A Brief History of Bookkeeping

In 1494 an Italian mathematician by the name of Luca Pacioli published “Summa de arithmetica, geometria, proportioni et proportionalità” (Venice 1494), a textbook for use in the schools of Northern Italy. It was a synthesis of the mathematical knowledge of his time and contained the first printed work on algebra written in the vernacular (i.e. the spoken language of the day). It is also notable for including the first published description of the method of bookkeeping that Venetian merchants used during the Italian Renaissance, known as the double-entry accounting system. The system he published included most of the accounting cycle as we know it today. He described the use of journals and ledgers, and warned that a person should not go to sleep at night until the debits equaled the credits. His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses — the account categories that are reported on an organization’s balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. He is widely considered the “Father of Accounting”. Also, his treatise touches on a wide range of related topics from accounting ethics to cost accounting.”

It has often struck me that a system described so eloquently more than 500 years ago, could somehow be reproduced in software and used by publishers to create an annuity. However that is precisely what software publishers like Intuit Inc. and The Sage Group, plc have done with their popular accounting software.

The fundamentals of accounting theory are basically unchanged since Pacioli’s day. In spite of this, by simply updating tax tables and changing the format of data files, the publishers force small companies – and their accountants – to upgrade their accounting software every year.

As a public accountant this is particularly irksome since most of us use audit software – called Caseware™ – and only purchase low-end desktop accounting software to accommodate our clients. What’s more, the bookkeeping done by our smaller clients is most often done very poorly. In fact it is often so badly done that I am frequently better off to export the bank account from within the accounting software to a spreadsheet, and use that as the framework for a more accurate set of books.

Thankfully the current crop of online accounting software allows companies to “invite” their accountant to collaborate and access their accounting data online – without purchasing a license.

It is a tribute to his genius that the bookkeeping algorithm described by Pacioli is as simple as it is. There are really only 2 very simple equations that form a part of the algorithm:

2 Underlying Equations:

  1. For each transaction the sum of debit parts is equal to the sum of credit parts
  2. The sum of assets is equal to the sum of liabilities plus the sum of equities (aka “the balance sheet equation”)