Vahé Baladouni UNIVERSITY OF NEW ORLEANS
AN EARLY ATTEMPT AT BALANCE SHEET CLASSIFICATION AND FINANCIAL REPORTING
Abstract: A recent investigation into the archives of the English East India Company has produced the earliest known classified balance of accounts. Dated May 1, 1782, this statement predates the model balance sheet prescribed by the Companies Act of 1856 by some seventy-five years. This classified balance of accounts, together with extensive supplementary notes accompanying it, may be said to represent the earliest manifestation of financial reporting.
The history of the British balance sheet1 may be divided into two dominant periods: modern and premodern. What marks the beginning of the modern period is the model balance sheet prescribed by the Companies Act of 1856 [Edey and Panitpakdi, 1956]. This statutory model formally introduced the notion of balance sheet classification which has since served as a general guide in the preparation of the statement. In contrast to the modern period, the premodern period is characterized by an absence of balance sheet classification [Chatfield, pp. 68-72]. During this period, the balance sheet, known as balance of accounts, was prepared in unclassified form.
It simply listed the company’s assets and liabilities in account form and with no apparent order of succession. Included in the liabilities was the stockholders’ investment. The difference between the total assets and total liabilities was shown as a balancing figure “in
1For studies on the history of British corporate financial reporting, see R. H. Parker, ed., “Select Bibliography of Works on the History of Accounting, 1981-1987,” Accounting Historians Journal, Vol. 15, No. 2, Fall 1988; “Select Bibliography of Works on the History of Accounting, 1978-80” and “Select Bibliography of Works on the History of Accounting, 1969-1977,” in R. H. Parker, ed., Bibliographies for Accounting Historians (New York: Arno Press, 1980); the studies are listed under “P. Corporate Accounting.” See also: T. A. Lee and R. H. Parker, eds., The Evolution cf Corporate Financial Reporting (New York: Garland Publishing, Inc., 1984).
28 The Accounting Historians Journal, June 1990
favour of” or “against” the company. This period, which covers some three hundred years, extends from the second half of the sixteenth century to the middle of the nineteenth century.
Although the preparation of the balance of accounts in unclassified form was the general practice until the middle of the nineteenth century, a recent investigation into the archives of the English East India Company has produced a classified balance of accounts dated May 1, 1782. So far as it is known, this classified balance of accounts is the only extant statement from the premodern period. Published some seventy-five years before the introduction of the 1856 model balance sheet, this balance of accounts is part and parcel of an extensive audit report dealing with the East India Company’s financial condition. The significance of this document cannot be overemphasized when one bears in mind that, throughout this period, none of the English language accounting treatises dealt with the subject of classification.
In fact, the only accounting treatise that is known to have addressed this subject is that of the Dutch author, Simon Stevin, published some one hundred and seventy-five years earlier, in 1608. Writing of this work, Littleton notes that Stevin “presents models for financial statements which are more in harmony with modern practice than many of those subsequently used by others.” He then goes on to say: “It is interesting also to note that Stevin’s balance-sheet is in the form now followed in England and to speculate on the question of whether or not this Dutch author was the inspiration for the British practice” [Littleton, p. 134]. While the 1782 classified balance of accounts does not in any way challenge the existing view of the financial reporting practices of the period, it nevertheless pro-vides us with fresh insights into the history of the British balance sheet.
2For published examples of unclassified balance sheets, see: A. C. Littleton, Accounting Evolution to 1900 (New York: American Institute Publishing Co., Inc., 1933), pp. 138-9; 141-4; 146-7; W. R. Scott, The Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720 (Cambridge: University Press, 1912; Reprinted by Peter Smith, 1968), p. 175; K. N. Chaudhuri, The Trading World of Asia and the English East India Company, 1660-1760 (Cambridge: University Press, 1978), p. 424; Vahé Baladouni, “Financial Reporting in the Early Years of the East India Company,” Accounting Historians Journal, Vol. 13, No. 1, Spring 1986, p. 27. For unpublished examples of the East India Company’s unclassified balance sheets, see: India Office Records, Accountant General, L/AG/18/2/4 (1757-1778), L/AG/18/2/3 (1787-1793), L/AG/18/2/7 (1796-1810).
This paper is an attempt at (1) analyzing the classification scheme employed by the East India Company; (2) identifying the information generated by the classified statement as well as the supplementary notes, and (3) assessing the place of the said classified balance of accounts in the evolutionary development of the balance sheet. But, first, it may be helpful to look at the circumstances which led to the preparation of the classified balance of accounts.
