The Language of Accounting
Three chickens standing around
The language of accounting and all things financial most likely emerged in the 14th or 15th century when society was using the barter and trade system. Individuals would keep ledgers that described trades or services rendered, such as the exchange of three chickens for a bag of seed.
These simple narratives in private ledgers offered proof of transactions when disputes were brought before magistrates.
When currencies came into use and material wealth evolved, so did bookkeeping. Merchants began employing bookkeepers to track and record what was owed and who owed them. During this period, numbers were arranged in a single column with a narrative listing the date of transaction, amount paid or owed and details such as sold one year’s worth of eggs, etc. The only downside to this system was the time involved in deciding to deduct or add monthly profits or losses.
Who is the father of accounting?
Textbook published in 1494
As to who exactly developed the modern accounting system of double entries, is up to some debate.
In the 15th century, Franciscan monk Luca Pacioli, a friend of Leonardo da Vinci and his math teacher, is credited with publishing a textbook in 1494 which listed an entity’s resources separate from any claim upon those resources.
In short, he created a balance sheet with debits and credits separated. This bookkeeping system was more efficient and offered a more accurate picture of a businesses’ overall strengths.
However, Pacioli never claimed to have invented double-entry bookkeeping.
In fact, 36 years before his treatise on the subject, Benedetto Cotrugli or Benedikt Kotruljevic from Croatia, described double-entry bookkeeping in 1458 in his treatise: Della mercatura e del mercante perfetto or Book on the Art of Trade, which included a short chapter describing double-entry accounting. His book was published two years after Columbus discovered America.
Assets = Liabilities + Owners’ Equity
Whoever devised the first system of double-entry bookkeeping led to the equation we know today as: Assets = Liabilities + Owners’ Equity.
As Europeans migrated to America, this new system followed and later with the appearance of the railroad and corporations, bookkeeping transformed into the modern practice of accounting. It was the emergence of railroads that seemingly shrunk the size of America and sped up the passage of information from city to city and the amount of business transactions that could be performed in a matter of days, or months.
Then as corporations grew and tried to attract more capital to improve and expand operations, financials were being published as balance sheets which offered better analysis.
Thanks to this powerful equation, business owners, workers and entrepreneurs can make wiser decisions on the value of their assets and worth.
Balance sheet. Courtesy: Accounting Coach