Pacioli

Luca Pacioli published the first book on accounting, Summa de arithmetica, geometria, proportioni et proportionalita, in 1494. I used to think that it mattered that the first book was written by a Ragusian merchant Benedetto Contrugli and that he should have got the credit.

However Pacioli wrote clearly and formalised the practice that had been developed in Renaissance Italy. His exposition is a masterpiece which I have come back to several times. It is more of a textbook than an invention. The history of how the Venetians arrived a this point is complex coming from Indian and Arabic sources. From a business perspective it is vital if a business is make a profit or a loss but conceptually it is just a difference in sign.

The ICAEW has a nice digitised copy of Pacioli’s book.. Geisjeeck has a good english translation of Pacioli’s book which i available at the Internet Archive.

There is a lot in this short book which is a handbook for Renaissance traders and the foundation of current accounting practice but I want to focus on two areas:

• the 4 books of record
• recording of journal entries

The 4 books of record

The four books are the :

• Inventory
• Memorandum
• Journal
• Ledger

They are described in Geisjeeck translation as :

First, we shall speak of commerce in general and its requirements. Immediately
after the Inventory, you need three books to make the work proper and easy. One
is called Memorandum (Memoriale) , the second Journal (Giornale) , and the third
Ledger (Quaderno). Many, on account of their small business, use only the last
two, that is, the journal and the ledger.

Although Pacioli counts three books, the inventory is an important part of the process and the simplest to understand. In a stock take at the end of a year it is rare that there is an exact match and some adjustments will be needed. Constructing the inventory is also the starting point of accounting records. It will be a much smaller document than th others.

There is duplication between the books. The inventory is a point of time record like a balance sheet. The memorandum, journal and ledger all cover a period of time. From any one of the other three books it is possible to reconstruct with a significant amount of work a ledger and journal to at least the level of the numerical entries. So this provides a level of redundancy. The double entry of items provides for error checking.

Something that is clear is that the memorandum or day book

Recording of accounting journals

The journal entries record the movement of money from one account to another. This is covered in more detail in the section on why Pacioloi was wrong.