Accounting established as first general-purpose business classification system

 

 

In 1494, an Italian Franciscan monk, Luca Pacioli, published a document that included a section titled Particularis de Computis et Scripturis (Details of Accounting and Recording) which contained elements of the basic accounting model that were later put to great use in commerce. Of course, the keeping of accounts was an activity engaged in since the beginning of time. One reason given for the emergence of the accounting model in Italy at that time was the significant increase in trade in that region between Europe and the Middle East.

 

The system of double-entry bookkeeping described in Pacioli's work is reported to have been used extensively--since at least the thirteenth century in Florence, with evidence that the system had spread north to Germany by the sixteenth century.

 

Additional classification systems were introduced with the spread of trading organizations resulted in an expansion of the accounting model and the introduction of related structures that required organization and control.

     

  . . . the Medici had set up a system of branches, which it could declare independent at any moment simply by rearranging the accounts if economic circumstances warranted it (a way of avoiding a local bankruptcy having repercussions on the whole firm). By the end of the sixteenth century, the commission system, more flexible, less costly and more time-saving, was tending to become general. All merchants - in Italy or in Amsterdam for instance - worked on commission for other merchants, who did the same for them. They took a small percentage on deals negotiated for other people and expected the same commission to be subtracted from their own accounts for a similar arrangement.

 

 

 

Such arrangements required reciprocal trust and cooperation among merchants--as well as supporting bookkeeping systems for verification and reporting. This resulted in improved accounting classification sophistication in areas of payables, receivables, subsidiary ledgers, capital accounts, etc.

 

The basic accounting model developed as a manual system of controlling financial assets using journals and ledgers and a systematic basis for tracking financial performance that also had a salutary effect on other control systems. The importance of this system and important extensions of the model evolved into a full-featured system of checks and balances that could explain important operational issues to individuals separated by time and distance from the actual events.

 

Though the breadth of this model has been enlarged upon over the centuries, the fundamental concept and structure of double-entry bookkeeping as published by Pacioli in the fifteenth century is fundamentally unchanged. Like the symphony orchestra model of the mid-nineteenth century, it has stood the test of time with remarkable consistency. Like the violin and its string siblings in the orchestra, the accounting paradigm has been the oldest and most useful control paradigm in modern institutions. As the symphony is based on and built around the strings, the primary economic control model has been based on accounting.