A Brief History of the ‘art’ of Accounting

Nikolaos Panaousis
Apr 29, 2018 · 10 min read

What is your perception of accounting and accountants?

Is it, maybe, a 9–5 schedule at a cubicle staring at a computer screen and punching numbers into a machine? Do you envision accountants as overworked and anti-social?

These questions resonate with many of us, and it is no secret that the general public is not fond of accounting — yet we all depend on it, from our day-to-day transactions to creating and maintaining profitable businesses — and even economies.

Then, given its power, why don’t we have more people interested in this field? To me, the answer is comprised of two words: our perceptions. Studies show that there is a substantial correlation between people’s perceptions and their willingness and intention to pursue a career in that profession. Knowing and appreciating the history of accounting, however, can allow us to shift those perceptions and create a favorable environment for a new generation of passionate students and leaders.


This post includes segments and citations of a research that I conducted on the same topic, providing an overview of the origins, purpose, and evolution of what is known today as modern accounting, tracing back to 14th and 15th century Venice, Italy.

Before we start, it is worth, mentioning, however, that bookkeeping and auditing, as well as other accounting functions, were introduced thousands of years before that of Venice, Italy. In fact, one of my arguments is that accounting was not a modern-day invention, as viewed by many, but it dates back over five-thousand years, making it one of the oldest human inventions.

Accounting’s origins are often misunderstood and overlooked by many people, which, sometimes, undermines its importance. Every major discipline, science, and art has a rich history which gives it a sense of identity, a solid foundation that helps people to better understand and respect it — and accounting is no exception to that. A comprehensive look into the “art” of accounting can show that it is necessary in our world in order to ensure order — both in our societies and economies; it affects us in ways that we rarely contemplate — ranging from day-to-day transactions, to global economic trends.

According to Doug Bennet (2015), accounting was first applied over 5,500 years ago in the Mesopotamia region and what is today known as Iraq. Back then, traders used journals that were made by clay to record the sale and purchase of crops and other goods, such as dietary products, kitchen items, wheat, and weapons. Two main reasons influenced the introduction of this method — fraud among traders, and avoidance of paying taxes to governments and rulers. Over time, accounting evolved and became a widely-spread practice among traders, merchants, and governments. It was the start of an era where order was desirable and pursued, while fraud and crime were persecuted. Years later, Greeks took the very basic recording practices that dated back to Mesopotamia and further developed the system. When Greek city-states instituted public building projects and paid for them with taxes, governments demanded an accounting of the amounts spent. In response to that, public officials developed a formal accounting system and appointed auditors to oversee the numerous functions that were taking place. 500 years after Greece’s input in accounting, however, Greek culture started to decline. And it was during that period of time when other civilizations started to adopt Greece’s practices.

Since then, people had been revising, implementing new concepts, and improving the accounting system; however, the modern accounting that we use today is believed to have originated in Venice, Italy — a global city-port in the Mediterranean Sea, and an epicenter for growth in southern Europe. It was then when the double entry system — the foundation for accounting — a method of putting debits on one side of a ledger and credits on the other, was introduced, and it was then when historians were provided with enough evidence and works from people like Luca Pacioli and Cosimo De’ Medici that led them to create their final conclusions about modern accounting’s origins. During the same period, accounting started to diverge and evolve in many different directions, meeting the various financial needs that were constantly arising in global trade and financial centers like the one of Venice.

For thousands of years, the ancient world was steeped in accounts, but there was almost zero progress and innovation, and few used the tools at their disposal. Single-entry accounting (each transaction representing a single entry in a journal or ledger) existed for thousands of years (in ancient Mesopotamia, Greece, Egypt, China, and Rome), but none of those civilizations managed to create a double-entry accounting system, so essential for the precise calculation of profit and loss (Soll 2014). By the twelfth century, northern Italy was a dominant force in the Mediterranean region and, as the richest and most populous place in Europe, it dominated trade. Italy’s rise as a maritime trade center wasn’t random: Its strategic location (in the middle of the Mediterranean) gave it access to three different continents — Africa, Europe, and West Asia. During that time, Italy was not one unified country, but was dominated by merchant-run city states, such as Florence, and Venice. Without kings and a central government, Italy was transforming into something new: an epicenter of growth and development, run by merchants whose wealth came primarily from trade. It was in cities like the one of Venice that modern banking, new recording practices, and long-distance trade developed (Soll 2014).

