Planet Money
2:28 pm
Thu October 4, 2012

The Accountant Who Changed The World

Originally published on Fri October 5, 2012 3:04 pm

The story of the birth of accounting begins with numbers. In the 1400s, much of Europe was still using Roman numerals, and finding it really hard to easily add or subtract. (Try adding MCVI to XCIV.)

But fortunately, Arabic numerals (1, 2, 3, 4, etc.) started catching on, and with those numbers, merchants in Venice developed a revolutionary system we now call "double-entry" bookkeeping. This is how it works:

Every transaction gets entered twice in financial records. If one day you sold three gold coins' worth of pepper, you would write that the amount of cash you had went up by three gold coins. You would also write in that the amount of pepper you had went down by three gold coins' worth.

Before double-entry, people just kept diaries and counted their money at the end of the day. This innovation allowed merchants to see every aspect of their business in neat little rows.

Jane Gleeson-White wrote the new book Double Entry: How the Merchants of Venice Created Modern Finance. She explains how significant this new accounting was:

"You could itemize the profits in each account, so you knew which products you were doing well in and which you weren't. Then you could start to think about how you would change your business activities. It was just a whole revolution in the way of thinking about business and trade."

Luca Pacioli was a monk, magician and lover of numbers. He discovered this special bookkeeping in Venice and was intrigued by it. In 1494, he wrote a huge math encyclopedia and included an instructional section on double-entry bookkeeping.

Thanks to the newly invented printing press, his book was mass produced and became a big hit. One of the first readers was Leonardo da Vinci, who at the time was painting The Last Supper. Pacioli's encyclopedia had a section on the mathematics of perspective painting which fascinated da Vinci.

"They were hanging out together....I think they were probably lovers. They certainly spent a lot of time together, and definitely Luca Pacioli was there in the church when Leonardo da Vinci was there in the actual church when Leonardo da Vinci was painting The Last Supper," said Gleeson-White.

What Pacioli is known for today, though, is that tiny section of the book about accounting. Today, every country and every business uses double-entry bookkeeping.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

AUDIE CORNISH, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.

MELISSA BLOCK, HOST:

And I'm Melissa Block.

We don't do too many stories about accounting, for good reason - even accountants admit it's boring. But that wasn't always the case.

David Kestenbaum, with our Planet Money Team, has this story about an accounting trick that rocked the world some 500 years ago. It involves a man who was a magician, a mathematician, and possibly the boyfriend of Leonardo Da Vinci.

DAVID KESTENBAUM, BYLINE: This is the story of the birth of accounting. And if you think about it, before you can have accounting, you really need something else. You need numbers. And in the 1400s, much of Europe was still using Roman numerals.

JANE GLEESON WHITE: I thought Roman numerals must have gone out with Roman Empire. But no, they lasted well into the Renaissance.

KESTENBAUM: This is Jane Gleeson White, author of the new book "Double Entry: How the Merchants of Venice Created Modern Finance."

WHITE: The problem with Roman numerals is, as any school child knows if they tried to work with them, is you can't add or subtract with them. You have to...

(LAUGHTER)

WHITE: They're like a written language for recording numerals. I mean, you might as well carve them into rock, that's how useful they are. Well, we still do that, don't we?

(LAUGHTER)

KESTENBAUM: Fortunately Arabic numerals: 1,2,3,4,5, those are catching on in Europe. And with those numbers, merchants in Venice are keeping very detailed financial records, using a revolutionary system we now call double entry bookkeeping. It's what students learn in Accounting 101. It's unclear who invented it but it works like this.

Every transaction gets entered twice in your financial records. If one day you sold, say, three gold coins worth of pepper, you would write that the amount of cash you had went up by three gold coins and the amount of pepper you had went down by three gold coins worth. Before this, people just kept diaries and counted their money at the end of the day. Now you could see every aspect of your business in neat little rows.

WHITE: It just became, for want of a better word, much more scientific. You could itemize the profits in each account. So you knew which products you were doing well in and which you weren't. And then you could think about how you would change your business activities. It was just a whole revolution in the way of thinking about business and trade.

KESTENBAUM: This great idea, though, it needed a way to get out to the world, which is where the accidental hero of our story appears - a man named Luca Pacioli. And Pacioli's great role in history is just that he wrote it down. He writes down how to do this.

Pacioli is a monk and a magician but really, his love is numbers. In 1494, he writes this huge encyclopedia of math, which today would be over a thousand pages long. And tucked inside, he includes a little instructional section on double-entry bookkeeping. Thanks to the newly invented printing press, the book can be mass-produced and it's a big hit.

WHITE: One of first readers of Luca Pacioli's encyclopedia was Leonardo Da Vinci. Leonardo reads the book and thinks it's the coolest, latest thing. It is the coolest, latest thing in mathematics.

KESTENBAUM: Da Vinci at the time is painting "The Last Supper." And conveniently, Pacioli's book has a section on the mathematics of perspective painting. The two men became friends. It is possible, Jane Gleeson White says, that Pacioli, and his book helped Leonardo Da Vinci complete "The Last Supper."

WHITE: They were hanging out together. You know, they lived together after they left Milan. I think that they were probably lovers, they certainly spent a lot of time together. And definitely, Luca Pacioli, he was there in the church when Leonardo Da Vinci was painting "The Last Supper."

KESTENBAUM: What Pacioli is known for today, though, is that tiny section of his book about accounting. Today, every business uses double-entry bookkeeping, every country. It's how we keep track of GDP and all that stuff. If Luca Pacioli were alive today...

WHITE: I think he'd be absolutely astonished. I mean, to think that that had gone on to become the governing system of every economy on Earth, and every corporation, every business, he would be astonished, wouldn't he? He'd fall over backwards, I think.

KESTENBAUM: Luca Pacioli today is sometimes called the Father of Accounting.

David Kestenbaum NPR News. Transcript provided by NPR, Copyright NPR.

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