Confucian Origins Of Chinese And Japanese Business And Accounting

The Impact of Confucianism on East Asian Accounting

Confucianism is a cultural tradition adopted by the Chinese and the Japanese, though most vibrant in the Chinese setup. The culture operated on the values of truthfulness, rituals, righteousness, benevolence, honesty, filial piety and loyalty thus the western society trusted their accountants and would not question the accounts. The doctrine advocated for communal welfare to be paramount rather than individual interests.

The doctrine overhauled the western accounting system as it despised competition, which, according to the People’s Republic of China contributed to the violation of Confucianism. The people also argue according to the doctrine, auditing is not right and the very act of auditing firms in the west shows a breach of trust, thus the Chinese were hesitant in adopting the western system of accounting. This paper will discuss the Confucian origins of Chinese and Japanese business and accounting as well as the recent events (Postma, & van der Helm, 2017), that led to changes in accounting regulation and concepts in these countries.

The Chinese system of accounting

The impact of Confucianism in East Asian Accounting is based on the tendency to concentrate on structure and form rather than creating room for innovative procedures which further hampered the efforts of capitalism. The culture of Confucianism greatly affected businesses in that values advocate for nepotism to enhance loyalty to the nation, family and friends. Through this, they ensure secrecy of accountants, as they consider which was not present in the western system of accounting which encouraged auditing and required financial statements at the end of a financial period.

According to Toms (2016), during the periods of Western Zhou Dynasty budgetary control was sophisticated and there was a single bookkeeping system. However, in the same period the imperial court had many difficulties in keeping track of government assets. This difficulty was tackled with the introduction of Sanzhufa (a three-pillar balancing method).

This technique worked with the aid of balancing the net asset or the surplus at the end of every accounting period. The formula involved subtracting disbursements from the revenues and whatever remained was equal to the surplus, hence the name three pillar balancing method (Beattie and Emmanuel, 2008). These methods were able to thrive since the Chinese were not interactive with the outside world. Moreover, few chines went ahead to attain the western education. Thus, they were not able to transfer the knowledge to vast Chinese country

As the economic growth took centre stage, there was rapid development in the private sector. The growth in the private sector prompted the businesspersons to introduce an advanced version of the three pillars, which was termed as Shizhufa (four-pillar balancing method) (Hudson & Takekoshi, 2015). The four-pillar method was introduced when the Tang dynasty was in the reign around (A.D. 618-907). Though the method was developed by the Chinese it had the influence of western accounting system as a result of the few Chinese who had acquired the western education.

The method accounted for the balance brought ahead due to a preceding document. However the Chinese were adamant in fully embracing the system and therefore they introduced four variables, which involved adding the opening balance to the revenues and subtracting the disbursement, which would equal to the closing balance (Hudson & Takekoshi, 2015).

The Traditional Chinese System of Accounting

As more Chinese acquired the western education, there was a significant development in accounting due to the introduction of the Sanjiao Zhang (a three-leg bookkeeping method). The method almost looked similar to the modern ways of accounting as it contained a single entry and double entry similar to the western system. The name three leg bookkeeping was as a result of using a single entry to record cash transactions and the double entry to record credit transactions (Ogura, 2012). Between the reign of Ming Dynasty and Qing Dynasty, there was an introduction of a more sophisticated technique of accounting.

This technique was known as Longmen Zhang or (dragon gate bookkeeping method). The method was an outdated way of double entry, which was advantageous as it provided for the determination of profit and the extraction of a trial balance. The dragon gate bookkeeping equation involved subtracting disbursement from revenues and the result would equal the subtraction of owners’ equity and liabilities from assets. This method measured profit on a cash basis on both sides of the equation (Supple, and Garnett, 2018).

The introduction of the double entry method was a significant progress in China’s accounting innovations (Toms, 2016). Despite the innovation, many substantial businesses did not employ the technique. However, banks and commercial firms employed the four pillar balancing method regardless of how big the organization was (Zeng, 2017).

As a result of the encroachment of the western ways of accounting the Chinese realized some deficiencies in their traditional ways of accounting and thus changes had to be implemented. These changes included extending bookkeeping to financial reporting, for instance, the profit and loss statement for due to ownership and control in joint stock companies. Moreover, the increased investment in the capital called for more focus on fixed assets as well as the depreciation account.

The adoption of these changes showed that the traditional bookkeeping by the Chinese could not handle large scale and joint stock companies. Such inadequacies as highlighted by Aiken (2015), were brought by the traditional confidence banked on the honesty of managers, lack of an original and form a transaction document. The first change that took place almost immediately was the management-based trust. The second change was the unsystematic recording procedures to allow cross-referencing as well as align with rank value and performs arithmetic calculations (Fisher and Roll, 2015).

The traditional bookkeeping systems were useless as a tool for internal control since they could not measure profit, no distinction between revenue expenditure and capital, moreover, depreciation was not accounted for. However, the adoption lagged as the Chinese were resistant to change, moreover, China is a huge country compared to Japan and it would take longer for the western system to be adopted since the technology was not as advanced as in the recent times.

Despite the deficiencies in the traditional accounting systems, the western accounting systems that could account for joint stock and handle financial reports, the Chinese never adopted the system (Song, 2008). This is evident as materials found in Beijing City archives show that many commercial and industrial organizations never moved on from the single entry and the four pillars balancing method in the second half of the 19^th century. Some used the partial double entry three leg bookkeeping method while a few used the dragon gate. Most of these methods continued to operate until the early years of the 20^th centuries (Hudson and Takekoshi, 2015).

