* First bookkeeping book printed in 1494 – very little change to bookkeeping * Since emergence of record keeping similar to banks and governments were applied to mercantile affairs, bookkeeping has possessed theory, form, and technology * Ancient theory in bookkeeping was inferred * Double entry arose from a certain methodology – double posting passed the test of mechanical accuracy. It is a fact that every transaction has dual aspect * System of debits and credits was used in ancient times – rise of proprietor and proprietorship allowed use of all financial elements of trade rather than just a system of record keeping * Paciolo showed no theory behind the ‘canceling out’ of debits and credits and the journal entry that followed, however he shows strong consciousness by closing accounts to profit and loss, and then closing those to capital * So consistent but did not dwell on theoretical explanation
Similarities to Modern Accounting * Paciolo used ‘subtraction by opposition’ – creditors placed on right side, and debtors on left side * Characteristic technology very similar to today – in debit and credit ledger, ‘de dare’ and ‘de havere’ (shall give, shall have) appeared, also ‘per’ (by) and ‘a’ (to) were used to indicate a debit and a credit, respectively * Transactions were listed like the following, ‘by cash to capital’ – today, we dropped the use of the words, and use indentions for credits * P. also made use of a trial balance – ‘you shall summarize…all the debit items of the ledger….and summarize all credit items….’ * P. used similar rules and the same sequence of bookkeeping operations – methodology is the same in ancient times as modern times * P. used same opening inventory method – list on a sheet of paper everything you own, starting with the most valuable and easiest to lose (liquidity) * P. had a provision for bad debts, but not for an allowance for bad debts * He also had an understanding of a petty cash account – an amount was charged to expense and set aside for small payments that could not be kept track of one by one, and also recommended separate accounting for a shop ‘outside your house’ as a means to monitor financial activity Differences * Lacked accounting theory – bookkeeping in ancient times was a means of recording procedure, and no explanation as to why one does these was needed * Ledger account has become more simplified, journal entries replaced phrases with position * Simple records no longer satisfactory due to businesses growing in size and complexity – within last one hundred years refinements of theory have been added, but bookkeeping as a whole is fairly unchanged * Paciolo has no provision for financial statements, probably due to simplicity of merchant transactions – having accurate records of profit and loss was sufficient * This also means there were no periodical closing, periodical inventories, etc * Accounting theory followed the development of business (need for financial statements) * Ancients viewed business as disjointed transactions – today it is regarded as a continuous process; today we use terms like income and earnings, rather than profits * Cost accounting was non existent until modern times; ancient times also placed less relevance on fixed assets and wages * Mercantile expenses included household expenses, as well as gambling expenses and stolen or lost money Conclusion * Capital and revenue expenditures grew out of our desire to determine net profits carefully – did not relate to Paciolo (not like he missed something) * Modern times have actually only added a body of theory to ancient accounting (besides auditing and cost accounting) * Have not contributed much to practical side * ‘We work on long established foundations, and we have not improved the basic fundamentals of methodology ….it helps us to realize, as no modern work could, our debt to the Middle Ages’