WHAT PROMPTED THE PREPARATION OF THE CLASSIFIED BALANCE OF ACCOUNTS?
It all began at a Stockholders’ Meeting of the English East India Company (formally known as Untied Company of Mer-chants of England Trading to the East Indies) held in the Company offices in London on a Monday, April 8, 1782. During this meeting, the Board of Directors presented the Company’s balance of accounts dated March 1, 1782. This balance of accounts was not, however, well received. Serious questions about its credibility led the stockholders to move and resolve “that a Committee of Thirteen Proprietors be appointed to examine into the General State of the Debts, Credits and Effects both in England and abroad, and to report the same with all convenient speed to a General Court of Proprietors.” [IOR, Court Minutes, B97, pp. 728-9]. It was also moved and resolved that “the appointment of the said Thirteen Proprietors be put by the Ballot at this House on Tuesday the 16th Instant . . . and that the determination thereof be reported to the General Court the same Evening” [IOR, Court Minutes, B97, p.729]. In accordance with this resolution, the elections were held on the appointed day.
Some two months after the election, on June 5, 1780 [1782], the Committee issued a 46-page report on the financial condi-
3William Wilson, Esq., Chairman of the Scrutineers (the others being Warwick Roades and James Donaldson), brought in the Report which was read to those present. In part, the report said: “… we being . . . appointed to report upon whom the choice falls have accordingly examined the said [voting] Lists, and find that the Thirteen following persons have the Majority of Votes for their appointment as Members of the said Committee, viz. John Call, Lionel Darell, Jr., Henery Dodwell, Phillip Francis, Keane Fitzgerald, William Jones, Stephen Lushington, William Mills, Jr., Robert Orme, Thomas Bates Rouis, Nathaniel Smith, John Frost Widmore, Jacob Wilkinson” [IOR, Court Minutes, B98, pp. 16-7]. Of these, (Sir) Lionel Darrell (1742-1803), (Sir) Stephen Lushington (1744-1807), Nathaniel Smith (1730-1794), and Jacob Wilkinson (c 1716-1791) were Company directors. Robert Orme (1728-1801) was historiographer to the East India Company [Makepeace to author].
tion of the Company. The report opened with the charge to the Committee: “to examine into the General State of the Debts, Credits, and Effects, both in England and Abroad, and to report the same with all convenient Speed to a General Court of Proprietors” [EIC, Report, p. 1; hereinafter Report], followed by the Board of Directors’ unclassified balance of accounts [Report, pp. 2-5; Exhibit 1]. On the “Dr.” side of the statement appeared eighteen items of liability, including the stockholders’ investment, while on the “Cr.” side, twenty-two asset items. A favorable balancing figure of £3,687,104 showed on the “Dr.” side. Footnotes followed the statement. Of these, one was in regard to the balancing figure and the other, the Company’s dead stock. With the assistance of the Company officers, the Committee had investigated each item on the balance of accounts and noted its findings with appropriate remarks [Report, pp. 6-15]. The remarks ranged from “certification” to providing additional information and explanation in support or revision of an item.
Following this examination or audit, the Committee pre-pared a revised statement, updated to May 1, “in the usual official Mode,” that is, in unclassified form [Report, pp. 16-7]. The Committee was induced to prepare this statement in order to point out in the most perspicuous Manner, how dif-ficult it would be for the Proprietors to discriminate and dissect such an Account, and how liable they and the Public were to be misled (without the Imputation of Design in any one) by the Inspection of a General Estimate; where on the Credit Side, the Quick Stock in England is blended with the several Quick Stocks abroad, and one general Total involves many Articles which are afloat, at risque, or obviously dormant and non-productive; thereby giving the Whole an equal Degree of creditable Value, in Opposition to Debts, which are actually due and must be paid in England; as well as others which will ultimately come to be paid there, if not liquidated abroad [Report, p. 18].
But the Committee did not leave matters there. Recognizing that an unclassified balance of accounts fell short of providing optimally useful information to the stockholders and the investing public alike or, even worse, misled them, the Committee took upon itself to develop a classified balance of accounts — something which had not been done before, nor was it going to be done for the remainder of the Company’s life through 1858.
