Friday, October 5, 2012

Luca Pacioli: The Father of Accounting



I was listening to NPR yesterday and heard the following story about the father of accounting.  Since one of my dearest friends is an accountant, this is dedicated to him.
The story of the birth of accounting begins with numbers. In the 1400s, much of Europe was still using Roman numerals, and finding it really hard to easily add or subtract. (Try adding MCVI to XCIV.)
But fortunately, Arabic numerals (1, 2, 3, 4, etc.) started catching on, and with those numbers, merchants in Venice developed a revolutionary system we now call "double-entry" bookkeeping. This is how it works:
Every transaction gets entered twice in financial records. If one day you sold three gold coins' worth of pepper, you would write that the amount of cash you had went up by three gold coins. You would also write in that the amount of pepper you had went down by three gold coins' worth.
Before double-entry, people just kept diaries and counted their money at the end of the day. This innovation allowed merchants to see every aspect of their business in neat little rows.
Jane Gleeson-White wrote the new book Double Entry: How the Merchants of Venice Created Modern Finance. She explains how significant this new accounting was:
"You could itemize the profits in each account, so you knew which products you were doing well in and which you weren't. Then you could start to think about how you would change your business activities. It was just a whole revolution in the way of thinking about business and trade."
Luca Pacioli was a monk, magician and lover of numbers. He discovered this special bookkeeping in Venice and was intrigued by it. In 1494, he wrote a huge math encyclopedia and included an instructional section on double-entry bookkeeping.
Thanks to the newly invented printing press, his book was mass produced and became a big hit. One of the first readers was Leonardo da Vinci, who at the time was painting The Last Supper. Pacioli's encyclopedia had a section on the mathematics of perspective painting which fascinated da Vinci.
"They were hanging out together....I think they were probably lovers. They certainly spent a lot of time together, and definitely Luca Pacioli was there in the church when Leonardo da Vinci was there in the actual church when Leonardo da Vinci was painting The Last Supper," said Gleeson-White.
What Pacioli is known for today, though, is that tiny section of the book about accounting. Today, every country and every business uses double-entry bookkeeping.

Double Entry: How the Merchants of Venice Created Modern Finance


Filled with colorful characters and history, Double Entry takes us from the ancient origins of accounting in Mesopotamia to the frontiers of modern finance. At the heart of the story is double-entry bookkeeping: the first system that allowed merchants to actually measure the worth of their businesses. Luca Pacioli—monk, mathematician, alchemist, and friend of Leonardo da Vinci—incorporated Arabic mathematics to formulate a system that could work across all trades and nations. As Jane Gleeson-White reveals, double-entry accounting was nothing short of revolutionary: it fueled the Renaissance, enabled capitalism to flourish, and created the global economy. John Maynard Keynes would use it to calculate GDP, the measure of a nation's wealth. Yet double-entry accounting has had its failures. With the costs of sudden corporate collapses such as Enron and Lehman Brothers, and its disregard of environmental and human costs, the time may have come to re-create it for the future.

3 comments:

silvereagle said...

Fascinating! Missed the broadcast, but glad I read it here! Thanks.....

Jay M. said...

Pretty cool! I honestly have no abilities whatsoever in accounting, and totally respect people who do! I've heard of double-entry accounting, and really don't understand exactly how it works.

Peace <3
Jay

fan of casey said...

Joe: Thanks for the dedication. I saw this story on NPR too.