MONEY, BANKING AND DOUBLE-ENTRY BOOKKEEPING

Each of those innovations changed human life in such fundamental ways that, once humanity had them we incorporated them (and the products and activities they brought in) into our daily lives to such an extent that we no longer gave them any more thought. Their fundamental role became no more remarkable than the presence of air and water.

The same is true of more recent innovations, such as radio, the telephone, computers, the Internet, laptops, and mobile phones. To those of us who lived through at least some of those innovations, we still think of them as life-changing developments. But ask anyone of school age and it is clear that to them, all of those technologies are just part of the everyday environment. Nothing remarkable. It is a measure of the greatness of any innovation that completely transforms the way we live, that before long we no longer recognize how profound and remarkable it is.

Time, then, to take a fresh look at double-entry bookkeeping.

The benefit of keeping detailed records of financial transactions was recognized back in ancient times. For example, in ancient Rome the first emperor, Augustus, created imperial account books and established a tradition of publishing data from them. While Augustus' primary purpose may have been propaganda—to publicize his personal spending—he made use of the accounts to plan projects and think about how the empire was managed. According to historian Jacob Soll in his excellent book The Reckoning, Augustus' attention to the accounts enabled Rome to flourish.

But the beginnings of modern bookkeeping came much later, in the emerging city-states of northern Italy in the eleventh century, where the Crusades sparked a massive growth in commercial activity. As trade flourished, merchants in Florence and Venice, in particular, developed a method of accounting that became known as bookkeeping alla veneziana ("the Venetian method").

In their ledgers, the Venetian merchants listed debits and credits in two separate columns. As Pacioli subsequently explained in Summa, this was the key to the new form of bookkeeping: "All the creditors must appear in the ledger at the right-hand side, and all the debtors at the left. All entries made in the ledger have to be double entries—that is, if you make one creditor, you must make someone debtor." Today, we call this "double-entry bookkeeping."

One important benefit of this system is it provides a built-in error detection tool; if at any moment in time the sum of debits for all accounts does not equal the corresponding sum of credits for all accounts, you know an error has occurred.

In Florence, in the fifteenth century, the bank run by the Medici family adopted double-entry accounting to keep track of the many complex transactions moving through accounts. This enabled the Medici Bank to expand beyond traditional banking activities of the time. It started opening branches in different locations, offered investment opportunities, and made it easy to transfer money across Europe using exchange notes that could be bought in one country and redeemed in another. This growth allowed them to dominate the financial world at a time when Florence was the center of the world for trade and education.

Looking back, we see that Venetian bookkeeping proved to be an ideal system for generating the financial statements that were required for the modern industrialized world. It could accurately record capital and income (as required by law and investors), it could distinguish between private expenses and corporate costs, and it could produce data that helped to evaluate past investment decisions.

It doesn't get more relevant and important to today's world than that.

To read the complete article, see:
HOW DOUBLE-ENTRY BOOKKEEPING CHANGED THE WORLD (https://www.mathvalues.org/masterblog/2019/4/26/how-double-entry-bookkeeping-changed-the-world)

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