Baladouni: An Early Attempt at Balance Sheet Classification 31
Exhibit 1
While it is clear from the foregoing discussion that the Committee’s immediate reason for preparing the balance of accounts in classified form was to provide a better picture of the Company’s liquidity, other questions also come to mind. One such question is: what brought about the need for preparing a classified statement at this particular time? To simply say that the Company was experiencing considerable difficulty in meeting its obligations at the time is not a satisfactory answer, for it was not the first time that the Company was plagued with liquidity problems. In fact, as recently as ten years earlier, in 1772, the Company’s affairs were “greatly embarrassed, and they were under the necessity not only of borrowing large sums of the Bank of England to meet existing demands, but also of making application to the public for a loan” [Auber, pp. 303-5]. The other question that lurks on one’s mind is why did the Company not continue to prepare its balances of accounts along this model? In regard to the latter question, one may speculate that the Company went along with the publication of the 1782 classified balance of accounts as a public relations gesture, but was not ready to make a practice of disclosing information to this extent on a continuing basis. These questions call for further investigation.
ANALYSIS OF THE CLASSIFICATION SCHEME
For an intellectually satisfying analysis of a classification scheme, attention must be turned to (1) the nature of the object divided; (2) the criterion of division; and (3) the parts resulting from the classification. It is with this perspective that East India Company’s 1782 classified balance of accounts will be examined here.
The Nature of the Object
In epistemology,4 the term “object” is used to refer to the thing toward which consciousness is directed or, stated simply, the thing perceived or observed. The person doing the perceiv-ing or observing is the “subject.” Concerning a knowledge-
On epistemological as well as ontological issues in current accounting literature, see: Wai Fong Chua, “Radical Developments in Accounting Thought,” Accounting Review, October 1986, pp. 601-32 and Ruth D. Hines, “Financial Accounting: In Communicating Reality, We Construct Reality,” Accounting, Organizations and Society, Vol. 13, No. 3, pp. 251-61. See also: William H. Beaver, Financial Reporting: An Accounting Revolution, Englewood, N.J.: Prentice-Hall, 1989; Yuji Ijiri, Theory of Accounting Measurement, Studies in
Baladouni: An Early Attempt at Balance Sheet Classification 33
situation, it is usually asked: Which of the two components impresses greatly its own character upon knowledge — the subject or the object? As it is to be expected, a question put in antithetical form is bound to produce opposing responses. Thus, at one extreme of the issue is the idealistic school which holds that the subject impresses greatly his/her own character upon knowledge, while at the other extreme is the realistic school which claims that knowledge is determined mainly by the object [Runes, s. v. “epistemology”]. To be sure, it is not necessary to dwell on this controversy except to suggest perhaps the obvious, that knowledge is ultimately determined by the interplay of both subject and object.
Whatever the interplay between subject and object, it must be recognized that the nature of an object provides special characteristics to a classification process. It makes a big differ-ence, for example, whether the object of consideration is a real whole or a logical whole. An object is a real whole if it is an internally unified entity such as an organism: a plant, an animal, a human being. In contrast to a real whole, an object is a logical whole if the parts possess only external unity. Examples of logical wholes are a library, an academic institution, or a company’s stock (assets). In all these cases, the parts that make up the whole are disparate items, that is, distinct and separate from each other by their nature. They are unified only by some overarching concept. For example, taking a close look at a company’s stock, or more particularly, at the stock of the East India Company, one would note such diverse items as cash and warehouses, receivables and forts and fortifications, vessels and merchandise. Despite the obvious differences between them, they may collectively constitute a logical whole if, in one way or another, they can be viewed from a given logical perspective. In fact, the variety of the East India Company’s stock or, for that matter, any company’s stock, may be viewed as a logical whole since all such items contribute to the same overall goal: to assist the company in making a profit.
The Criterion of Division
Unlike the division of a real whole, the division of a logical whole can be made only according to some intellectual crite-
Accounting Research No. 10, Sarasota, Fl.: American Accounting Association, 1975; Yuji Ijiri, The Foundations of Accounting Measurement, Englewood Cliffs, N.J.: Prentice-Hall, 1967; George Sorter, “An ‘Events’ Approach to Basic Accounting Theory,” Accounting Review, January 1969, pp. 12-19.
rion. Now while there may be several criteria for dividing a logical whole, it is very likely that only a limited number of them would lead to a good division. Whatever the number of possible divisions, every division has to be guided by a definite criterion, that is, a fixed point of view. The reason for this requirement is, of course, to ensure the relative clarity of the parts. And, to be sure, a good division helps not only to systematize the various parts of an object, but also to further one’s theoretical understanding of it.
