Luca Pacioli's Particularis de Computis et Scripturis
By L. Lauwers and M. Willekens
"According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly.
Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books are at the direct basis of this system: the memorandum (memoriale), the journal (giornale), and the ledger (quaderno). The latter book is considered as the central one and is accompanied by an alphabetical index.
The use of several other books is also suggested in Pacioli's treatise, such as: an inventory book and a receipt and/or payment book.
Pacioli describes the accounting procedures to be adopted right from the start up of a business. Before starting a business, it is considered as necessary to make an inventory (inventario) which comprises all the assets and debts. The inventory always relates to one single day and is to be written on a separate folio or in a specific book. In terms of today's jargon, this beginning inventory corresponds with an opening statement of financial position, or simply an opening balance sheet. Apart from furniture, all the main categories of goods are listed in the inventory: cash money, jewels, valuables, clothes, furnishings, merchandises, buildings, estates, deposits, borrowings, debtors and creditors.
By posting the inventory entries to the journal and then to the ledger, Pacioli initiates the reader into the accounting mechanics of double-entry: each journal entry gives rise to two entries in the ledger, once as a debit and once as a credit. Note, however, that Pacioli only refers to the inventory (which can be seen as a kind of balance sheet) at the beginning of the merchant's operations. At the time, it was not common to make an inventory, i.e. to draw a balance sheet, on a regular basis.
The subsequent recording of transactions is described as follows. First, there is the memorandum, which is a kind of diary and which only selves as a first rough draft. The events are recorded in the memorandum by anyone in the business who executes a transaction; this is done in chronological order and is accompanied by some narrative details. From the memorandum the bookkeeper is to record the transactions into the journal. In the journal the events are converted in debit and credit amounts, and all amounts are to be expressed in the same type of money! In a journal entry, "Per" (from) is used to indicate the account that is affected at the debit side, and "A" (to) is used to indicate the account that is affected at the credit side.
In summary, in the journal the opening inventory and all subsequent changes therein are recorded. Since no closing (i.e. end-of-period) entries are included in the journal, this book is to be considered as a technical aid in preparing the accounts in the ledger.
All journal entries are posted to the corresponding accounts in the ledger. Each account in the ledger took both sides of a double page. Debits were posted on the left hand side, and credits on the right hand side. Note also that Pacioli uses the terms "deve avere" (has to have) when referring to assets or asset accounts, and "deve dare" (has to give) when referring to liabilities or liability accounts. Pacioli explicitly states that the ledger should at all times be in equilibrium, and should this not be the case, the accounting system is in error. He further recommends to check the equilibrium on a regular basis. For this purpose, he suggests a procedure outside the accounting system, that is to list the totals of debits and credits per account and to make the sum of all debits and credits across accounts, which he calls the Summa Summarum.
What Pacioli actually suggests is to make a (interim) trial balance. Recall however that this exercise is not necessarily related to the process of closing the books (although it is adopted then as well), as it merely serves as a check. As to the question when and how the books should be closed, Pacioli's approach is incomplete in the sense that the procedure is entirely done outside the accounting system. Pacioli makes two suggestions as to when the books should be closed: either when the books are full, or at the end of the year. The procedure of closing the books consists of four steps. The procedure is initiated by ticking and checking the entries. Second, the asset and liability accounts (that is the inventory accounts) in the ledger are ciosed directly. This implies that per account the balance between debit and credit amounts is computed and recorded at the side with the smaller total. This balance then serves as the opening balance in the new ledger. Next, the nominal and expense accounts are closed in the same (direct) way, but here the balances are transferred to the profit and loss account, and subsequently profit or loss is transferred to the capital account.
Finally, the capital account is closed and its balance transferred to the new ledger. Before posting the closing balances to the new ledger, Pacioli recommends to compute the Summa Summarum (see before) as a check on the equilibrium in the accounts.
An important observation is that Pacioli does not make a direct link between closure of the accounts to open a new book, and drawing a balance sheet. Furthermore, the computation of profit or loss is not only done when the books are closed, but much more frequently. Again, this is done outside the accounting system on a separate sheet by listing all the debit and credit amounts for the nominal and expense accounts and herefrom computing the balance.
In the entire closing procedure, it is striking that no balancing accounts are used, since the accounts are closed directly. As a result the journal cannot serve to check the correctness (i.e. the equilibrium) of the accounting system. A similar "direct" approach is promoted by Stevin. Ympijn is the first author to introduce the use of balancing accounts in the closing procedure. Both authors published on double-entry bookkeeping after Pacioli (see Section V).
