At last! Double-entry bookkeeping, what Matthaus Schwartz, 16th-century accountant to the Fuggers’ banking operations, called “the magic mirror in which the adept sees both himself and others”! (Pay attention, Erdman, this will be on the test.)
In the Middle Ages there were no accounts receivable or payable, little lending, and no accountants. There were no companies apart from the individual owners. Financial records looked like diaries, keeping track of transactions in narrative form. Increased trade and complicated business arrangements revealed the critical shortcomings of traditional record-keeping.
Around 1300 some Italian accountants began using double-entry bookkeeping. The first step was to post assets and liabilities separately; by mid-century accountants in Bruges were lining them up in parallel columns, making them easier to compare. Balancing the books was a hit-or-miss, more-or-less affair. Pacioli, a Franciscan and a close friend of Alberti the master teacher of perspectival painting, wrote the state-of-the-art reference book on all things mathematical in the late 1400s. Pacioli devoted an entire section of this masterwork to double-entry bookkeeping. He recommended that a firm just getting started with the new technique should take an inventory of assets (goods, properties, cash) and liabilities. The books were to be three in number: the memorandum book (a detailed record of every transaction), the journal (income statement), and the ledger (balance sheet). Each book was to be marked with “that glorious sign from which all enemies of the spiritual flee, and before which all the infernal pack justly tremble: the Sign of the Holy Cross.” Then came the arduous task of balancing: income with outgo, assets with liabilities, net income with change of assets. If income exceeded outgo, all was well. If not? “May God protect each of us who is really a good Christian from such a state of affairs.”
Crosby observes in conclusion:
Double-entry bookkeeping did not change the world. It was not even essential for capitalism. It was not an intellectual masterpiece like Copernicus’s model of a heliocentric universe, and literati and cognoscenti have scorned bookkeepers’ ledgers as no more glorious than the sawdust and shavings on the floor of a carpenter’s shop… But our tastes affect the development of our culture and our societies less than our practices do. Bookkeeping has had a massive and pervasive influence on the way we think.
Double-entry bookkeeping was and is a means of soaking up and holding in suspension and then arranging and making sense out of masses of data that previously had been spilled and lost… Money is never middle-ish. Every time an accountant has divided everyting within his or her purview into plus or minus, our inclination to categorize all experience as this or as that has gained validation… Precision, indispensible to our science, technology, economic and bureaucratic practice, was rare in the Middle Ages, and even more rarely quantitative. In the past seven hundred centuries bookkeeping has done more to shape th perceptions of more bright minds than any single innovation in philosophy or science.