“How bookkeeping works” is a common question asked by business owners and those who need to understand how accounting works. Double-entry bookkeeping is the most common form of bookkeeping because of the way it tracks money in an organization – and it essentially has remained unchanged for centuries. It is also the simplest form of bookkeeping, making it easier to master. You can start using double-entry bookkeeping as soon as you know what to do with debits and credits.
The early development of accounting dates to ancient Mesopotamia, and is closely related to developments in writing, counting and money and early auditing systems. By the time of the Roman Empire, the government had access to detailed financial information. In the Islamic world, ninth century commercial arithmetic and algebra was further standardized by Al-Khwarrzim.
Double-entry bookkeeping – Luca Pacioli
In the 1400s, Luca Pacioli published Summa, an illustrated guide to bookkeeping with double-entry accounting. This first book on financial accounting is seen as a major turning point in the history of accounting. Pacioli’s work influenced merchants and modern accountants for centuries.
Pacioli’s time is seen as a period of transition from the medieval economy to one governed by merchants and bankers. In the Middle Ages, Italian merchants had been the most influential group of bankers in Europe. The concept of double-entry bookkeeping is more closely associated with medieval accounting practices than with modern accounting standards. However, Pacioli’s Summa was influential in establishing the double-entry method as a standard for financial transactions and for later historians to use as a frame of reference.
The Joint-Stock Company & The Birth of the Limited Liability Entity
Moving on from Pacioli, a history of accounting would not be complete without mention of the advent of the predecessor of the modern corporation: the joint stock company. A joint-stock company is a business that has ownership divided between multiple investors, who each take delivery of a share in the company. The public issues shares so that more people can buy them and thus become shareholders. These shareholders then have a vote on how the company should be run, with different numbers of votes attaching to different sizes of shares owned by an individual shareholder.
Although joint stock companies had existed before 1600 across Europe, it was in England at this time that these businesses began to develop into what we would now recognize as a modern day limited liability entity; where one person could own shares without fear of being responsible for the debts or liabilities of other shareholders if the company failed.
When do we see the birth of modern professional accounting?
The birth of modern professional accounting can be traced back to the middle of the nineteenth century. The period from 1850–1880 was a time of considerable change in both accounting practice and education, where the concepts of specialization and professionalism were introduced.
Today, it’s regulated and standardized by the various international accounting standards that provide exclusive frameworks for internal accounting policies. The strict regulation imposed by these guidelines ensures the reliability and comparability of financial statements worldwide.
2021: To Automate, or Not to Automate?
In 2021, we are often asked “Will bookkeeping be automated”. Answer: To some extent it will, and to some extent it will not. Historically, bookkeeping has been done manually, with paper and pencil. The birth of the modern computer has created a demand for accounting software. Accounting software can automate some data entry tasks and help accountants – and their clients – in many ways. In other ways, software is making manual accounting obsolete.
The bookkeeping industry – as has occurred in every recent accounting revolution – will be affected by some aspects of the technology revolution. The theoretical basis of accounting – double-entry bookkeeping – is well established and remains a common thread throughout time. As long as we have written records, double-entry bookkeeping has existed. Relatively new concepts of automated accounting are changing how we think about accounting, and our financial system, which in turn will affect how we go about keeping record of it.
And how would Luca Pacioli feel about the pace of innovation happening right now in cloud-bookkeeping? it is our strong opinion that even if Pacioli had started the modern era of accountancy – in the 21st century – he would be surprised by what is happening today. Cloud-accounting is now a reality, and companies are realizing all the benefits.
Equally, Pacioli would be excited by the advent of automation in bookkeeping. He would have seen the benefits of technology and would have been eager to take advantage of it in an age where bookkeeping was manual. And like the many different approaches to double-entry he has seen, there will be a number of ways that people approach business solutions and record-keeping.
What we can say with confidence though, is that he would have loved the convenience of cloud-bookkeeping, something that should not be underestimated. The benefits of automation and cloud-bookkeeping are clear; they are extremely valuable.
The main takeaway from this article is that how we track money in organizations – whether through double-entry bookkeeping or otherwise – will always change and adapt. The accounting industry is a fast-moving one, and Luca Pacioli would have been surprised by it all. Whether he would have embraced the changes is another matter altogether.
Stay tuned to this series for information on some recent technological changes which are underway. Curious about innovation in accounting? Ask one of our Cloud-Bookkeepers how their careers have evolved over the last few years.
If you would like to learn more about how cloud-based bookkeeping and accounting services can help elevate your business in 2021, contact Chris at [email protected]