Accounting 101 - Accounting Father ( Lucapacioli) PDF

Preview

Summary

Discusses why Pacioli is the father of accounting....

Description

The Father of Accounting online-accounting-degree.org/father-of-accounting-luca-pacioli/

Luca Pacioli The Father of Accounting ; The discipline and science of accounting is essential for the world economy to function well. Without an accurate way to keep track of investments, expenditures, depreciation, unearned revenue, and the thousand moving parts of a business, there would be no way to understand the true financial picture of a company and no way to be confident in its prospects. This would ground commerce and trade, capital investment, and other transactions that keep the economy running. After all, would you want to do business with someone that might be lying to you? The history of accounting is the background of industry that has driven global progress for centuries, but it’s not just a number churning machine. Several figures have made key contributions to the science. Yet, one of the most important people in the history of accounting is Luca Pacioli, a Franciscan friar who lived during the fifteenth and sixteenth centuries. Pacioli is today known as the “Father of Accounting.”

In the Beginning… Most people are not likely to think of accounting when the topic of the “world’s oldest profession” is raised, but many experts believe that accounting fits that description to a tee. From the beginning of trade, people needed a way to keep track of their business dealings even if those dealings were largely self-sufficient subsistence farming for their own needs. As civilization progressed, ancient bookkeeping methods were developed. In the so-called “Fertile Crescent,”of the ancient Middle East, bookkeepers would use clay tokens of different shapes and sizes to keep track of wealth. Each token could represent a different commodity — sheep, cattle, grain, and so forth. New technologies and recording methods developed over time, and as money was introduced to facilitate economic exchange, the token system was abandoned in the favor of written accounts. Bookkeepers literally became book keepers —they kept the written accounts. During the Italian Renaissance, Italian merchants began to involve themselves in trade with other cities, first trading across the Mediterranean Sea and then in other parts of the world. The increasing complexity of these trade relationships required better record keeping, and the system of double-entry bookkeeping emerged. Luca Pacioli, an Italian Franciscan monk wrote Summa de Arithmetica, Geometrica, Proportioni et Proportionalita in 1494–the first full description of this method of accounting, detailing the Italian merchant’s use of balance sheets, income statements, trial balances, and of course debits and credits. 1/4

During the Enlightenment and Industrial Revolution, Britain’s rise as the world’s chief economic power meant that accounting methods would have to advance as well. Men such as Josiah Wedgwood began implementing systems of cost accounting in their companies, and professional accountants began offering their services in London. Such methods were carried over to the United States, and large firms such as General Motors adopted these accounting methods as well. Today, standardized accounting practices are in use across the globe, helping companies around the world to stay afloat, attract investment, and keep the engine of the world economy running.

The Life of Luca Pacioli Luca Pacioli was born between 1446 and 1448 in Tuscany, Italy, where he received an education in the ways of medieval merchants and commerce. Over time, his interest in mathematics led him to become an expert tutor in the subject, and he wrote a textbook on mathematics to help instruct his students. During the years 1472–1475, Pacioli became a Franciscan friar, but he did not end his tutoring career. In fact, one of the people Pacioli later taught mathematics to was none other than the Renaissance Man himself: Leonardo da Vinci. Da Vinci and Pacioli later collaborated to write De Divina Proportione, a treatise on the mathematical and artistic concept of the golden ratio. While these two lived together in Milan, Da Vinci learned a lot about mathematics from Pacioli. The knowledge he gained would help Da Vinci create some of the excellent anatomical drawings for which he is known today. Much of Pacioli’s work in mathematics was not original or unique, but his writings had a large influence in Italy, allowing for information that was formerly the possession merely of the elite to be disseminated among the general populace. Pacioli died in 1517, the same year that Martin Luther’s 95 Theses in Germany would help spark the Protestant Reformation. In 1494, Pacioli published his most famous work —Summa de Arithmetica, Geometria, Proportioni et Proportionalita. In addition to providing instruction in standard mathematics, this work would also describe double-entry bookkeeping completely for the very first time. It was also the first textbook on algebra that was written in the vernacular language of northern Italy. As the popularity of this book increased, the concepts of double-entry bookkeeping spread throughout Italy and eventually the rest of the European continent. The book further describes some of the more popular accounting methods and tools in use among the northern-Italian merchants of his time. While it’s common now, the use of journals and ledgers were a relatively new and revolutionary creation in Pacioli’s time. He described the use of the ledger to account for assets like inventories and receivables, liabilities like notes payable, capital, income, and expenses. These accounts are the foundations of the balance sheet and income statements (as you accounting students should know!). The book further documents the use of a trial balance that can be used to prove a balanced ledger that is still open, and how to make year-end closing entries. 2/4

What is startling is how many of these concepts are still in play today. Almost every accountant that does the numbers for a client company makes journal entries to the general ledger, draws on the trial balance, or ties out numbers between the balance sheet and income statement. It’s because these ideas have become so widespread today (literally worldwide) that Pacioli is known as the “father of accounting.”

Debits and Credits Pacioli did not actually invent double-entry bookkeeping, nor did ever claim to have done so. He gave credit to one Bendetto Cotrugli for coming up with the system, as he relied on an unpublished by Cotrugli for the portion of his work on accounting in his own Summa (Though in reality, the earliest accounts of double-entry bookkeeping may have emerged from Muslim traders in the 7th century) . Nevertheless, Pacioli’s summation of the method was incredibly important for the history of accounting, as it was one of the first descriptions of double-entry bookkeeping to be distributed on a large-scale. Double-entry bookkeeping allows for a company or individual to keep track of credits and debits and thereby keep accounts in balance. Every financial transaction is recorded in two columns, debits in the left and credits in the right, ensuring that the ways in which each transaction affects every aspect of the company’s finances is properly recorded. For example, a company that takes payment for a specific service will record a debit in the cash account and a credit in the revenue account, allowing them to keep track of the real impact of the payment on the company’s bottom line. Because two entries are made here, the accounts are said to be “balanced.” Double-entry bookkeeping itself may not sound all that exciting, but without it, most experts would confess that the industrial revolution and growth of free-market capitalism could never have happened. Luca’s description of double-entry bookkeeping ensured that the process would become widely adopted across the Western world and would encourage the rise of Europe and the United States as eventual global powers. Without the work of an otherwise obscure Franciscan friar in the fifteenth and sixteenth centuries, the economy as we know it today could not exist. Pacioli’s description of doubleentry bookkeeping led to the rise of modern accounting, accurate record keeping, and the overall growth of industry and trade. Understanding his role in accounting history is important for understanding Western history and the way in which the economy functions today.

Additional Resources Beginner Bookkeeping — Knowing the accounting terms in this dictionary is helpful to understanding the history of accounting. Engines of Ingenuity — The importance of double-entry bookkeeping in the history of civilization is explained on this page.

3/4

Cliffs Notes: Double Entry Bookkeeping — A simple explanation of double-entry bookkeeping, the accounting method that Luca Pacioli pioneered, is found here. Dictionary of Scientific Biography — The Dictionary of Scientific Biography has this entry on the life and influence of Luca Pacioli. History of Double Entry Bookkeeping — A history of double entry bookkeeping and Luca Pacioli’s contributions to it can be found here. Luca Pacioli (1445–1517) — A fuller biography of Luca Pacioli is found on this UKbased webpage. Luca Pacioli: The Father of Accounting — Texas A&M University makes this short biography of Luca Pacioli available to web surfers. Source:AccountingDegreeOnline.net

4/4...