To: Dr. Moffitt
From: Daniel Arnold
Date: 3/5/15
Re: Individual Project – “The History of Double-Entry Bookkeeping”

Accounting has played an important role in the evolution of civilization, even before the modern concept of ‘accounting’, as understood by modern man, existed. Man’s drive to measure and record his surroundings required more and more complex means in order to do so (Gleeson-White 11). This drive to more complex recording techniques led to writing, a numeric system, the spread of arithmetic, and created a standard system in an effort to ease international trade. The scope of this paper will focus on the realization of double-entry bookkeeping, a major branch of accounting.

Double-entry bookkeeping (DEB) is defined as an accounting system that recognizes both sides of a transaction using equal amounts of debits and credits. Unlike a single-entry system, it tells the whole story of a transaction (Gleeson-White 11). In order to understand how DEB came into existence, one must reflect on history. As stated earlier, man’s natural drive to measure and record events around him led to arguably one of the biggest single leaps in human civilization - writing. Professor Denise Schmandt-Besserat discovered this link between writing and accounting in 1969. Schmandt-Besserat asserts this about her discovery: “the origin of writing is no longer a mystery…contrary to all expectations [no one would have] guessed that writing derived from counting” (Gleeson-White 10).

Schmandt-Besserat was researching small, three-dimensional clay figures of varying geometric shapes other archaeologists had discarded and left languishing in storage. After grouping these shards together, she realized she was examining a rudimentary system of bookkeeping, which dated back to 7000 BCE, thousands of years earlier than the first known examples of writing (Schmandt-Besserat). Archaeologists have dubbed this system and others like it “proto-writing” (Mattessich).

Certain ‘assets’ such as sheep, goats, or grain, were represented by these clay figurines. Multiples of these ‘assets’ would be represented by different, but noticeably similar, shapes (one sheep might be a sphere and 10 sheep might be an egg). Eventually this system would allow for 300 token shapes (Gleeson-White 12). At some time, between 7000 BCE and 3500 BCE, the Sumerians grouped these clay figures together and then baked them into a clay envelope with symbols pressed into the outside to denote the contents (Mattessich). Essentially these envelopes became the first ‘account’. Schmandt-Besserat believes the Sumerians created these envelopes to prevent tampering. If one wanted to tamper with the contents, one would have to smash the envelope and the tampering would be evident (Schmandt-Besserat). In this method, we can see the seed of the first ‘account’ and with it the first ‘internal control’.

Around 3500 BCE, Sumerians went from pressing symbols into clay to using a stylus to etch symbols into flat clay tablets. This move, coupled with an ever-growing bank of symbols, coalesced into cuneiform, the earliest known form of writing (Mattessich). Until approximately 2000 BCE, writing was the exclusive tool of merchants until co-opted by religious personnel and lawmakers (Gleeson-White 12-14).

Man now had the written word to denote account titles, but still lacked a usable numeral system and a way to indicate combined transactions. No less than famed mathematician Leonardo da Pisa, AKA Fibonacci, would be the one to provide this numeral system. Fibonacci learned of the Arabic numeral system while travelling through the Mediterranean in the 12th century. Fibonacci wrote of this numeral system in his seminal work, Liber Abacci, “these are the nine figures of the Indians [sic Arabs]: 9 8 7 6 5 4 3 2 1. With these nine figures and with this sign 0 which in Arabic is called zephirum, any number can be written.” Liber Abacci further noted, among many other subjects, how this numeral system was applicable to commercial concepts such as weights and measures, interest, bartering and monetary exchanges (Gleeson-White 18-20).

Fibonacci’s contributions to accounting were not complete, however. He acquired a crucial idea from Northern Africa: arithmetic. Europe did have a rudimentary concept of addition and subtraction but could not do either in the abstract. If a European accountant wanted to add or subtract he would have to employ an abacus (Gleeson-White 19). In its simplest form, using an abacus is not much different from the physical trade of clay figurines thousands of years earlier. Liber Abacci provided examples of how to perform computations in the abstract. Fibonacci, via Liber Abacci, also introduced Europe to multiplication. Multiplication is essential in some modern accounting techniques like accruals of interest (Gleeson-White 19).