For example, a good division comes from the pen of Adam Smith. In his epoch-making work, The Wealth of Nations, 1776, Smith divided stock or capital into two classes: fixed and circulating. Circulating stock or capital, he observed, is that which is “continually going from him [the merchant] in one shape, and returning to him in another, and … by means of such circulation of successive exchanges . . . yield him . . . profit.” Unlike circulating stock, fixed stock or capital “yield[ed] a revenue or profit without changing masters or circulating …” [Adam Smith, Vol. 1, p. 331]. As Smith himself indicated, this division of stock was based on the criterion of “capital employment.”
It was some six years after the publication of Adam Smith’s work that the East India Company issued its first classified balance sheet. However, this balance sheet was based on a markedly different criterion of division. It divided the Com-pany’s stock into two general classes of stock: quick and dead. Now according to the Oxford English Dictionary, the term “quick stock” referred to any stock which was “productive of interest or profit,” whereas the term “dead stock” referred to any stock which lay “commercially inactive or unemployed, unproductive.” But this distinction between quick and dead stock is at best confusing and at worst mistaken. Since all items of stock contribute in one way or another to the operation of the company, it would be incorrect to regard any stock as “inactive” or “unproductive.”
Where does, then, the error or confusion lie? Anyone who has ever given thought to it is well aware of the fact that a dictionary definition is of necessity general. It rests on vast amounts of the literature of the period and it, therefore, may conceal a great deal more than it reveals. This problem is, however, partly overcome wherever a dictionary provides specific quotations from the literature. In reviewing the quotations given for quick and dead stock, one comes across a particular sense of the word “productive.” This sense is revealed in the following quotation: “The quick stock of both companies shal be paid for discharge of their debts” [OED, s. v. “quick”]. It takes no great imagination to realize that in this context the word “productive” meant the ability of a particular stock to serve as a means for paying a company’s debt.
It was in this sense that the Committee used the word “productive.” In fact, in its long and detailed report the Com-mittee often referred to a particular stock’s “productive or effective value” as its ability to generate cash in order to pay the Company’s obligations. To quote: “The Part generally deemed Quick Stock, which is Cash, or what is readily convertible into cash, carries its real Value along with it.” [Report, p. 44]. In contrast, the term “dead stock” referred to those items of stock which could not be converted into cash to pay for the Company’s obligations without interfering with the normal operations of the business. This point is well made in the following statement: “The Articles under the Head of Dead Stock must evidently remain so during the Existence of the Company; and though in their present State they may be well worth the Estimated Value, the Amount cannot be converted to any other use” [Report, p. 22].
It is interesting to note here that another term, “assets,” which has since come to replace the term “stock,” had the same connotation in English law as early as the 1530s [OED, s. v. “assets”]. At that time, the term “assets” was in the collective singular like “alms,” “riches,” and “eaves.” Today it is treated as a plural and has a singular, “asset.” “Assets” entered the English vocabulary via the French. The form it took in Old French was asez, whence assez in Modern French. In Old Provençal, assatz; Old Spanish, asaz; Portuguese, assaz, assas; Italian, assai. In all these forms the word means “enough.” According to the OED, “the origin of the English use [of the word assets] is to be found in the Anglo-French law phrase aver assetz ‘to have sufficient,’ viz. to meet certain claims” or, stated somewhat differently, to have enough to pay one’s debts.
The Parts Resulting from the Division
In its Report, the Committee had argued that the time-honored way of preparing the balance of accounts, namely, in unclassified form, not only did not help assess the solvency of a company adequately, but worse than that it misled its readers. The unclassified balance of accounts caused the readers to believe that “the Whole [stock carried] an equal Degree of creditable Value, in Opposition to Debts” or, stated somewhat differently, conveyed the presumption that all items of stock had an equal debt-paying ability. But since the “various Articles [items of stock] . . . could not be esteemed of the same produc-tive or effective value,” that is, convertible into cash for the payment of debts, the Committee went on to say that it would . . . elucidate the Value and Destination of the component Parts of the several Quick Stocks, if they were classed and arranged under distinguishing Heads, each of which should comprehend on the Debit Side articles correspondent to those on the Credit Side; and at one View show the Balance of either Side of each Class [Report, p. 18].
