With the ongoing steady stream of Mass Anxiety from the election, COVID news, riots of all sizes, and general economic and social bewilderment, you’ve probably been wondering, “hey, who exactly invented modern accounting?” Because that’s just the kind of intellectually curious person you are.
Well, we here at CLM Advisors are impressed, and our research tells us that the so-called “father of modern accounting” was an Italian mathematician named Luca Pacioli. Luca wouldn’t relate very well to today’s world or its economics, because he died in 1517, but what he did give to the world was the first written work on what is known as “double-entry accounting.” It’s a simple concept, really: Say you are a car dealer. You sell someone a car, and record the cash from the sale. But is that all? Of course not – you also have to record the fact that you now have one less car. And actually, if you care at all about profits, you also have to record the transaction of how you obtained the car in the first place. Debits and credits, always in balance. You can read all about it, and Luca, here, if you care. But even if you don’t care, if you’re a small business owner, you really should. Consider the following quote from the linked article about small business in Italy in the 15th century:
Before the Venetian style caught on, accounts were rather basic. Early medieval merchants were little more than travelling salesmen. They had no need to keep accounts – they could simply check whether their purse was full or empty. But as the commercial enterprises of the Italian city states grew larger, and became more dependent on financial instruments such as loans and currency trades, the need for a more careful reckoning became painfully clear.
Does that sound familiar? As your business grows larger and more complex, you need stronger accounting procedures and better information in order to make sound business decisions. All of a sudden, those tedious little debits and credits start to become the language that tells the story of how your business is performing, and shows you what you can and can’t do to improve or change that performance.
So, tonight over dinner, give Luca a quiet little salud. He was a smart guy who wrote the book on a very important idea that affects economies and livelihoods.