Historical records start to appear containing elements of DEB approximately, 100 years after Liber Abacci was published (Gleeson-White 19). Among the best preserved are the General Ledgers of Giovanni Farolfi & Co. (1299-1300). Study of the Farolfi ledgers by Dr. G. A. Lee (of Nottingham University) revealed the Farolfi Ledgers manifested what Dr. Lee called the six essential elements of DEB (Lee).
(1) Economic entity
(2) The concept of algebraic opposition
(3) Monetary unit
(4) A = L + E
(5) The concept of profit and loss and that profits and losses change equity
(6) Periodicity

By using debits/credits to increase/decrease accounts, Farolfi neatly sidestepped a problem in European mathematics still unresolved. Although Indian and Arabic mathematicians had resolved problems with negative numbers as early as 620 CE, European mathematics was still deeply rooted in Greek concepts, which had no experience with negative numbers due to their high reliance on geometric proofs. By their very nature, lengths, areas, and angles cannot be negative. Thus, the Greeks never seriously encountered negative numbers and therefore had no way in which to handle them - and by extension neither could the Europeans. (Rogers). It is worthwhile to mention here that the Indian mathematician who first resolved negative numbers used accounting terms and concepts in which to do so. Farolfi’s ledgers almost meet the requirements for DEB, as we know it today. However, the ledger’s that survive are from one branch of a rather large company. The other branches were not using this proto-double-entry system, so this system did not go beyond the Tuscany region of Italy (Lee). One last issue of note regarding the Farolfi Ledgers is that they are examples of the first serious attempt at stating an annual balance (balance sheet) and determining profit (income statement). Although this seemed to be more of a personal preference since it would have been very rare to show these books to anyone outside of the company (Lee).

Finally, all the elements were in place in order to formalize the rules for DEB. Someone just needed to take the concepts mentioned earlier and coalesce them together to ensure their place in history. That someone was the Franciscan monk, Luca Pacioli. Although, as mentioned earlier, good examples exist of DEB almost 100 years before Pacioli. He was the first to publish them for the entire world to see in 1494. Pacioli used the printing press, which was still relatively new and still expensive to acquire, to publish a treatise on mathematics and similar subjects called, Summa de arithmetica, geometria, proportioni et proportionalità (Review of arithmetic, geometry, and proportions). Summa contained over 300 sections and only 13 are on DEB, but it was the first codification of DEB procedures. Summa was printed using typeset and thus was distributed quickly by Renaissance era standards. Many people, seeing the benefit of such a well-organized accounting system, adopted it immediately (Lauwers).

In Summa, Pacioli lays the foundation for DEB procedures that would be very familiar to modern-day accounting students. For instance, when Pacioli writes, “[double-entry’s] regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly” (Lee) is a clear parallel to one of FASB’s fundamental qualities – relevance. FASB relates that in order for information to be relevant is has to have predictive value. Pacioli also mentions one should journalize first then post to a ledger (beginning of the accounting cycle) and introduces trial balances, balance sheets, and closing procedures (though modern accounting has departed much from his original closing procedures) as we know them today. Pacioli did not stop at DEB concepts in Summa. It is worth noting that Pacioli is also credited with first mentioning the Rule of 72 and he clearly advocates regular auditing (he just does not use that word) of one’s books (Lee).

Modern historians agree that Pacioli did not invent DEB; he merely catalogued procedures extensively used in Venice. Several examples exist of DEB before Pacioli. In fact, a complete text by Benedetto Cotrugli, a diplomat of Naples, dated 1458 is the earliest known complete codification of DEB. However, Cotrugli’s manuscript published in 1573 was 79 years too late (Lauwers).

Eventually DEB became the standard in Europe and, by way of European colonists, a majority of the world. DEB was firmly in place just in time for the dawn of the Industrial Revolution which some say might not have been possible without DEB (Double Entry Bookkeeping). The Industrial Revolution began to see a departure from smaller proprietorships and partnerships toward huge corporations. These corporations were growing fast and to never before seen sizes. DEB allowed managers, potential investors, and owners to remain informed of their interests (Gleeson-White 130-136).

