The History of Accounting (Part 2)

The History of Accounting: The Birth of the Double-Entry system

Eventually, man’s society evolved in to more complex forms. As hunting tribes began to settle down and start planting crops, mankind was faced with new challenges, mainly in the form of having more resources than they need. What did they do with all this excess? After several (failed) attempts at trying to finish it all, they eventually came into contact with other tribes who were willing to trade their resource for the other tribe’s resource. It was a very simple means of fulfilling each other’s needs.

If tribe A has a shortage of chickens and a surplus of wheat, it made financial (or chicken-cial?) sense for them to trade their wheat with tribe B which has a surplus of chickens but a shortage of wheat. Trade became more complex and eventually currency evolved in human society, from giant gold plates in the BCs to the sophisticated anti-forgery bills and notes we have today.

The evolution of currency demanded a more, well, accountable form of accounting rather than making rudimentary markings on paper (or goat-skin, which was probably more widely available then). With currency, transactions also grew more complex, with the development of the concept of giving and taking loans, purchasing in bulk (large quantities) and hiring of employees.

Enter Luca Pacioli, who in 1424, published a textbook on mathematics called : Summa de arithmetica, geometria, proportioni et proportionalità – (It’s Italian, in case you didn’t notice). This book outlines the foundation for double-entry accounting and speaks of journals and ledgers and the accounting cycle. Apparently the book also cautioned wannabe accountants to ‘not sleep until the debit equals the credit!’. Apart from giving many accountants of the day sleepless nights, the textbook outlined the classic account classifications we use today (assets, liabilities, equity, expense, income) and proposed the use of a trial balance to balance the business ledger.

What the double-entry system does is that it creates a system where accounting errors can be spotted and corrected very easily. Basically, when your accounts don’t balance, something is wrong. It can either be due to human error and /or ignorance (see: stupidity) or someone is messing around with your inventory and accounts (see: fraud and theft!). Beyond the obvious benefits of the double-entry system, it also contributed to the development of more sophisiticated transactions and allowed traders to effectively record their ever-growing businesses with greater ease and simplicity.

Through double-entry, accountants or those with a knowledge of accounts became more important in society as they were the ones who held the keys to recording the wealth and property of businesses. The double-entry system is indeed the greatest weapon in an accountant’s arsenal, using it to fight off the ever-present shadow of financial stupidity!... and fraud and error and etc...

Next: Stagnating in Wealth