Based on this criterion of productive or effective value, the Committee then devised a classification scheme, which upon application, produced, as it will be seen a little later, a balance of accounts of considerably greater informational value than the unclassified statement could have possibly generated. This classification scheme is presented below in diagrammatic form:
Stock
Quick Stock Dead Stock
Effective Floating Dubious
When applied to the 1782 unclassified balance of accounts, the aforementioned classification scheme produced the following schematic arrangement (in descending order of the stock’s productive value):
[Liabilities] Dr. [Assets] Cr.
Effective Property
Standing Debts Standing Credits
Current Debts Current Credits and Cash
Merchandize and Advances Merchandize and Advances Balance
Floating Property Floating Adventures
Outward Balance
Baladouni: An Early Attempt at Balance Sheet Classification 37
Dubious Property
Debts Outstanding Credits Outstanding
Doubtful Credits Stores Balance
Dead Stock
Dead Stock Balance
Balance (Total of the
Balances shown above) [Stockholders’ Equity]
Other features of this balance of accounts were: (1) presentation of items by geographic areas; (2) use of three money columns — England, Abroad, Totals; (3) inclusion of amounts in foreign currencies as well as their rates of exchange; (4) indication of the balance of each component part; (5) recapitulation of assets and liabilities together with the balancing figure (stockholders’ equity).
THE INFORMATIONAL VALUE OF THE CLASSIFIED BALANCE OF ACCOUNTS AND SUPPLEMENTARY NOTES
The unclassified balance of accounts had always provided the customary information about the nature and amounts of the Company’s stock, debts, and the stockholders’ equity in net company stock. What had been missing in such a statement, however, was a classification which would (1) permit the grouping of similar items to arrive at significant subtotals; (2) provide an arrangement so that critical relationships are revealed; and (3) help the reader’s attention focus on the most important items. It was in June of 1782 that the East India Company published the first and perhaps only classified balance of accounts that met the foregoing features [Exhibit 2]. Based on the criterion of productive value, this classified balance of accounts, together with the supplementary notes, generated sufficient information to help the stockholders and the investing public assess the liquidity and financial flexibility of the Com-
The Accounting Historians Journal, June 1990 Exhibit 2
Baladouni: An Early Attempt at Balance Sheet Classification 39
pany. Here are some of the highlights of the 1782 Financial Report.
Effective Property
The Committee brought under this heading the most pro-ductive quick stock “which is Cash, or what is readily converti-ble into Cash” [Report, p. 44]. Then as now, “readily” meant promptly, without delay, with facility and quick efficiency. This section was comprised of both short-term (Current Credits and Cash; Merchandize and Advances) and long-term (Standing Credits) items. The long-term item was a receivable from the British Government. This receivable was viewed as a potential source of cash which could be used to pay the long-term creditors: bondholders, annuitants, and others. The short-term items were to be used to meet the Company’s current obligations.
From the notes to the balance of accounts, the reader was informed that the “Current Credits and Cash” item included an amount of £286,036 which represented
the Company’s proper and separate Fund, not liable to be involved in their commercial Operations, but applicable to the Augmentation of their Dividends without Participation of the Public, and ought to have been set aside and kept separate, unless introduced as a Loan . . . [Report, p. 22].
Had this amount been excluded from the effective property section or offset by a liability account, the favorable balance of £255,919 would have changed to an unfavorable balance of £30,117 (£286,036 – £255,919). Aside from this point, it was also noted that debts amounting to £861,291 were “liable to immediate Demand” and “unless the Sum due from Govern-ment for Saltpetre, as well as that due for Goods sold … be speedily paid, your committee conceive the Company cannot discharge the . . . Debt …” [Report, p. 22] and that “the Com-pany will soon be embarrassed in their Operations for Want of Current Cash, unless some relief can be obtained from Govern-ment.” [Report, p. 23].
Floating Property
This class of quick stock — floating adventures outwards — represented merchandise in transit to various presidencies abroad — Bengal, Fort St. George, Bombay, Bencoolen, and China. Although this stock could be deemed as effective, nevertheless it had to be viewed separately because it could not be readily converted into cash as long as it was subject to the risks and uncertainties of the seas [Report, p. 38]. The risks and uncertainties resulted, among other things, from piracy, wars between maritime nations, and the hositility and violence of native rulers and people. Upon arrival at their destination, these merchandise were to be incorporated in the effective property section of the appropriate presidencies. In the meantime, the Committee could do no better than classify them between “the classes of effective and dubious property” [Report, p. 42].
