussion on why there were accounting positions at the Mountain Liang, we zero in on the nature of human beings, covering the topics such as the virtual or vicious origin of human life, the Maslow Pyramid, the Economic Men of Adam Smith. This discussion relies on the instructor’s scope of knowledge and interests. Since this lesson is based on the economic assumption of Economic Men, the concept is crucial. Some Chinese traditional thoughts might be mentioned to the students, such as the Confucius “内圣外王”, those prevalent social customs, bureaucratic institutions and ethical ideas illustrated in the novelty of Ming and Qing dynasties. The nature of the firm Accounting exists in all organizations represented by the enterprise, therefore, accounting education is oriented with business accounting. We demonstrate the forms of enterprises as a starting point. This section reviews for a while the firm theories, and it directs the attention of the students from the knowledge about the firm to knowledge about the members in the firm, by means of case discussion (such as Enron and Anderson. For further reference, please read Liu Feng, 2003，Nature of the Firm: a deconstruction theoretical analysis based on the failure of Anderson, Guangdong Finance and Accounting, vol. 3)， Value of Accounting Since a firm consists of human beings, who are in general economic men, they definitely demand a mechanism of trust. Otherwise, the firm can not survive, let alone grow. In the course of human progress, new ways and mechanisms for trust have been continuously explored. For instance, the early human society was control by mankind or organizations. In fact, under the feudalist emperorship, blood ties was one of the most important means of trust. The feudalist defending system also served as a device of trust. Of course, these means are not only expensive, but also unsuitable to the human needs. Thus they have been gradually abandoned. From the perspective of firm’s operations and economic functions, many ways have been invented and tested in the human history. For instance, mankind was used for control in the ancient trading business in Jing dynasty. (晋商票号). Mortgaged contracts prevailed in 1980’s. However, these systems are limited by the geographic locations (e.g. controlling by mankind), or by scales (e.g. large-scale firm demanding an extremely large amount of mortgage), therefore reducing their generality. Compared with these, accounting can express the firm’s operating activities in monetary terms, which facilitates the summarization and comparison. Thus it has been widely accepted as a relatively efficient way. Of course, we can prove its efficiency in other ways such as the Economic Darwinism. The essence of the Darwinism can be expressed as “survivors are the fittest”, or put it in other words, what can survive is relatively efficient. Nowadays, almost all organizations, profitable such as firms or non-profitable such as hospitals and schools, employ accountants, which proves accounting to be an efficient mechanism. In fact, as an old Chinese proverb says, “even the real brothers should have a clear-cut bookkeeping.” It is evident that a good bookkeeping is better way to maintain trust. Here is the unique value of accounting: a lower-cost and widely accepted mechanism of trust. Origins and Evolution of Accounting This section is designated to present a relatively integrated accounting view to the students by means of describing the origins and evolution of accounting. As accounting is a lower-cost device of trust, it can be traced back to the early stage of human civilization. It can easily figured out that, in early times, due to the low productivity, mankind had to select the most necessary things for sake of survival, and written civilization could not derive from the motivation of leisure and entertainments. The earliest written record of human civilization, such as recording with string ties and curving the woods, are all highly related to accounting. “Phoenician created alphabets for the only purpose of accounting”；”The earliest documents in the world are accounting records and dictionary, which is not occasional event. They made the Sumer a necessity. “. This section is rich in references, which can be selected in the discretion of the instructor. A.C.Littleton, a well-known accounting expert, published in 1933 book titled as the Evolution of Accounting Before the 20th Century. He points out that the double entry system was invented based on seven premises: the Art of Writing, bookkeeping is first a means of recording；the Arithmetic, the methodology of bookkeeping is composed of continuous simple calculations；the Private Property, bookkeeping only concerns the records of the facts relating to properties and rights to them；the Money, or the money economy, only when bookkeeping converts all properties and their exchanges into a uniform monetary unit, it takes the form of existence；the Credit, e.g. unsettled exchange, if all exchanges are settled on site, there is no need for recording them；the Commerce, the local exchange alone can not channel businesspeople minds into an integrated system；the capital, without it, business is always a small scale, no credits incurred (p.12). Italy exactly met all these conditions then. The double entry system was originated in Italy, with the Cross Crusade and the advance of financing industry. It is suggested that the book the Era of Marco Polo, the Cross Crusade, and the Mongolian Empire (contemporary with Guo Jing, the hero of the Stories of Heroes Defeating Eagles (Shediao Yingxiong Zhuan) be linked together, to ensure a better understanding. The evolution of accounting is closely linked to the prospects of the society and economy. Following Italy, the Netherlands became the strongest economic power in the world. The automatic balance mechanism of the double entry system was greatly improved. Then the Great Britain, with its industrial revolution and modern plants, first saw the appearance of cost accounting. Later, with the boom of capital market in the United States, the traditional bookkeeping evolved into financial accounting. Meanwhile, auditing became a separate discipline. The birth of management accounting was bred by the economic growth in the 1950’s of the 20th Century. In the U.S., due to complicated capital market and diversified financing resources, financial management stood out as an important subject. The media also reports that, before the Crises of Southeast Asia, the salaries and positions of CFO in Hong Kong were not remarkable at all, however, ever since then, they have been significantly promoted. It can serve as evidence that accounting is determined by the economic circumstances. So far, we have depicted a framework of accounting. Of course, the impacts of technological development on accounting should be mentioned as well. For instances, the wide use of computers enhances the accounting processing capacity, reduces the cost and satisfies more diversified needs of information; the internet realizes the real-time transmission of information, which will lead to a revolutionary influence on accounting. Additionally, this section is also related to the new trends in such disciplines as the accounting for changing prices and multinational enterprise accounting. Pedagogical Notes This is a great concern of most beginners. Our experiences tell us to offer a relaxing environment to the learners. For this reason, the first lesson rarely mentions special accounting terms. They are encouraged to read more, especially with a view related to their specialty. For instance, read those sociological works or novels of the Ming and Qing dynasties with varied perspectives of trust, control and accounting. Beginners might wonder what accountants should do in future. We quote some examples from the Stories of Heroes Defeating Eagles (Shediao Yingxiong Zhuan), to illustrate the close connection between the job responsibilities and the jobber’s capacity. The student is supposed to understand that in college time, the extensive scope of knowledge and ability will be of great importance to the future career development. Notes on Case Discussion The case is intended for two purposes: first, the student shall learn how to consult related materials and this ability is very crucial to future independent studies. Hints can be provided to the student, as to the way of utilizing the online resources. Second, students are required to judge the court verdicts from the value of accounting, thus encouraged to learn about laws, including the conventional and common laws, as well as the judiciary procedures. Key points 1. From economic man to a coalition of interest of economic man. 2. The relation between trust and human nature and its implication to core value of accounting. 3. The relation between economic development and accounting development. Reading material 1、Chancellor, Edward, Devil Take The Hindmost, A history of financial speculation, First Plume Printing, 2000. 2、Jensen, Michael C. and Meckling, William H., "The Nature of Man" . Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998, and Journal of Applied Corporate Finance, 1994 http://ssrn.com/abstract=5471 3、Littleton, A.C., Accounting Evolution to 1900, American Institute Publishing Co., New. York, NY, 1933. 4、Shiller, Robert, Irrational Exuberance, Broadway Books, NY, 2001.