Who is the Father of Accounting? (Luca Pacioli)

In this video I talk about the Father of Accounting!

VIDEO SUMMARY

If you are an accountant, there is a person in accounting history that you need to know about. That person is Luca Pacioli, and he has become known as the “Father of Accounting” because he has probably influenced your work more than anybody else.

The timing of this is really important. Luca Pacioli came from a poor family and lived in Italy during the Renaissance. If you remember what happened during the Renaissance, Italy had all these coastal cities that were important trade routes across the Mediterranean. These cities became very wealthy, and you had a whole new type of business environment with wealthy merchant families. This is a big contrast from the Dark Ages, where the wealth was controlled by monarchies. These Italian cities became a source of growing economic activity that funded all the great advances we saw in the Renaissance like science and art. All this economic activity required a lot of accounting. Luca Pacioli was an accountant for a number of these wealthy families as well as a teacher of accounting.

The reason Luca Pacioli is known as the Father of Accounting is because he wrote the first accounting textbook. What is incredible, is that the way he describes accounting is the same way we do accounting today. He lays out the whole system of double entry bookkeeping. He describes debits and credits. He describes journals and ledgers. He describes the financial statements. He describes the year end closing process. And a number of other things. He did not invent these things, but what he did was gather together all the best practices of accounting, and put them in a book. It effectively standardized the profession of accounting and spread this knowledge throughout the business community.

I just took a week of vacation. Since I am a crazy accountant, I spent my week studying the manuscripts of Luca Pacioli from the Renaissance. What I discovered is his writing is so much more than accounting. I wanted to share with you six insights I had from Luca Pacioli’s work.

• Accounting has an interesting connection to the art world. At a young age, Luca Pacioli became friends with the artist Piero Della Francesca. Piero Della Francesca was one of the innovators during the Renaissance with perspective, and how to show something in three dimensions. Being able to draw in three dimension was one of the incredible changes we saw in the Renaissance. So Luca Pacioli learned about three dimensions from Piero Della Francesca and used this knowledge as he continued his studies in math. Not only that, Luca Pacioli continued his association with the art world and later in life became friends with the great artist, Leonardo Da Vinci. Luca Pacioli actually taught Leonardo Da Vinci math, and the two ended up collaborating on some books together. So why is the art connection important? If you do accounting, you know that it is a very structured framework, much like three dimensional painting. An accountant has to think across the dimension of time, as you represent transactions in yearly financial statements. So just like Renaissance artists were creating a depiction of the real world, accountants are creating a depiction of the business world. So I can see the influence from Luca Pacioli’s friendships with famous artists.
• Luca Pacioli shows that accounting is not just a set of rules, it is a purpose. I really appreciate this approach, because he does not just tell you what to do. He tells you why you are doing it. He says things like “If you are in business and do not know all about it, your money will go like flies, that is, you will lose it.” And “Where there is no order, there is confusion.” So he spends time talking about the overall goal of accounting, which is to keep track of your money, or you are going to lose it.
• Luca Pacioli shows how accounting fits in the larger context of business. In his writing about double-entry bookkeeping. It is full of explanations of how to use accounting for larger business decisions. One of the things he talks about is the “Rule of 72,” which is a method to calculate interest. Not only is it amazing that he knew what the Rule of 72 was, but he is talking about more than just accounting. He talks about Finance, and he talks about best business practices.
• One thing that Luca Pacioli is very blunt about, is that accounting is hard work. It is interesting how many times he mentions this. He talks about the typical work day for a merchant, he describes the business owner reviewing his books in the evenings before bed. It sounds like he is describing a twelve hour workday. And he talks numerous times about the importance of hard work, and not being lazy. So accounting was not designed to make your life easier, it was to make your life harder. But the value of this hard work, is that it leads to better business decisions.
• Luca Pacioli thought accounting is a reflection of character. This was the most shocking thing for me. Luca Pacioli talks about ethics. Not only does he give practical advice, like “don’t keep two sets of books.” He talks about accounting like it is a reflection of who you are as a person. So if you take the time to keep well-organized, accurate books, that is a reflection of your character. And when you give your financial statements to other people, you are telling them, “this is how I do business.”
• Luca Pacioli wrote five books. This is important to understand because it provides a lot of insight into his mindset. Writing a book in the Renaissance was not like writing a book today. Today you can sit at your computer and type out your thoughts. This was a major life commitment. You would write your draft by hand and then print them on the printing press, one page at a time. So you did not write a book unless you had a strong message to get across. So let us look at the books Luca Pacioli decided to write:
  1. Math textbook (Tractatus mathematicus ad discipulos perusinos)
  2. Double-entry bookkeeping (business) (Summa de arithmetica, geometria proportione et proportionalita)
  3. Golden Ratio (art) (De divina proportione)
  4. Chess (strategy) (De ludo scacchorum)
  5. Magic (De viribus quantitates)

The books on the Golden Ratio and Chess were both written with Leonardo Da Vinci, where Leonardo drew the illustrations and Luca Pacioli wrote the text. Out of all these books, his book on accounting was the best seller, and it was actually just one section in a larger book on mathematics. To give you some idea of how important of a book this was, the printing press was just invented, so some of the first books ever printed was the Bible, and Luca Pacioli’s book on accounting. Access to this information revolutionized business, and Luca Pacioli became a wealthy man.

It is important to understand, that he published his book on accounting when he was 49 years old. He had already had a career as an accountant working in the busiest economies in the world. So he was able to bring all that experience into this book. But he also brought in his own personality, which is why the book is so rich. When you look at his other books, it reveals his personality, because back then, you would not write a book unless the subject matter was important to you. When you look at these books, you get a bigger appreciation for accounting. This is how Luca Pacioli thought about his world. Accounting is a little bit math, a little bit business, a little bit art, a little bit strategy, and a little bit of magic.

Double entry bookkeeping was an incredible innovation, that was so effective, we still use it today. Accounting did not come about by some person sitting in a back room somewhere doing journal entries. The Father of Accounting spent his life traveling across Italy, hanging out with the great artists, being engaged in the business revolution, becoming a best-selling author and a celebrity, and going from poverty to success. When you understand the history of accounting, you start to realize that accounting has a really exciting past, and is going to have an exciting future as well.

Works Cited: Gleeson-White, Jane. Double Entry: How the Merchants of Venice Created Modern Finance. W.W. Norton & Company, New York. 2013.

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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.