Accounting Practices

Imagine children operating a lemonade stand.  At the end of the day, they had made $22.30.  Was that a profit?  How much did the sugar and lemons cost?  What were their labor costs?  We can’t really know whether they made money until we have an accounting system.  Imagine how businesses would operate if they didn’t have an accounting system.  They couldn’t.  But how did accounting systems begin?

Muslim traders in the 7th century are believed to be the earliest businesses to have an accounting system.  But their system didn’t get adopted by others.  Benedetto Cotrugli, an Italian merchant, was thought to be the first person to describe the accounting system we still use today.  But his work was never published.

The person who is considered the father of accounting was a contemporary of Cotrugli’s by the name of Luca Pacioli.  Luca was born in Tuscany, Italy, and educated in business practices.  He was also very interested in mathematics and tutored students.

Luca’s tutoring experience gave him a teaching facility which led to writing a very popular book on algebra which also contained an explanation for double-entry bookkeeping.

Luca’s book became the source of knowledge for accounting systems for merchants in Italy and eventually all of Europe.  He introduced to merchants the terms of debits/credits, general ledger, accounts receivable/payable, balance sheets, and income statements.  All of these terms still comprise the core of accounting systems today.

Some beginnings take hold because someone has the ability to translate them into language that others introduced.  Other beginnings start with those who take the creations of others and can make them more acceptable to the public.  Luca Pacioli didn’t invent the accounting system we use today, but he made it understandable to others.

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“Accounting is the language of business.”  Warren Buffett

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