It was becoming increasingly hard for merchants and traders to keep track of their purchases, and, for that reason, a new system needed to be invented to keep up with the advancements — the double-entry bookkeeping system, a well-developed system used to identify, record, analyze, communicate, and present economic events (Weygandt 2015). The double-entry method enabled Venetian traders to capture the effects of business transactions before or after they affected cash flows. For example, when merchants earned revenue by selling their goods, they could easily recognize a change in their net worth by entering a transaction that either increased or decreased their profits and assets. This system also allowed them to record transactions, even when the cash was to be received at a later date. The earliest double-entry accounts were in paragraph forms, and the debit and credit paragraphs were corresponding; however, over time, the paragraphs were replaced with descriptions and written in side-by-side columns (Soll 2014). Many nowadays confuse the meaning of debits and credits in accounting. Debit simply represents the left side of a transaction log or journal, and credit represents the right side; it is a reworked version of the single-entry system (which utilized only one side) that was used in the past.

Because of all the advancements on bookkeeping practices, a modern banking system was also desirable. Cosimo De’ Medici came up with an ideal solution: He formed the Medici bank — a bank that used state of the art accounting tools and techniques to measure and allocate profits, which, later on, led to the improvement of the double-entry process, bringing it closer to the one that we use today (Bennet 2015). However, even though demand and pressure led to the improvement of the system, it wasn’t properly documented until a Dominican friar, Luca Pacioli (often referred as the father of accounting), published his first accounting textbook in 1494, describing how the system functioned. Among all that, he also introduced the concept of journals and ledgers to facilitate bookkeeping and proposed the use of a trial balance to verify postings (Gleeson-White 2013). According to Doug Bennet (2015), for Pacioli, “accounting was a means of bringing order to a chaotic world and even measure the virtue of vice of men and women before their maker” (p. 8). Keeping in mind Pacioli’s words, it is agreeable, by many, that accounting has the power and the potential to bring order to our political and economic world, and this realization comes from Italy’s firsthand experience with a developing accounting system, slowly unlocking its full potential.

Fig. 1. Brown, J. John. Sing Sing Prison. Photograph. Double-Entry Journal

The introduction of the double-entry system was based on two factors: to provide order in the political and economic world, and to discourage and prevent theft and fraud. To understand its power, it is important to examine what accountants call the fundamental accounting equation: The assets controlled by a person or organization always equal to the claims on those assets held by its owners and creditors (Gleeson-White 2013). This allows merchants, traders, businesses, and governments to track their assets and obligations, while preventing theft and misuse. These developments, that help individuals and governments to keep track of their finances, act as measures of performance and make double-entry bookkeeping “a tool for financial planning, management, and accountability” (Soll, 2014, p. xv). Important political and economic writers (e.g., Adam Smith; Karl Marx; Max Weber) considered proper accounting bookkeeping of tremendous importance to the development and maintenance of successful economies. Max Weber (1923), a German sociologist, once said that modern firms and governments are bound with accounting, “which determines its income yielding power by calculation according to the methods of modern bookkeeping and striking a balance” (p. 225). Weber (1923) considered accounting an important element to the development of capitalism and the sustenance of nations. And, indeed, double-entry accounting matters not only for calculating profits, but also because it establishes a concept of balance that that “could be used to judge and hold accountable a political administration” (Soll, 2014, p. xvi).