Some other - less technical - features in Pacioli's treatise are worth mentioning. It is, for example, recommended to have books authenticated by the official merchants' organisation in order to avoid fraudulent practises. Also, Pacioli almost always uses Arabic numerals to write amounts in the money column. Roman numerals are used to write the year at the top of each folio of the ledger. Finally, to distinguish successive sets of books, Pacioli recommends to mark the books of the first set with the sign of a cross, those of the second set with an A, of the third with a B, and so on.
V. ACCOUNTING BEFORE AND AFTER PACIOLI
Pacioli does not refer to the origins of double-entry bookkeeping. He does, however, by no means claim to have invented the system, expli- citly statiiig that his work is a reflection of ''enetiaii accounting rules as developed through international trade. During the eleventh and twelfth century the Italian city-states such as Genoa, Florence, and Venice were the leading trade centers. The oriental trade routes, extended during the crusades, turned Venice into a world market for oriental products (spices, sugar, different kinds of wood, cotton, silk, perfumes, ivory, glasswork, etc.).
Most likely, the Italians picked up their knowledge of double-entry bookkeeping at Alexandria, Constantinople, or some other eastern city (Colt (1844),p230). Recent investigations are supportive of this thesis. Albraiki (1994), for example, proves that during the early years of the Mamluk period (1250- 1517) double-entry bookkeeping was already in use in Egypt and Syria. It further appears that the Old Cairo geniza cllection!)'contains a fragment (dated ca. 1080) in the form of a journal and a four page account (dated 1134) listing both credits and debits (Scorgie (1994)).
Most accounting historians, however, do not accept double registration of a transaction, once as a debit and once as a credit, as a sufficient (albeit necessary) condition to meet the requirements of a double-entry accounting system. De Roover ((1952), p114), for example, states: "A necessary prerequisite is that all transactions be recorded twice, once on the debit and once on the credit side. If this requirement is not fulfilled there is, by definition, no double entry. This principle involves the existence of an integrated system of accounts, both real and nominal, so that the books will balance in the end, record changes in the owner's equity and permit the determination of profit or loss" (italics added). Kam ((1986), p29) defends the opinion that the key aspects of double-entry relate to the duality of accounts and the duality of classifications (i.e. assets versus equities) and to their equilibrium.
From a survey of accounting development in the Italian city states in the pre-Pacioli era by de Roover (1952), it can be concluded that at least "some" principles of double-entry bookkeeping were practised in Florence in the late 13th century. Surviving fragments of ac- count books of Rinieri Fini (dated 1296-1305) and Forolfi (dated 1299- 1300), both merchant-bankers, indicate that each enty, albeit still in paragraph form, gives a cross reference to a corresponding (earlier or later) debit or credit. De Roover strongly rejects that this distinctive feature (as compared to other systems at the time) meets the requirements of double-entry. The rationale is that there is no indica- tion of a procedure to close the books, and - in our opinion more importantly - there is no evidence that at the end a baiance can be drawn showing the assets, liabilities and the owner's equity.
The oldest discovered record of a complete double-entry system is the Messari (treasurers) accounts of the city of Genoa in 1340. These books do not only contain debits and credits journalised in a bilateral form, but also each transaction is recorded twice in the ledger. The ledger of 1340 further contains balances carried forward from a preceding one of the year 1339. Because of this, the Messari accounts enjoy general recognition as a double-entry system. Unfortunately, no records prior to 1340 were found in the Genoase archives.
Apart from the development of the principles of double-entry bookkeeping through Italian accounting practice, one other event in the pre-Pacioli era is worth mentioning. In 1458, and hence prior to the publication of the Summa, Benedetto Cotrugli wrote a chapter, entitled "Dell'ordine di tenere le scritture mercantilmente" in a general book on merchant practices (entitled "Della mercatura e del mercante per- fetto"). This book remained, however, unpublished until 1573. Although various accounting historians categorise Cotrugli's chapter as containing elements of double-entry bookkeeping, there are major quality differences with Pacioli's work. First, only a few folio's (one chapter out of fifty in a book containing 212 folio's on trade in general) are dedicated to bookkeeping. Second, the influence of Pacioli's work over the years has been far more reaching than Cotrugli's (even after 1573). De Waal(1927) considers Cotrugli's work as a general des- cription of trade practice at the time, and concludes that most likely by the second half of the 15th century double-entry principles were extant in Italian city states.
