He paused gently and said, "Yes Steve, but I think I am right. Check it on Google. Quickly I pulled out my handy iPhone and went straight to Google. He was right: The first recorded history of the description of double entry bookkeeping was done by Benedikt in in his work: Book on the Art of Trade.
Although only in a short appendix, it was the first description of what was as one of the world's great intellectual breakthroughs -- modern accounting.
This craft enables merchants, entrepreneurs and their investors to keep track of every penny they received or spent. Thanks to accounting, it allowed people to organize massive amounts of information into journals and then produces summary financial statements -- primarily income statements and balance sheets.
The income statement showed, over a time period, total revenues minus total expenses, leaving either a profit or loss. The first book on double entry system was written by an Italian mathematician Fra Luca Pacioli and his close friend Leonardo da Vinci. Pacioli and da Vinci did not claim to be the inventors of double entry system but they explored how the concepts could be used in a more efficient and organized way.
Pacioli wrote the text and da Vinci drew the practical illustrations to support and explain the text in the book. It was further divided into many small chapters describing double entry, journals, trial balance , balance sheet , income statement and many tools and techniques subsequently adopted by many accountants and traders. No one exactly knows when and how it was invented.
The double entry system of accounting or bookkeeping is based on the fact that each business transaction essentially brings two financial changes in business. In double entry system, every debit entry must have a corresponding credit entry and every credit entry must have a corresponding debit entry.
It is the basic principle of double entry system and there is no exception to it. To understand why the business would debit furniture and credit cash, see the rules of debit and credit.
I have several sources of income from around the world—from my university position and my ed tech startup company BrainQuake; fees from writing, speaking, and consulting; royalties from books; and more recently income from a number of pensions and annuities.
As a result, I long ago started keeping meticulous records, using Excel spreadsheets to keep track of individual activities and QuickBooks to bring it all together. Fibonacci while I was researching my three books on Leonardo and his hugely influential mathematics text Liber abbaci the project began with a single book in mind , I had long ago come to appreciate the magnitude of the mathematical developments those two authors had catalogued—and thereby contributed to—in terms both of human intellectual progress and the impact of those methods on the way people around the world go about their daily lives.
Double-entry book-keeping, on the other hand, the one topic Pacioli covered that those previous authors had not, simply never caught my attention. But there is a reason why people hardly ever give any thought to just how revolutionary, in their time, were numbers and the associated innovation of money , arithmetic, the Hindu-Arabic representation, the classical arithmetic algorithms, and algebra.
Each of those innovations changed human life in such fundamental ways that, once humanity had them we incorporated them and the products and activities they brought in into our daily lives to such an extent that we no longer gave them any more thought. Their fundamental role became no more remarkable than the presence of air and water. The same is true of more recent innovations, such as radio, the telephone, computers, the Internet, laptops, and mobile phones. To those of us who lived through at least some of those innovations, we still think of them as life-changing developments.
But ask anyone of school age and it is clear that to them, all of those technologies are just part of the everyday environment. Nothing remarkable. It is a measure of the greatness of any innovation that completely transforms the way we live, that before long we no longer recognize how profound and remarkable it is.
Time, then, to take a fresh look at double-entry bookkeeping. The benefit of keeping detailed records of financial transactions was recognized back in ancient times. For example, in ancient Rome the first emperor, Augustus, created imperial account books and established a tradition of publishing data from them.
But the beginnings of modern bookkeeping came much later, in the emerging city-states of northern Italy in the eleventh century, where the Crusades sparked a massive growth in commercial activity. In their ledgers, the Venetian merchants listed debits and credits in two separate columns. All entries made in the ledger have to be double entries—that is, if you make one creditor, you must make someone debtor. One important benefit of this system is it provides a built-in error detection tool; if at any moment in time the sum of debits for all accounts does not equal the corresponding sum of credits for all accounts, you know an error has occurred.
In Florence, in the fifteenth century, the bank run by the Medici family adopted double-entry accounting to keep track of the many complex transactions moving through accounts. This enabled the Medici Bank to expand beyond traditional banking activities of the time. It started opening branches in different locations, offered investment opportunities, and made it easy to transfer money across Europe using exchange notes that could be bought in one country and redeemed in another.
This growth allowed them to dominate the financial world at a time when Florence was the center of the world for trade and education. This then was the environment in which Pacioli grew up and lived.
Luca Bartolomeo de Pacioli was born between and in the Tuscan town of Sansepolcro, where he received an abbaco education, the package of commercially-oriented Hindu-Arabic arithmetic, practical geometry, and trigonometry that had been common in Italy since Leonardo published Liber abbaci , on which the schooling was based.
I tell that story in my book The Man of Numbers. With texts written in the vernacular rather than the Latin used by scholars, abbaco focused on the skills required by merchants. Around , Pacioli moved to Venice, where he worked as a tutor to the three sons of a merchant.
Several months after that, 29 sacks of wool arrive in Pisa, via Barcelona. The wool is coiled into 39 bales. Of these, 21 go to a customer in Florence and 18 go to Datini's warehouse, arriving in , over a year after the initial order. They are then processed by more than separate subcontractors.
Eventually, six long cloths go back to Mallorca via Venice, but don't sell, so are hawked in Valencia and North Africa instead. The last cloth is sold in , nearly four years after Datini's original order.
Fortunately, he had been using bookkeeping alla Veneziana for more than a decade, so was able to keep track of this extraordinarily intricate web of transactions. So what, a century later, did the much lauded Luca Pacioli add to the discipline of bookkeeping? Quite simply, in , he wrote the book. Amidst this colossal textbook, Pacioli included 27 pages that are regarded by many as the most influential work in the history of capitalism. It was the first description of double-entry bookkeeping to be set out clearly, in detail and with plenty of examples.
Pacioli's book was sped on its way by a new technology: half a century after Gutenberg developed the movable type printing press, Venice was a centre of the printing industry. His book enjoyed a long print run of 2, copies, and was widely translated, copied, and plagiarised across Europe. Double-entry bookkeeping was slow to catch on, perhaps because it was technically demanding and unnecessary for simple businesses.
But after Pacioli it was always regarded as the pinnacle of the art. As the industrial revolution unfolded, the ideas that Pacioli had set out came to be seen as fundamental to business life. The system used across the world today is essentially the one that Pacioli described.
First, he describes a method for taking an inventory, and then keeping on top of day-to-day transactions using two books - a rough memorandum and a tidier, more organised journal. Then he uses a third book - the ledger - as the foundation of the system, the double-entries themselves. Every transaction was recorded twice in the ledger. If you sell cloth for a ducat, you must account for both the cloth and the ducat. The double-entry system helps to catch errors, because every entry should be balanced by a counterpart, a divine-like symmetry which appealed to a Renaissance Man.
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