Dubious Property
Under this heading came three types of stock. The first of these — Credits Outstanding — represented rents due the Company from the circars (various authorities) of India and other renters in Bengal and Fort St. George. Although the balances of some of these accounts were being gradually reduced, the Committee “thought they could not with Propriety class the whole as Credits, which would probably be paid when demanded” [Report, p. 26]. Other account balances were on the rise and the Committee could not, therefore, “possibly class these Totals under any other Head than Outstanding Credits, which they fear will long remain a non-productive object to the Company …” [Report, p. 30].
The second of these dubious properties — Doubtful Credits — was made up of the following items: (1) Hospital Expenses for His Majesty’s Troops at Madras, Bengal, and Bombay; (2) Expedition to Manila; and (3) Subsistence of French Prisoners in India [Report, p. 21]. The Committee could neither view these items of stock as effective property nor could it think “warranted totally to reject them, because they [the Committee] conceive when a favorable Opportunity offers, Government will endeavor to obtain some Satisfaction for the Maintenance of French Prisoners; and on some future Adjustment of Accounts admit of a liquidation of the other two Articles” [Report, p. 22].
Lastly, “a Variety of Articles, many of which might occa-sionally be sold to the European or native Inhabitants” [Report, p. 26], and, therefore, be converted into cash, yet they had to be included in the section of dubious property because they were “absolute by necessary” to the Safety of their [the Company’s] Settlements, [and] cannot properly be parted with” [Report, p. 44]. Collectively, these items were referred to as Stores. This class of stock consisted of military hardware as well as items for “the Service of the Troops in the Field, and such as must, in Case of any great Consumption be replaced, and kept up to the present State” [Report, p. 26]. Such stock could not, of course, be thought of as “real Property,” that is, “convertible at all Times to Country Currency, or equivalent Sterling Money, and equally applicable to the Discharge of Debts or Encumbrances” [Report, p. 26].
Dead Stock
Under this heading fell such items as the East-India House, warehouses, fortifications, and other buildings as well as ships, sloops, and vessels. By their very nature, these items of stock were to “remain so during the Existence of the Company; and though in their present State they may be well worth the Estimated Value, the Amount cannot be converted to any other use” [Report, p. 22]. A substantial portion of this stock was created nearly a century earlier in India and were valued by Lord Godolphin’s Award in 1708 at £400,000 [Scott, Vol. II, p. 174]. These items of stock were “absolute by necessary to the Safety and Preservation of [the Company’s] several Settlements, and give a Permanence and Stability to their Property in India” [Report, p. 44]. Although the dead stock could not be converted into cash in order to meet the Company’s obligations, yet as the Committee observed, these items of stock “are an essential Part of the Company’s real Property that must always give a very considerable additional Value to the Proprietors Stock at Market” [Report, p. 44].
A Note on the Stockholders’ Equity
In the preparation of the Company’s unclassified balance of accounts, it was customary to include the stockholders’ invest-ment in the liabilities section and to let the balancing figure represent the retained earnings “in favour of” or “against the Company.” The classification scheme for the 1782 balance of accounts had made it necessary to remove the stockholders’ investment from the liabilities section and include it in the statement’s balancing figure, £6,384,319 [see: Exhibit 2, Re-capitulation of the Totals]. By removing the stockholders’ in-vestment from the class of liabilities, the Committee had made the distinction between the creditors and stockholders clearer. This arrangement also emphasized the residual nature of the total stockholders’ equity (stockholders’ investment, £2,800,000; earnings, £3,584,319). Another way of arriving at the stockholders’ equity figure was, of course, by adding up the balances of each of the four sections of the classified balance of accounts [Report, p. 42].
As in all classification schemes, here too, a whole has been succesively broken into smaller and smaller groups in an em-pirical manner. The successive subdivision of the whole stock has served to reduce the uncertainties surrounding the “produc-tivity” of the many and sundry items or, to put it somewhat differently, increased their informational value. But to be sure, a totality cannot be divided with complete rigor. Overlaps and crisscrossings are bound to occur. Difficulties in sharply distin-guishing between classes do not mean, however, that genuine distinctions cannot be made. They can and are made. In fact, the differences turn out to be far more interesting and informative than the similarities.
