Accounting in disaster and accounting for disaster: the crisis of the Great Kanto Earthquake, Japan, 1923

Abstract

This essay examines the role of accounting records in a crisis situation; namely, the Great Kanto Earthquake of 1923. Kanematsu, a trading business, did not suffer a physical loss of assets as a result of the earthquake but, nevertheless, the amount of financial loss it suffered was not small. Kanematsu had to take countermeasures to tackle the situation created by the earthquake. By using accounting and other records of Kanematsu, the authors examine the actions taken in the midst of confusion just after the earthquake and the role played by accounting. The authors show that the sudden natural disaster and the resulting crisis was a test of orderliness of the accounting record.

Keywords:

• Japan
• natural disaster
• trial balance
• Kanematsu

Notes

Scranton (2008) has listed possible areas for future research and includes the activities of businesses during and after political, natural or war-borne crises, such as the Kanto earthquake.

The paid-up capital of banks and corporations that belonged to the four largest groups represented 15% of the total paid-up capital of Japanese companies.

Studies of corporate failure and reorganization include Dewing (1914) for American firms and Takahashi (1930) for Japanese firms.

Covello and Mumpower (1985) discuss the historical development of risk management methods.

The Japanese government had banned people from trading with foreigners since 1641. Official trading relationships were handled by the government and it only traded with East Asian countries and the Netherlands. Its ‘closed-door’ policy suddenly ended in 1854. Four American gunships came to Japan and, five years later, the country opened five ports for trading with the United States, the United Kingdom, the Netherlands, France and Russia. Japanese merchants were not accustomed to foreign trading and, naturally, most of the imports to, and exports from, Japan were handled by foreign traders for several decades.

An ‘anonymous association’ is a kind of partnership in Japan.

Slips (Denpyo) are small, thin pieces of paper that were used to record original transactions. After the entries were recorded into the cash journals, ledgers and appropriate subsidiary ledgers, they were filed and stored. Because they were very thin and prone to damage, and all of the information contained on the slips was recorded into bound books, they were unlikely to have been treated carefully, and, therefore, only a small selection of them has survived in good condition.

The ‘Shand system’ is an accounting system that was named after the originator of the system, Alexander Allan Shand, who was a banker at the Yokohama branch of the Chartered Mercantile Bank of India, London & China. He was employed by the Japanese government to establish a bookkeeping system for national banks after it decided to establish a national bank system in Japan (McKinnon 1994; Muirhead 1996). His exposition, The Detailed Method of Bank Bookkeeping was translated into Japanese (Ginko-Boki-Seiho) and published in 1873. This was the first book on double-entry bookkeeping written in Japanese. As the Meiji government opened schools to teach this bank bookkeeping system, it became popular in the early Meiji era. Indeed, many business firms engaged in activities other than banking also adopted this system and, therefore, it became an element of the Japanese bookkeeping system, the ‘slip system’, which is popular even now in Japan, both in practice and in educational circles (Someya 1996, ch. 5).

The ‘Shand system’ is generally understood as a bookkeeping system that uses three kinds of slips and the cash journal (Shimme 1937; Kurosawa 1990; Hisano 1992). The main peculiarity of the system is that on both the transfer slips and in the cash journals, transactions were entered on opposite sides, reflecting the fact that a ‘debit’ entry means that ‘cash is debited to the accounts entered’. If cash was not involved in a transaction, the recorder assumed it as a composite transaction that consisted of a cash outlay and cash inflow. The sales of merchandise on account, for instance, can be divided into two separate transactions that involved cash, cash sales and lending money to the customer. By assuming the existence of a cash account, it is possible to enter all transactions into a cash book. Such method of entry into the journal is called ‘cash journalizing’.

The terms ‘receipt slips’, ‘payment slips’, and ‘transfer slips’ were adopted from Nishikawa (1956).

‘On the earthquake in Tokyo region’, dated 4 September 1923; ‘On the earthquake in Tokyo region (part 2)’, dated 6 September 1923.

Newspapers did not re-appear until 5 September.

Most of the merchandise was commissioned, i.e. merchandise for which clients had placed an order to purchase. For each order they designated its amount, quality and price. The percentage of the merchandise purchased by Kanematsu for prospective sales was small and it was separated from commissioned merchandise.

It seems likely that the Tokyo office also had its own account books – some ledgers and other books show evidence that they were written in Tokyo.

For the 10-year period from 1918 to 1927, Kanematsu distributed only 30% of its profits as dividends. On three occasions it declared special dividends but, on each occasion, the dividend was treated as additional paid-up capital.

Of course there were exceptional corporations. The most noteworthy were Zaibatsu related businesses and Takahashi praised their managerial and financial policies.

In 1924 the problem was solved when the insurer decided to pay out the full amount of the coverage.

Maeda wrote, ‘We incorporate debits and credits in a single ledger account of suspense accounts. Therefore, even if the remaining balance was small, there were hundreds of millions of yen which had been debited and credited when we investigate it minutely… we should divide this account into the accounts of temporary payment and temporary receipt, and other accounts payable’ (Correspondence from Kobe to Sydney, #86, 3 March 1924).

During the Taisho era, the commercial code required a joint-stock company to have an auditor, but there was no requirement to hire an external professional auditor (see Matsumoto and Previts 2010).

In April 1920, faced with the economic downturn in Japan, the head office of the Yokohama Species Bank collected information about the amount of letters of credit issued by each branch office, and was surprised that the sum was intolerably high. It suspended the issue of new letters of credit and began to reduce the amount of credit granted to its customers.

The amount was 71.9% of total assets and the only liability to outside parties. It was quite large compared to that of one year previously, when it had been just 3,576,101.04 yen.

Many records show that the severest period of credit restriction was June/July 1921. The outstanding bills decreased from 16,609,815.34 yen on 20 May to 6,025,671.41 yen on 30 September.