Based on the song of the Sorting Hat itself one year, it seemed that in the beginning, each of the founding wizards had their own preference on who to accept (except Helga Hufflepuff, who would accept any witch or wizard who wanted to learn).

Excerpt: (from [Harry Potter Wiki][1])

> Said Slytherin, "We'll teach just those
>
> Whose ancestry's purest."
>
> Said Ravenclaw, "We'll teach those whose
>
> Intelligence is surest."
> 
> Said Gryffindor, "We'll teach all those
>
> With brave deeds to their name."
>
> Said Hufflepuff, "I'll teach the lot
>
> And treat them just the same."

The hat also recognized the inherent error in dividing the students:

> And now the Sorting Hat is here
>
> and you all know the score:
>
> I sort you into Houses
> 
> because that is what I'm for.
> 
> But this year I'll go further,
>
> listen closely to my song:
>
> though condemned I am to split you
>
> still I worry that it's wrong,
> 
> Though I must fulfill my duty
>
> and must quarter every year
>
> still I wonder whether sorting
>
> may not bring the end I fear.


  [1]: http://harrypotter.wikia.com/wiki/Sorting_Hat#The_Sorting_Hat.27s_songs