In summary, DEB has had a long road to realization and has been able to change with the modern financial world. Pacioli never considered ideas such as derivatives nor impairment losses but both concepts were able to integrate into DEB easily. Accounting in general was instrumental in developing writing and was among the first disciplines to use algebra and base 10 numerals. Whatever DEB’s role is in the future remains a mystery but its past is well travelled and diverse. Other methods may even take the place of DEB in years to come. The scholar of accounting may already be aware of momentum, or triple-entry bookkeeping however, triple-entry is relatively unknown beyond academic circles. If one thing is clear from studying accounting it is that no matter where man finds himself in the future he will find a way to measure and record it.

Appendix A

G. A. Lee’s Six Essential Elements as Written by Lee (Lee)

* the concept of the individual proprietor or (more clearly) the business partnership as an accounting entity, whose books record its financial relationships with other economic agents; * the concept of algebraic opposition, firstly between increases and decreases in a physical holding of cash or goods, secondly between increases and decreases in the level of indebtedness by or to another economic agent or entity, thirdly between indebtedness by, and to, other entities in general, and fourthly, and least obviously, between assets and liabilities of the entity accounted for; * the concept of a single monetary unit, to which amounts in other currencies are converted, thus making the entries additive overall; * the concept of proprietors' equity, as the algebraic sum of assets and liabilities; * the concept of profit or loss, as the net increment or decrement to equity resulting from one or more acts of exchange between the entity and its economic environment (excluding the proprietors); and * The concept of an accounting period, over which profit or loss may be measured.

Negative Number Rules from India Using Accounting Terminology (Rogers)

The Indian mathematician Brahmagupta stated the rules for dealing with positive and negative quantities as follows: * A debt minus zero is a debt. * A fortune minus zero is a fortune. * Zero minus zero is a zero. * A debt subtracted from zero is a fortune. * A fortune subtracted from zero is a debt. * The product of zero multiplied by a debt or fortune is zero. * The product of zero multiplied by zero is zero. * The product or quotient of two fortunes is one fortune. * The product or quotient of two debts is one fortune. * The product or quotient of a debt and a fortune is a debt. * The product or quotient of a fortune and a debt is a debt.

Works Cited
Double Entry Bookkeeping. n.d. Article. 25 February 2015. <http://www.quickmba.com/accounting/fin/double-entry/>.
Gleeson-White, Jane. Double Entry: How the Merchants of Venice Created Modern Finance. New York: W. W. Norton & Co., 2012.
Lauwers, L and Willekens, M. Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli. 1994. 10 February 2015. <https://lirias.kuleuven.be/bitstream/123456789/119065/1/TEM1994-3_289-304p.pdf>.
Lee, Geoffrey. "The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299-1300." Accounting Historians Journal 4.2 (1977): 79-95. Journal Article. <http://clio.lib.olemiss.edu/cdm/compoundobject/collection/aah/id/1742/rec/9>.
Mattessich, Richard. "The Oldest Writings, and Inventory Tags of Egypt." 1998. Accounting Information. Document. 20 February 2015.
Rogers, Leo. "The History of Negative Numbers." n.d. maths.org. Article. 22 February 2015. <http://nrich.maths.org/5961>.
Schmandt-Besserat, Denise. en.finaly.org. 8 December 2008. Document. 24 February 2015. <http://en.finaly.org/index.php/Two_precursors_of_writing:_plain_and_complex_tokens>.

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[ 1 ]. Definition taken from www.merriam-webster.com
[ 2 ]. Cuneiform would write a symbol several times in a series or pattern to denote a large number like 50. This was not easy to combine with other ‘numbers’. It would be similar to trying to add a picture of a bird to a picture of a rock.
[ 3 ]. Merchants were still combining by physical means. The concept of abstractly combing numbers was coming.
[ 4 ]. Summarized here. Entire original text shown in appendix A
[ 5 ]. Modern mathematics allows for negative angles but a negative angle is merely a restatement of a positive measure. The classic definition of an angle is two rays subtended by the arc of a circle. Circle arcs are distances and distances can never be negative.
[ 6 ]. Entire original text shown in appendix A
[ 7 ]. Relevance -Accounting information has relevance if it would make a difference in a business decision. Information is considered relevant if it provides information that has predictive value, that is, helps provide accurate expectations about the future
[ 8 ]. Rule of 72 -a mathematical procedure to determine how long before an investment doubles at a given interest rate.