It is now apparent that the accounting system doesn’t have a sole function and focus, but it has the power to sustain, improve, or even destroy, entire nations and empires. Historical research suggests that when rulers, governments, merchants, and entire economies in general, implement accounting into their culture, and treat it as a means for prosperity and not just as a tool to be used when needed, it is then when they succeed and set the foundations for the future. An example of that comes from Jacob Soll (2014) in his book “The Reckoning:”

The Emperor Augustus is famous today for his buildings and his statues… but the key to Augustus’s power can be found in his own account of his reign, the Res gestate divi Augusti. In it, he describes buildings, armies, and feats. He also includes a lot of numbers. Indeed, he measured his own success by them… Financial numbers, symbols of Augustus’s great achievements, were taken from entries in rudimentary account books. The true founder of the Roman Empire linked accounting and transparency of numbers with political legitimacy, stability, and achievement. (p. 1)

In today’s world, Augustus’s approach doesn’t sound strange or outdated; instead, very well familiar. In a business dominated society, where millions of transactions take place every hour, and where numbers are more important than ever before, proper accounting is a necessity to ensure a suitable flow in the economy. Part of the success of a nation is based on proper handling of numbers, analysis, and interpretation of economic events.

Developments in accounting continued to be made, and — as result of economic, industrial, political, and societal developments — accounting started to further diverge and evolve, having started in Venice, Italy and continued past the Industrial Revolution, up to the present. The bookkeepers are the earliest form of accountants. They emerged thousands of years ago, and they set the foundations for what was to follow. The point where the accounting system started to diverge into branches and specializations was during the end of the 18th century, during the Industrial Revolution. Because of the automation and an increase in production, thus an increase in demand, business owners and managers needed a better way to run their businesses, as cost efficient as possible. People began to specialize in accountancy. The traditional branches of accounting that have been established today include: taxation accounting, financial accounting, managerial accounting, cost accounting, auditing, and forensic accounting. These branches are specializations in particular areas, providing expertize and in-depth insights to these fields. For instance, tax accounting helps individuals and businesses follow and comply with the rules that are set by the tax authorities and the governments, while financial accounting involves recording, analyzing, and communicating financial information to mainly external users, such as investors, in accordance with regulations. (Weygandt 2015). Meanwhile, managerial accounting is more focused on internal users and is less regulated, its goal being the interpretation and communication of information for an organization’s goals. Each major branch focuses on different areas, contributing to the expansion of the accounting system, allowing room for further innovation and development to the practices that are being currently employed. Today, accounting is a business itself, with an increasing number of practitioners worldwide, and with governing bodies that oversee all the accounting functions. In the U.S., the Generally Accepted Accounting Principles (GAAP) are a set of standards and regulations that accountants and companies must follow when they make their financial statements publicly available. In an article in the Wall Street Journal, Theo Francis (2015) states that GAAP is a combination of authoritative standards and commonly accepted ways of recording and reporting accounting information. Internationally, the International Financial Reporting Standards (IFRSs) are overseen by the International Accounting Standards Board (IASB), which shares many similarities with its American counterpart (GAAP).

We now harvest the power of accounting, and constantly try to improve and build upon it as we advance in both our economic and technological sectors. Studying and understanding the history of accounting, a history that is not much discussed, analyzed, and appreciated, opens the doors to understanding our past, which helps us prepare for the future. The “art” of accounting has been evolved and improved throughout the years, but it is far from perfect. Flaws exist, and will never entirely disappear as we continue to develop and expand our economies and our trade. Accounting acts as a stabilizing force: it as a check and balance for an entire economy — when used correctly, it can benefit an entire nation, but, when misused, it can result to disaster. It is up to us to preserve and continue to innovate in this field, while also remembering its rich history throughout the millennia.


Citations:

Bennett, D. (2015). A history of accounting. Armed Forces Comptroller, 60(1), 6–9.

Francis, T. (2015, December 14). U.S. corporations increasingly adjust to mind the GAAP. Retrieved April 26, 2017, from The Wall Street Journal.

Gleeson-White, J. (2013). Double entry: how the merchants of Venice created modern finance. New York: W.W. Norton & Co.

Soll, J. (2014). The Reckoning: Financial Accountability and the Rise
rise and Fall of Nations. New York, NY: Basic Books.

Weber, M. (1923). General economic history. New York: Cosimo.

Weygandt, J. J. (2015). Accounting principles, (12th ed.) Hoboken, NJ: John Wiley & Sons.

Nikolaos Panaousis

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Writing, talking about global affairs, creating connections, researching, and staying engaged locally and globally. 🌍

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