By Andrew Beattie on February 26, 2009 A A A
Filed Under: Accounting, Balance Sheet, Bookkeeping, Financial Statements, Ledgers & Journals
Accounting is the language of business and, by extension, the language of all things financial. In the same way that our senses are needed to translate information about our surroundings into something understood by our brains, accountants are needed to translate the complexities of finance into summary numbers that the public can understand. In this article, we will follow accounting from its roots in ancient times to the modern profession that we now depend on.
Bookkeepers most likely emerged while society was still in the barter and trade system (pre-2000 B.C.) rather than a cash and commerce economy. Ledgers from these times read like narratives with dates and descriptions of trades made or terms for services rendered.
Example - Barter and Trade Bookkeeping
Monday, May 12 - In exchange for three chickens which I provided today, William Smallwood (laborer) promised a satchel of seed when the harvest is completed in the fall.
Wednesday, May 14 - Samuel Thomson (craftsman) agreed to make one chest of drawers in exchange for a year\'s worth of eggs. The eggs are to be delivered daily once the chest is finished.
All of these transactions were kept in individual ledgers, and if a dispute arose, they provided proof when matters were brought before magistrates. Although tiresome, this system of detailing every agreement was ideal because long periods of time could pass before transactions were completed.
The New and Improved Ledger - Now With Numbers!
As currencies became available and tradesmen and merchants began to build material wealth, bookkeeping also evolved. Then, as now, business sense and ability with numbers were not always found in one person, so math-phobic merchants would employ bookkeepers to keep a record of what they owed and who owed them. Up until the late 1400s, this information was still arranged in a narrative style with all the numbers in a single column whether an amount paid, owed or otherwise. This is called single-entry bookkeeping and is similar to what many of us do to keep track of our checkbooks.
Example - Single-Entry Bookkeeping
Monday, May 12
Bought one sack of seeds
Monday, May 12
Sold three chickens
Wednesday, May 14
Bought a chest of drawers
Wednesday, May 14
Sold one year\'s worth of eggs
It was necessary for the bookkeeper to read the description of each entry to decide whether to deduct or add it when calculating something as simple as monthly profit or loss. This was a very time consuming and inefficient way to go about tallying things. (To learn all about the history of money through the ages, see From Barter To Bank Notes.)
The Mathematical Monk
Continuing in the tradition of monks doing high-level scientific and philosophical research, in the 15th century, Italian monk Luca Pacioli revamped the common bookkeeping structure and laid the groundwork for modern accounting. Pacioli published a textbook in 1494 that showed the benefits of a double-entry system for bookkeeping. The idea was to list an entity's resources separately from any claims upon those resources by other entities. In the simplest form, this meant creating a balance sheet with debits and credits separated. This innovation made bookkeeping more efficient and provided a clearer picture of a company's overall strength. This picture, however, was for the owner who hired the bookkeeper only. The general public didn't get to see these records, at least not yet.
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Example - Basic Double-Entry Bookkeeping