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Venetian trade was booming at the end of the 11th century and saw the introduction of double- entry book-keeping. Here’s how it evolved...

Today, financial management is staking big claims in the future of accounting – and of the planet – with its focus on sustainability and the measurement of non-financial value, both human and environmental. But what about its past? Where did it come from?

The story of this dynamic, 21st century-branch of finance reaches back into the Dark Ages. At the end of the 11th century the emerging city-states of northern Italy were swept up in a commercial explosion sparked by The Crusades.

As trade flourished, the northern Italians developed a new kind of record-keeping to cope with the growing complexity of their business dealings.

It was perfected by the merchants of Venice and became known as book-keeping alla veneziana: the Venetian method.

We know it today as double-entry book-keeping. The man responsible for its codification and preservation – the author of the world’s first printed book-keeping treatise – was Fra Luca Pacioli, Renaissance mathematician and Franciscan friar who was, in his day, more famous than his collaborator, Leonardo da Vinci.

As the origin of all subsequent book-keeping treatises throughout Europe, Luca Pacioli’s book-keeping tract is not only the source of modern accounting, but also ensured that the medieval Venetian method itself survived into our times.

And so accountants have named Luca Pacioli the “father of accounting”. Born in the 1440s near Florence, Pacioli wrote the first mathematical encyclopaedia of Europe, published in Venice in 1494.

It made two significant contributions to modern science and commerce: it was the first printed book to deal with Hindu-Arabic arithmetic and its offshoot, algebra, and it contained his 27-page treatise on Venetian accounting.

Algebra would underpin the Scientific Revolution; Venetian accounting the Industrial Revolution. In his treatise, Pacioli recommended Venetian book-keeping above all others. In their ledgers, the Venetian merchants divided debits and credits into two columns.

As Pacioli says, this is the most important thing to note in Venetian book-keeping: “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.”

Because of the power of the recently invented printing press to spread multiple copies of identical texts relatively cheaply and quickly, Pacioli’s book-keeping treatise, as the first printed synthesis of the method, made Venetian book-keeping the standard across Europe by 1800, the dawn of the industrial age.

The first signs that double entry would be equal to the task of monitoring and directing this new industrial world of factories, wage labour and large-scale capital investment were found in England, in the works of Her Majesty’s potter, Josiah Wedgwood.

An entrepreneurial and marketing genius, Wedgwood built the world’s first industrialised pottery manufactory. So ravenous was the appetite of the cashed-up classes for his vases that Wedgwood described it as “violent vase madness”.

But the mania for Wedgwood vases brought the firm such sudden success that it could not meet demand. By late 1769, Wedgwood and his partner, Thomas Bentley, had serious cash-flow problems and an accumulation of stock.

The Wedgwood way In response, in 1772 Wedgwood decided to use double-entry book-keeping to examine rigorously his firm’s accounts and business practices. The results proved enlightening.

He found that the firm’s pricing was haphazard, its production runs too short to be economical, and that it was spending unexpectedly large amounts on raw materials, labour and other costs, without collecting its bills fast enough to finance expanding production.

During this period of scrutiny, Wedgwood made an important discovery – the distinction between fixed and variable costs – and he immediately understood the implications of their difference for the management of his business.

He told Bentley that their greatest costs – modelling and molds, rent, fuel and wages – were fixed: “Consider that these expenses move like clockwork, and are much the same, whether the quantity of goods made be large or small.”

He realised that the more their factory produced, the cheaper these fixed costs would be per unit of production.

In other words, by scrutinising his books using double entry, Wedgwood had uncovered the commercial benefits of mass production. And in the process become, perhaps, the first cost accountant.

The shift in outlook required to move Pacioli’s book-keeping system beyond its mercantile origins in an exchange economy to manufacturing, where the emphasis is on the production of goods, was huge.

Two books on account-keeping for factories published soon after Wedgwood’s early forays into cost accounting show the conceptual difficulties posed by the need to incorporate new elements – labour and materials per unit of production – into an enterprise’s accounting system so that managers could calculate the cost of each unit of production.

The difficulty lay in the fact that the transactions needed to incorporate the manufacturing of products into the existing double-entry system were not financial transactions; they did not involve the exchange of goods, but such manoeuvres as adding the cost of labour acquired or materials bought.

These “non-financial” transactions were new – and to fit them into the 300-year-old system was not easy. Only after a century of factory production had such accounting problems become better grasped. In the same century the rise of the joint stock company brought double entry centre stage – and spawned a new profession: accounting.

The huge amounts of capital expenditure required to build railways – raised from private investors on stock exchanges and managed by joint stock companies – brought new issues of accounting and accountability.

By the 1860s in Britain, accountants were legally required at every phase of a company’s life. While in 1800 financial statements were an incidental product of an enterprise’s book-keeping system, by 1900 they had become book-keeping’s raison d’être.

And Venetian book-keeping proved to be the perfect mechanism for generating these financial statements. 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.

With accountants now central to corporate life, a number of legitimate practitioners decided to distinguish themselves from the herd.

This led to the incorporation by Royal Charter in 1854 of the Society of Accountants in Edinburgh. By 1900 there were professional accounting associations in the United States and most of Europe – and in the 20th century the profession flourished.

The increased significance – glamour, even – of accounting information and financial reporting after the Second World War is reflected in the massive investment that companies began to make in the presentation of their financial reports.

By the 1970s public companies were using their annual reports as much as a tool for public relations – to communicate new concepts such as “corporate identity”, for example – as for delivering financial accounts and other information.

Accounting’s forward-looking, post-war exuberance was seen in its extended functions of financial management, forecasting and business planning, rather than its former cautious, past-oriented role associated with auditing.

In 2012, in a new era shaped by the 2008 financial collapse and the environmental crisis, these more future-oriented accountants – management accountants – are well suited to address the challenges of the 21st century in building sustainable businesses.

The challenges of this new era are great, but just as Luca Pacioli’s medieval Venetian accounting adapted to the demands of the industrial age, so accountants will find new ways of dealing with the demands of our own.

  • Double Entry: How the merchants of Venice shaped the modern world... and how their invention could make or break the planet tells the story of double-entry book-keeping, from its emergence in northern Italy during The Crusades and its codification by Luca Pacioli in 1494, to its rise to prominence in the hands of a new profession – accounting – during the Industrial Revolution and 20th century.
  • Jane Gleeson-White is a writer and editor with degrees in economics and literature. She’s the author of Double Entry: How the merchants of Venice shaped the modern world... and how their invention could make or break the planet (£12.99, Allen & Unwin, 2012), Australian Classics (2007) and Classics (2005), and a PhD student at the University of New South Wales.

    Image: Getty Images/The Bridgeman Art Library


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