Zhang Chengliang / China Daily

Double-entry bookkeeping (DEB) is the definitive badge of commercial accounting throughout the modern world. Some historians have claimed that it was an essential ingredient in the success of Western capitalism. It was "imported" to China from the West through the opening of the concessions in the treaty ports, begun by the Treaty of Nanjing in 1842 following the first Opium War. However, the recent rapid economic growth of China has reopened historical debate about the extent to which its economy had prospered during the Ming (1368-1644) and Qing (1644-1911) dynasties.

It certainly developed a significant market structure on the base of its underlying agricultural bureaucratic feudalism. With my colleague Keith Hoskin,I have been investigating the claims made for an indigenous form of "Chinese double-entry bookkeeping" (CDEB), seen as having developed among bankers, merchants and proto-industrialists, and for its significance within such a market economy.

How far, and how long back in history, did the technological and economic divergence between the West and the East extend? The debate begun by Joseph Needham as to the mechanisms and direction of diffusion of inventions between East and West continues but has often proved to be dominated more by speculation than by reliable historical evidence. It is only fairly recently that questions have been asked about the possible roles of the historical accounting developments that were taking place.

Such questioning about China forms a valuable complement to the reawakening of a wider interest in the "macro-questions" of the roles of bookkeeping and accounting in the shaping of Western organizations and institutions: but our belief is that those questions have generally been posed about China without an adequate theoretical framework from which to explore the potential significance and power of accounting.

Our own view, in line with that of Basil Yamey of the London School of Economics, is that there is no direct and positive connection between the development of DEB in Italy, beginning in the late 13th century, and the development of Western capitalism. So we argue that caution should be exercised in drawing any analogous connection in the Chinese context between its economic success, now generally believed to have rivaled Europe's until the late 18th century, and the development of CDEB. More importantly, in asking whether CDEB was a home-grown equivalent to DEB we argue that a more fundamental understanding is needed concerning the similarities and differences between the knowledge worlds within which DEB and CDEB emerged.

Accounting represents both naming and counting of its objects, and mediates accountability relationships between different people or entities. But the West and the East have always had very different ways of writing words and numbers, and of laying out and organizing texts, and they developed differing kinds of accountability relationships within their respective societies.

In addition there were very different institutional arrangements for education and examination at the highest level (Western universities as compared with the traditional Chinese civil service examination that lasted until 1905 at nearly the end of imperial rule). How far did specific historical practices and ways of thinking and acting differ between each as a result?

The Chinese accounting history that has been reported in Western literature to date has generally followed a common pattern. Developments were piecemeal over several centuries, lacking the supporting structures of a respected and politically and socially powerful merchant class of the European kind; of the benefit of widely circulated printed treatises for instruction in DEB; and, later, of an organized accounting profession. What previous authors have generally claimed to be the indigenous development of CDEB, (the "Dragon-gate" system) originated from about the middle of the 17th century with a final refinement (the "Four Feet" system, also known as the "Heaven and Earth Matching" accounting system) coming in the mid-18th century.

This was about 250 years after the first appearance in Italy in 1494 of Luca Pacioli's printed description of DEB, and up to 450 years after the first Italian records believed to have been kept in full DEB. However, elements of "reciprocal-entry" in accounting for movements in customers' and suppliers' personal accounts and in accounts for various commodities (the "Three Feet" or "Lame" system) can be traced back to around the middle of the 15th century, much closer in time to the Italian and subsequent Western developments.

But the descriptions of CDEB given by previous authors in Western literature still leave many details unclear. Even in its most developed form (the "Heaven and Earth Matching" system) it remains unclear how far there was full integration and articulation of owners' equity and correspondingly a profit and loss account and balance sheet that were outputs of the system (as in DEB) rather than supplements to it. Moreover the accounting principles deployed for determining profits also appear to have remained confused and underdeveloped (although this was true in the West, too, until the rise of the joint stock company and the growth of external passive stock-exchange investment requiring annual financial reports on managers' stewardship and business performance).

Was CDEB a wholly indigenous development? The Ming and Qing dynasties together lasted over 500 years and, given there was some international trade (especially from Guangdong province via Guangzhou) and extensive internal trade (especially originating from the lower Yangtze region), Western accounting influences could perhaps have been spreading among merchants and bankers before the watershed of the Opium Wars in the 1840s. However, we concede that no such international influences have been positively identified.

Whatever the influences, the stage of development achieved by CDEB appears to contain only as much duality in processing transactions as is needed for the kinds of business being carried out. Bankers need to be able to record transfers in and out of customers' accounts, and traders buying or selling on credit similarly need to record the effect of purchases and sales, and then the offsetting payments and receipts in due course, in order to keep track of what they owe to suppliers or are owed by customers. Inventory movements in and out need similar dual tracking. But while CDEB clearly contains this level of "natural" or "functional" double-entry, as now understood it does not in any clear way go beyond this to the full integration and internal cross-referencing that characterizes Western DEB.

So how do we see CDEB's role in Chinese economic development? Insofar as the late-imperial Chinese economy had an active merchandise and banking sector, with links to international trade, the Chinese bookkeeping and accounting systems that were developed were clearly sufficient, if not to promote, at least not to inhibit the growth and success of that activity. This is consistent with Basil Yamey's skeptical view of the significance of DEB for capitalism's development in the West, where over the centuries DEB became so embedded an institution that ultimately (as is the situation today), it became almost impossible to imagine non-DEB commercial accounting.

So the ultimate acknowledgement in China of Western DEB as "superior" during the developments after 1850 (at least until the New China in 1949, and revived after 1978 when the reform and opening-up policy was implemented) may reflect as much changing power relations and the rhetoric of "modernization" as any inherent technical superiority of DEB.

We acknowledge that our understanding to date contains more questions than answers. Our major handicap has been the current lack of access by English-speaking researchers to original archives of Chinese accounting records to test the arguments developed in the existing research literature available in English and Chinese. But work now being done on recently discovered archives holds the promise of a much deeper understanding.

There is now an urgent need for collaborative research between Western and Chinese accounting scholars and historians to share and debate their understanding, insights and interpretations of what those archives may reveal and thereby bring more illumination to the arguments we have advanced here. At this stage one can only speculate on what a fuller understanding of these Chinese institutional traditions may imply for the nature and success of translation of the modern Western-based apparatus of international accounting and auditing standards for adoption in modern China's capital markets.

The author is a professor in the Department of Accounting, London School of Economics. The views do not necessarily reflect those of China Daily.