The time was 1494. Columbus had discovered America just two years before. The author was a Franciscan monk.
The chapter on practical mathematics addressed mathematics in business. He said that the successful merchant needs three things: sufficient cash or credit, an accounting system that can tell him how he¡¯s doing, and good bookkeeper to operate it. His accounting system consisted of journals and ledgers. It rested on the invention of double-entry bookkeeping. Debits were on the left side because that¡¯s what ¡°debit¡± meant, ¡°the left¡±. The numbers on the right were named ¡°credits¡±.
If everything was done right, then the bookkeeper could do a trial balance (¡°summa summarium¡±). Add up all the debits and then add up all the credits, he said. If everything had been done right, the totals should match. If not, ¡°that would indicate a mistake in your Ledger, which mistake you will have to look for diligently with the industry and intelligence God gave you.¡± He wrote.
Before computers came along Jack had never got a trial balance right the first time. Many hours were spent looking for the mistakes, though not necessarily with the reverent attitude that Father Pacioli advised!
Double-entry bookkeeping was so simple and met the needs of business so well that it caught on immediately.
In 1850 14 accountants offered services to the public in New York City, 4 in Philadelphia, and 1 in Chicago. The British Isles was the superpower of world commerce. Many enterprises and individuals employed the services of public accountants. Citing the needs of courts to employ public accountants ¡°to aid those Courts in their investigation of matters of accounting¡± select accountants were titled ¡°Chartered Accountants.¡± The US equivalent title is ¡°Certified Public Accountant¡±. These titles are used to this day.
The arrival of the income tax laws were another major event in accounting history. Attorneys naturally thought that since income tax returns were legal documents, they would have exclusive rights to prepare them. Accountants replied that since that the bulk of the work in preparing a return involved accounting calculations, they were more properly accounting work.
The substance of the tasks trumped legal argumentation. US law firms in the 1920¡¯s were slow to incorporate income tax preparations into their business skills. Public accountants saw a new lucrative opportunity and jumped into tax work with both feet. By the time the lawyers challenged the accountants for practicing law without a license, income tax preparation had been so thoroughly identified with accountants that they lost the case.
The Great Depression rocked the integrity of the accounting profession. The British Steamship Company was just one of the large world giants that went bankrupt just after posting large profits. ¡°How could profitable companies go bankrupt?¡± Investors asked. Court cases showed that the economic reality was that the companies weren¡¯t profitable after all. The profits were the result of bookkeeping tricks. Moreover the reserve funds that were on the books were non-existent.
So far, these events could be chalked up as individuals' fraud (albeit widespread fraud) and handled through the ordinary course of justice. What made the events historic was when the accountants testified in court that the bookkeeping practices were ¡°generally accepted accounting principles¡± and then proceeded to prove that they were. This was more serious than just individual malfeasance. If the basic rules of accounting gave false information, then something was wrong with the basic rules of accounting.
Worse, followed. Corporate...