The History of Double-Entry Accounting
Double-entry accounting involves the crediting of one person’s account and the equal debiting of another person’s account. It is fundamental to even the most complicated economic exchanges. Whether in an M.B.A. program or in your own personal finances, double-entry accounting will turn up.
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Definition
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Also known as double-entry bookkeeping, double-entry accounting balances the credits and debits on an individual or a business account. Unlike a single-entry system, the double-entry system regulates exchange by making sure that irregularities do not occur. For example, when the debits on one account and the credits on another do not match, the error is visible. The accountant can then review both sets of data to find the mistake.
Early Examples
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Pliny, a Roman writer, described double-entry accounting in a single line in “Naturalis Historiae Plinii.” In the 13th century, the Florentine merchant Amatino Manucci kept records that show some evidence of double-entry accounting. The founder of the historically important Medici Bank, Giovanni di Bicci de' Medici introduced a rudimentary system of double-entry accounting in his bank operations.
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Luca Pacioli
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A Franciscan friar and Tuscan mathematician, Luca Pacioli, wrote the first detailed explanation for double-entry accounting. Pacioli, known as the “Father of Accounting,” compiled notes on the practice in a 26-page treatise on accounting in his book, “Summa de arithmetica, geometria, proportioni et proportionalita.” Since his book was written in the vernacular, Pacioli’s work became instrumental in establishing double-entry accounting throughout Italian banks.
Evolution
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Though the practices of double-entry accounting have remained consistent, modern financial instruments, such as derivatives, have made it a more complicated process. Additionally, corruption in major accounting agencies, such as Arthur Anderson LLC, have revealed how easily the fundamentals of accounting can be distorted without careful oversight.
Importance
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In his book, “The Protestant Ethic and the Spirit of Capitalism,” Max Weber described double-entry bookkeeping as one of the six fundamentals of a capitalist system. Weber argues that the method of monitoring expenses and maximizing costs demonstrates the level of complexity required of any system described as capitalist. His contemporary, Werner Sombart concurred, writing that, “capital, as a category, did not exist before double-entry bookkeeping.”
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