The classification scheme employed in the preparation of the 1782 balance of accounts distinguishes four classes of stock: from the most “productive” or liquid to the least “productive” or liquid. While there may not be too much to say about either of the extreme classes — “Effective Property” and “Dead Stock” — there may be some room for argument over the “Floating Property,” namely, goods in transit, and the “Dubious Property.” It may be argued, for example, that the Committee adopted a rather conservative attitude by not assigning some liability against the “Floating Property” or even by not including it in the “Effective Property” section. However, given the risks of shipwreck and other unforeseen hazards on the high seas, the Committee may have felt justified to create a separate class for “Floating Property” with no liability designated against it. Upon a careful examination of the specific items under the “Dubious Property,” too, one may find some criss-crossing with the bordering classes. Then, as now, when a clear decision could not be made in recognizing an item’s full poten-tial as a productive stock, one relied on the convention of conservatism by understating the “productive value” of the stock. Primarily geared toward facilitating the assessment of the Company’s solvency, the 1782 Financial Report may be said to convey a wealth of information when compared against the meager and often misleading information carried by the customary unclassified balance of accounts.
CONCLUSION: THE HISTORICAL VALUE OF THE DOCUMENT
The English East India Company’s 1782 Financial Report containing, among other things, a classified balance of accounts and supplementary information, was studied in this paper both from the “outside” and the “inside” [Collingwood, p. 213]. What constitutes the “outside” of an event are those happenings that can be described in physical terms. Some of the major physical happenings in regard to the event of this study were: the holding of a Stockholders’ meeting on April 8, 1782; the Board of Directors’ presentation of the Company’s balance of accounts dated March 1, 1782; the stockholders’ resolution to appoint a committee of thirteen “proprietors” to examine the Company’s general state of financial affairs; the actual examination of the Company’s state of financial affairs; and, finally, the preparation and publication of the Report.
By the “inside” of an event is meant those things that can be described only in terms of thought. In regard to the present event, two critical thoughts may be discerned: the stockholders’ defiance of the Board of Directors’ view of the Company’s state of financial affairs and the Committee’s creative response to the problem of financial reporting. The focus of this paper has been on the latter. It essentially rests on the development of a classification scheme for the preparation of the balance of accounts and a presentation of supplementary information to provide maximum disclosure of the Company’s state of financial affairs.
What were, then, some of the significant thoughts behind the Committee’s creative response to the problem of financial reporting? Here are three:
1. Full Disclosure. Perhaps the most significant thought expressed in this document is the idea of full disclosure. In its broadest sense, disclosure implies opening up something to view. To the Committee that something was sufficient information to enable the stockholders and the public alike to assess the Company’s state of financial affairs. This document provides the first clearly-articulated expression of the idea of full disclosure, namely, a balance of accounts accompanied by supplementary information.
2. Classification. Equally well articulated in this document is the idea of classification. It was clear to the Committee that an appropriate classification scheme or, in their words, “Imputation of Design,” would markedly increase the informational value of the balance of accounts. Inextricably related to the idea of classification was, of course, the choice of a criterion of division. The choice of “productive value,” namely, liquidity, as a criterion suggests that the stockholders’ overriding concern was centered on the Company’s liquidity and financial flexibility.
3. Notes and Supplementary Information. To provide the stockholders and the public with the necessary information with which to assess the Company’s liquidity and financial flexibility, the Committee propounded the idea of supplementary information. Notes to financial statements were already in common use. The supplementary information was meant to help the stockholders, creditors, and other users to assess the amounts, timing, and uncertainties surrounding prospective cash receipts and disbursements. By its own admission, the Committee expressed at times its own “opinions” and made certain “remarks” on the state of the Company’s financial affairs. It is both interesting and instructive to hear the Committee’s reason for this:
… if they [the members of the Committee] have exceeded the Limits of their Appointment, by giving Opinions instead of adhering to Figures only, they did it solely from a Persuasion, that their Report would be incomplete without such Remarks, and that if these Remarks have carried them into Matters not wholly comprised under Debit and Credit, they were so connected with Accounts as to be the very Source and Cause of them [Report, p. 45].
Finally, and in more general terms, it may be said that this document, which testifies to a long-felt need for more informa-tive reporting than was customary to provide, represents the earliest manifestation of the idea of financial reporting, that is, presentation of accounting information both by a classified financial statement and supplementary notes. Unique in its conception and application, the English East India Company’s 1782 Financial Report remains the only one of its kind during the premodern period.
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