Thursday, July 19, 2012

"How a Medieval Friar Forever Changed Finance"

Do you remember how you celebrated the 500th?*
From Bloomberg's Echoes blog:

Echoes: 7/17
Luca Pacioli, father of modern accounting Source: Unknown 
Consider some headlines from the past week. China announced its gross domestic product had slowed to a three-year low of 7.6 percent in the latest quarter. The International Monetary Fund cut its global growth forecasts to 3.9 percent for 2013. And Citigroup Inc. announced its net income was down 12 percent.

The system that generates these 21st-century accounting figures -- the numbers that run our nations and corporations -- was first codified by a Renaissance friar named Fra Luca Bartolomeo de Pacioli. He was at one time more famous, as a mathematician, than his collaborator Leonardo da Vinci.

Pacioli is remembered today, if he’s remembered at all, as the father of accounting. He wrote the first mathematical encyclopedia of Europe, which made two critical contributions to modern science and commerce: It was the first printed book to explain Hindu-Arabic arithmetic and its offshoot, algebra, and it contained the first printed treatise on Italian accounting.

Algebra would underpin the Scientific Revolution; Italian accounting, the Industrial Revolution.

Double Entry
As his encyclopedia was going to press in Venice in 1494, Pacioli added a 27-page summary of a new form of accounting that had first emerged in Italy around 1300 and been perfected by the merchants of Venice. He called the addition a “special treatise which is much needed” to help merchants keep their accounts in an orderly way.

Known in the 15th century as accounting “alla Veneziana,” the system is now called double-entry bookkeeping and is standard practice throughout the world. In 1494, it was exceptional -- and in his treatise Pacioli recommended it above all others.

In their ledgers, Venetian merchants separated debits and credits, dividing them into two columns. As Pacioli wrote: “All the creditors must appear in the Ledger at the right-hand side, and all the debtors at the left. All entries made in the Ledger have to be double entries -- that is, if you make one creditor, you must make someone debtor.”...MORE
*In November 1494 Pacioli published Summa de arithmetica, geometria proportioni et proportionalita.