An image of Luca Pacioli

The History of Accounting

Estimated reading time: 4 minutes

Before trying to understand how accounting works, it can be helpful and illuminating to understand how it developed and helped to shape the modern world.

Early Years

Accounting as an activity dates back thousands of years. For as long as people have been able to write, they have kept records of agricultural output, tax systems and monetary transactions. As far back as 3,000BCE the ancient Sumerians, living in modern-day Iraq, used clay tablets to record laws, prayers and and accounting records.

A Sumerian clay tablet
Ancient Sumerian clay tablet showing an account of barley rations issued monthly to adults (30 or 40 pints) and children (20 pints) written in Cuneiform, circa 2350 BCE. From Ngirsu, Iraq. British Museum, London

The Development of Writing

We may like to imagine the motivation behind the invention of writing was the creation great works of literature, but in reality it was the far more mundane business of keeping records. It is claimed that the expansion of commerce and business during the 1st millennium BCE - and the resulting increased importance of accounting records - was the driving force behind the creation of the ancient Phoenician alphabet. Modern-day Arabic, Hebrew, Latin and Greek alphabets all derive from this alphabet.

During the same period as the Sumerians, the Egyptians also recognised the importance of accounting records. They used papyrus scrolls to record tax receipts and agricultural produce as well as other administrative items such as court records. They are also credited with the concept of auditing – if royal auditors discovered mistakes in their audit of the grain-barns, the book-keepers responsible for the erroneous records could be punished with mutilation or death! Thankfully bookkeepers have less to fear these days, although senior managers can receive prison sentences in cases of corporate fraud.

The Egyptians had no currency and so their accounting records were simple lists, rather than modern accounting where every item has both a description as well as an estimated financial value. A key part of accounting is estimating the monetary value of a company's assets and liabilities, which it records on its balance sheet.

The First Currency

The ancient Greeks made significant developments in the scale and complexity of accounting with the creation of a minted currency in about 600 BCE. This allowed them to create detailed records of public finance and even to have a banking industry that could facilitate transfers over long distances. The Athenians introduced the world to democratic principles, and they applied these in accounting governance as well. 10 public accountants were elected and charged with managing public finance effectively.

2 Ancient Athenian coins
Ancient Athenian coins, circa 467-465 BCE. Silver Dekadrachm (43.38 g). One side of the coin shows the head of Athena, goddess of wisdom, wearing an earring, necklace, and crested Attic helmet. The other side shows an owl with its wings spread.

 

The Romans had a complex financial system in order to manage their vast territories. Households had to maintain records of income and expenditure which were used as the basis for taxation. The quaestors were the modern-day chancellery in charge of managing the treasury and public expenditure. The treasury was housed in the impressive Temple of Saturn in the Roman Forum, the remains of which are shown in the photo below.

The remains of the Temple of Saturn in the Roman forum.
The remains of the Temple of Saturn in the Roman forum.

Despite the advancements in financial administration the Romans made, the sheer scale and complexity of managing public finance and funding the public Roman armies was one of the reasons that private armies controlled by individual generals such as Julius Caesar and Gnaeus Pompey emerged. These private armies were a significant factor that led to the transition from the Roman republic to the Roman empire.

Double-Entry Bookkeeping

While these ancient civilisations all recognised the importance of financial management, the concept of double-entry bookkeeping used around the world today was not invented until the Italian Renaissance, about a thousand years after the fall of the Roman Empire.

An Italian monk called Luca Pacioli who was a contemporary and friend of Leonardo Da Vinci described a system of the familiar debits and credits in his Summa de Arithmetica, Geometria, Proportioni et Proportionalita. As the name suggests the book mostly covers mathematics, but in a chapter devoted to business Pacioli describes the accounting methods in use among Italian merchants at the time.

An image of Luca Pacioli
Luca Pacioli, known as the father of modern accounting for publishing the first known text on double-entry bookkeeping. The picture is attributed to Jacopo de'Barbari

 

The Summa was a comprehensive and well-written summary of a variety of subjects and was the first “textbook” of its kind. As a result it gained widespread readership and led to increased standardisation of accounting methods across Europe, which then spread around the world through colonisation. The historian Herbert Muller in his book "The Uses of the Past: Profiles of Former Societies" wrote:

"Few have heard of Father Luca Pacioli, the inventor of double-entry bookkeeping; but he has probably had much more influence on human life than has Dante, or Michelangelo."

While it is unlikely that Pacioli created double-entry bookkeeping, by recording it and publishing it in the Summa there is no doubt that he has had a huge influence on the development of modern business and commerce.

These days various governing bodies are responsible for developing new accounting rules and regulations and ensuring that practising accountants are properly equipped to face the challenges of modern business.

If you would like to find out more about some of the accounting concepts mentioned in this post, check out our free online Basic Accounting course.

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