The Evolution of Chinese Accounting with the Adoption of Western Methods

The continued use of traditional accounting systems was unable to handle joint-stock companies that were cropping up in China. For instance, Kaiping Coal Mines failed to issue dividends due to a mistake in bookkeeping according to British Consular Reports from Tientsin 1912. Such inconveniences forced some companies to declare a fixed dividend of 10% irrespective of the company’s profit performance and also to exempt them from issuing financial reports. This system also meets some challenges since some argued that they did not get enough information relating to company financial performance (McKinnon, 2006). However, despite the shortcomings of the Chinese system of accounting, the Chinese did not adopt the western system of accounting.

The Chinese detested the system for a various number of reasons, including lack of trust and secrecy. Since the Chinese never had auditors and usually used to hide their financial documents, the western way seemed as a violation of their culture. Moreover, the western system required firms to provide yearly financial reports yet the Chinese preferred to hide their financial information relating to their business.

Another reason that made it difficult for the western accounting system to penetrate the Chinese community was the centralized way of ruling whereby adoption of new ways of accounting could only be allowed once the ruler has given permission. The Chinese also had a cutler of repelling and resenting outside cultures, they kept to themselves which made it difficult for the merchants to pass the knowledge relating to western ways of accounting. 

The modernization of accounting in Japan

Japan was operating in an indigenous accounting system that had no nationwide uniformity. Instead, there were various bookkeeping methods used and hidden from the public. With such, the country accounting system was vulnerable hence the reason it drifted to the western system much faster than china. Despite the secrecy, manuals used for bookkeeping were prepared and reserved by the mercantile families (Supple and Garnett, 2018).

According to Kim (2017), the Tomi Yama bookkeeping system consisted of dual calculations. The dual calculation included proprietor’s equities at the end of the year, which equalled the difference between assets and liabilities at the end of the year. The second part, proprietor’s equity at the beginning of the year equalled the proprietor’s equity at the end of the year. On the other hand, the Tanabe family had three financial reports in the 19^th century. These reports had a net income record that compared closing and opening balance, a summary of revenue expenditures and another for assets and liabilities. However, the Tanabes operated several iron forges in the Izumo province, which used more than thirty books that were used to prepare the periodic statement (Ogura, 2012).

Another family whose accounting records were discovered were the Nakais who referred accounting records as the ledgers of good fortune. These records consisted of dual entry in which transactions were recorded in two books. The Nakais referred to profit as to kuyo, or residual profits, which are the net profit gained after the given rate of return.

Changes in Accounting Regulations and Concepts

According to such forms of accounting systems, it shows that the double entry concept already existed in Japan. However, most Japan business people practiced single entry system referred to as the Daifukucho. The Dafukucho system consisted of four accounting books which are the ledger, also known as daifukucho, cash book (Kingindericho), purchase day book (kaicho) and sales day book (uricho). This system had no particular classification of accounts or distinct revenue expenditures and capital; rather the cash basis accounting was used (Postma and van der Helm, 2017). The existence of double entry in japan made it easy to adopt the western accounting system as there understandable similarities.

Same as china these systems were inadequate as the economy continued to grow due to the opening of the ports to the United States of America. The Japanese responded with haste in adopting and modernizing the country. Thanks to the Meiji government, it established economic and political institutions that were based on western models in modernizing the country. Moreover, the Japanese students obtained their education overseas to aid the Japanese national development agenda. Such efforts enabled the government to modernize strategic sectors and non-strategic consumer industries. The efforts were quickly spread to the private sector in which private entrepreneurs branched out into new fields.

The modernization of accounting in Japan was significantly realized in the 19^th century after realizing that the indigenous bookkeeping methods were inadequate in handling western machinery and production. Contrary to China, Japan swiftly adopted the western accounting systems, in which double-entry bookkeeping was introduced to enable a capitalistic economy grow. Moreover, the Dutch, British, and French assisted the revolution as most of them were employed as accountants and implemented the accounting principles as well as the ledgers (Toms, 2016).

In addition, the assimilation of the western accounting system in the japans ways was further influenced by the publication and dissemination of accounting tests. The Japanese resorted to importing and translating accounting books into Japanese. Moreover, accounting schools were introduced which helped dispense western accounting knowledge.

Despite the adoption of the western accounting practices, Japanese people went ahead to introduce statutory regulations that aimed at regulating joint stock forms of business. The first regulation was the National Banks Act in 1872. This act ensured the uniformity of financial statements for national banks. Another regulation termed as the commercial code was introduced in 1890, which required businesses to maintain accounting books that contained an inventory of assets and liabilities as well as a balance sheet. Moreover, the law required audited to be presented to the shareholders (Zeng, 2017).

The reason why the western accounting system flourished in Japan and not in China

The main reason is based on the political, social and cultural differences between China and Japan. China was resistant to change due to its centralized political power, narrow-based knowledge as well as the anti-merchant mentality. The Chinees did not welcome business people into their country due to the centralised way of government. On the other hand, Japan had multi-structures of political powers that which aided in the adoption of change. Moreover, the Japanese were pro-merchant and had a broad learning (Postma and van der Helm, 2017).

Conclusion

            In conclusion, China always upholds what has been developed indigenously rather than adopt new ways. This shows strong cultural ties to Confucian doctrines, which has seen China, lag behind in using universal accounting systems. Moreover China is big country compared to Japan and passing knowledge regarding the western accounting system would take a lot of time.

This is the reason why japan seems to have rapidly adopted the system as china lagged. On the other hand, Japan has managed to incorporate in the western system of account ting, which helps in creating universal financial reports that can be understood by investors from any part of the world. This shows that Japan is at the forefront in drifting from its Confucian origins. Moreover Japan is surrounded by sea and foreigners could come in from any direction as compared to China where only one end of the country was exposed to the sea. 

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