Definition: “The Double-Entry Book Keeping System is the practice of recording a business transaction in two equal parts called debit and credit entries. Debit refers to the left column and credit refers to the right column in an accounting journal.”
The earliest advances in accounting were developed in ancient Mesopotamia, and later in the Egyptian, Babylonian, Indian, and Roman Empires. Yet all those advances utilized a single-entry accounting system. Moreover, accounting then was not a specific profession but only an extension of the duties of clerics, scribes and royal officials. It wasn’t until the Middle Ages, when Jewish merchants pioneered a debit and credit system, that double-entry accounting occurred. It is likely that Renaissance merchants learned this method from Jewish bankers in Cairo, when commerce began to flourish in the Italian city-states.
Because of the vast amounts of money being moved in complex transactions, there was increasing concern among Italian merchants about keeping track of their finances. Consequently, the first evidence of double-entry book keeping appeared in 1300 on a ledger from the Giovanno Farolfi & Company, a firm of Florentine money lenders. Next, in 1340, the Treasurer’s Accounts of Genoa recorded a journal of debits and credits carrying balances from the preceding year, which made it a double-entry system. But the earliest known manuscript of double-entry book keeping was a treatise written by the economist Benedetto Cortrugli in 1458.
Then in 1494, Luca Pacioli (1445-1517) published a 615-page compendium, “Summa de Arithmetica, Giometria, Proportioni et Prportionalita” (Collected Knowledge of Arithmetic, Geometry, Proportion, and Proportionality). It was his fifth book and was intended as a guide to already existing mathematical knowledge; book-keeping was only one of five topics covered. Pacioli was aware of Cortrugli’s previous manuscript and openly [“and graciously”] credited Cortrugli with the origination of the double-entry system. Pacioli never realized that his Summa would become the forerunner of modern accounting.
Luca Pacioli, an Italian educator, mathematician, and Franciscan monk, popularized and disseminated the system of the double-entry to keep financial records, and for that reason he is known as “the father of modern accounting.” Pacioli loved science, architecture, and theology but had a special affinity for mathematics. Although his works were not original, he created a compendium of accomplishments in the art of accounting. Like many Renaissance scholars, his publications on accounting provided invaluable facts that may have been lost to later generations of merchants, bankers, and even modern businessmen.
At the age of 16, young Luca left his mercantile apprenticeship to tutor the children of wealthy merchants while studying at the University of Padua. He eventually entered the Franciscan order and dedicated his life to the pursuit of knowledge. Luca soon became a highly productive scholar, publishing eleven books on algebra, geometry, mathematics, chess, accounting (and on the lighter side) magic squares, and card games. A typical Renaissance man of mixed talents and endeavors, he was awarded a chair in mathematics at the University of Perugia and the equivalent of a doctorate degree.
Pacioli lectured in Naples, Venice, and Florence, packing the halls with famous figures of his time. His friends and patrons included Renaissance scholars and artists like: Francesca, Donatello, Brunelleschi, Alberti, the banker, Lodovico Sforza and noble, Federigo, Duke of Urbino. Pacioli was also a close friend of Leonardo da Vinci, and they collaborated with mathematical precision on projects including the lay-out of da Vinci’s Last Supper. Leonardo in turn illustrated Luca’s books on mathematics. In 1514, Friar Pacioli was invited to teach mathematics at the University of Rome, where Pope Leo X intended to create a faculty “second to none!”
A profoundly religious man, Luca believed that mathematics was divinely inspired with cosmic significance, and he often ended his calculations with: “For the praise and glory of God.” Yet he also stressed the importance of putting his theories to practical use by applying mathematical principles to the business of accounting while explaining these ideas in common terms. For Pacioli, accounting was an ad-hoc ordering system for merchants. Its use provided the merchant with continued information about his commercial finances, and allowed him to evaluate how things were going and then act accordingly.
Luca wrote primarily for merchants who used his book as a teaching guide to educate their sons, who would inherit the family business. It also gave instructions on recording barter transactions and exchanges in a variety of circumstances which were essential for young merchants to learn. His approach to teaching the double-entry concept was unique and innovative, and his pedagogical insight enabled him to engage students and maximize their understanding of accounting principles. The Summa entailed a practical description of assets, receivables, inventories, liabilities, capital expenditures, credit, and income statements.
Once merchants realized Pacioli’s book could be used as a tool to track their finances, its popularity surged, and it became a standard for keeping accounts. His work presented a simple, readable description of the book keeping practices of merchants in Venice, Florence, and Milan. The Summa was also one of the first books printed by Guttenberg’s printing press in vernacular Italian (not Latin) making it easier for shop keepers and small business owners to understand. In addition, it was the first time the symbols of plus and minus appeared in a publication that was eventually translated into Dutch, German, Russian, and English.
Pacioli’s Summa included a 27-page treatise which he codified rather than invented. Ironically, his most influential chapters describing double-entry book keeping were added as a simple favor “In order that the subjects of the most gracious Duke of Urbino may have complete instructions in the conduct of business,” and… “to give the trader… information as to his assets and liabilities.” It was these chapters describing the use of double-entry book keeping that changed the way accounting was seen and used for centuries to come.
According to the double-entry book keeping system described by Pacioli, each transaction would be recorded twice: once as a debit from one account and again as a credit from another. As part of this process, income and balance sheets made their appearance. His ledger had accounts for assets including categories still reported on balance sheets and income statements today. Pacioli also demonstrated closing entries, and proposed a trial balance to prove a balanced ledger. By using this double-entry system, merchants were able to improve the efficiency and profitability of their businesses.
Pacioli also described how merchants kept books of debits which means “he owes,” and credits, which means “he trusts,” and recommended the Venetian method of accounting above all others. The Summa touched a range of topics from ethics to cost accounting in an exhaustive, widely researched study of mathematics. His system included the accounting cycle as we know it today. Moreover, Pacioli warned that a merchant should never go to bed until the debits equaled the credits. Manual and even computerized accounting systems owe much of their processing logic to his principles.
Pacioli’s treatise laid the foundation for double-entry book keeping as it is currently practiced. His writing enabled merchants to audit their own books and ensure that entries in the accounting records made by their bookkeepers complied with the method he described. Those merchants who did not maintain their records were at greater risk of theft by their employees and agents. It was no accident that the first and last items in his treatise concerned maintenance of an accurate inventory.
Accounting Pro would like to express its gratitude to Luca Pacioli, a consummate Renaissance man, who had a tremendously beneficial impact on the accounting profession.
Article by Dan Fitzsimons