The spread of the Italian accounting rules over the rest of Europe and thence further afield, was the result of treatises, some of them strongly based on Pacioli's work, describing and explaining the system and its practice. The "Quaderno doppio" (Venice (1534)) of Domenico Manzoni da Oderzo was one of the first reproductions of Pacioli's "De computis". This work, important because of elaborate examples, was very popular and widespread among merchants: it enjoyed no less than seven editions between 1534 and 1574.
Other books that are directly or indirectly based on Pacioli's work are Hugh Oldcastle's "Profitable treatyce" (London (1543)), a translation of Pacioli's tractatus (Lanero (1994)), and Wolfgang Schweicker's "Zwifach Buchhalten" (Double-entry bookkeeping, Neurenberg (1549)), a translation of the Quaderno doppio.
The first printed treatise on Italian bookkeeping in the Dutch language was provided by Jan Ympijn Christoffels, the founder of the socalled Flemish school (ten Have (1973), p69). His "Nieuwe instructie" (New instructions, Antwerp 1543), a rewrite of Pacioli's tractatus, was also translated into French (1543) and English (1547). Simon Stevin was the last author of this Flemish school. His "Wiskonstige ghedachtenissen" (Mathematical memoirs, Leiden (1608)) contains about 100 pages on bookkeeping. In addition, Stevin gave new insights in the general principles behind accounting. De Waal((1927), p289) states that the development of the theoretical side of accounting until as late as the 19th century was based on the writings of Luca Pacioli and Simon Stevin. In the post-Pacioli era, thus, relatively few changes to the double-entry accounting system emerged until the 19th century. The industrial revolution and the rise of capitalism propelled the further development of accounting systems and accounting theory in the 19th and 20th century.
Aggregation of capital and labour in factories where steam and other power sources were applied to produce standardised goods on a large scale led to dissatisfaction with some aspects of merchant double-entry bookkeeping (Mathews and Perera (1991), p19). Problems associated with depreciation of machinery, allocation of fixed costs and overheads and some inventory costing issues were new at the time, and had not existed in the days of craft industries and owner managers. As a result, "cost accounting" issues received considerable attention. The need for large amounts of capital to finance industrialisation resulted in pressures to change the legal framework in which companies operated (Goldberg (1949), p22).
Separation of ownership and control was first established in the U.K. in the middle of the 19th century by way of Joint Stock Companies and Limited Liability Companies. This resulted in a split of accounting systems for internal (i.e. managerial accomting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.
Nowadays accounting research and practice continues to develop in various directions and in correspondence to economical, regulatory, and social conditions. Nevertheless, Pacioli is not forgotten, which may be concluded from the foreword of the Programme book of the 17th annual congress of the European Accounting Association (Venice, April 6-8,1994): "The choice of Venice also has a strong symbolic meaning fcr all acccuntants. As is well known, it was in Venice that in 1494 Fra' Luca Paciolo published his "Summa", the first printed book on double-entry bookkeeping. The Venice Congress, therefore, coincides with the five-hundredth anniversary of the emergence of our field."
Pacioli wrote the first printed mathematical encyclopedia, known as the Summa. This work set the boundaries of contemporary knowledge, and drew a framework for major advances in algebra which would take place during the next century. Thanks to the Summa, Pacioli has gained a place in the history of mathematics. By including a treatise on bookkeeping, Pacioli is considered the father of accounting. As he lived and taught in the Italian city-states during the early Renaissance, Luca Pacioli was in a fortunate position. Libraries had been enriched with manuscripts of ancient Greek writers as a result of the fall of Constantinople to the Turks in 1453, and the related flow of refugees into Italy. Further, thanks to the invention of printing knowledge disseminated at an unprecedented rate. And finally, Pacioli's experience in bookkeeping turned him into an eligible candidate to organize and to structure a large part of mercantile arithmetic which had been developed through the intense commercial activity in Italy. We end this paper by quoting the inscription on the memorial stone placed in Pacioli's house of birth in Borgo San Sepolcro in 1878. The text reflects the essential significance of Pacioli: "For Luca Pacioli, who had da Vinci and Alberti as friends and advisers, who turned algebra into a science, and applied it to geometry, who lectured in double-enty bookkeeping, whose work was the base and the norm for later mathematical research; for this great fellow citizen, the people of San Sepulcro, ashamed of 370 years of silence, have placed this stone, 1878."