Dual Entry Accounting is perhaps man’s greatest innovation. Why do we make such a claim?
In order to understand this, we must travel back to the year 1492. Venice is the center of the western world and Christopher Columbus has set sail to find a new trade route to India. A Franciscan monk by the name of Luca Pacioli sits in his room and creates the outline for: Summa de Arithmetica, Geometrica, Proportioni et Proportionale.
As part of what would have otherwise been simply another boring textbook on Mathematics, Pacioli sees fit to include a section on “Details of Accounting and Recording” in which he described the accounting practices used in Venice at the time. When Summa was published in 1494, it contained what is recognized as the first complete description of dual entry accounting.
To be clear, accounting in some way, shape, or form has always been practiced. What Pacioli accomplished, perhaps unwittingly, was to disseminate throughout Europe the accounting method which had made the merchants in Genoa, Florence, and Venice the most successful in the Western World.
What makes dual entry accounting so special? Dual entry accounting, in a nutshell, is the formal recognition that every trade has a net affect on the income statement and balance sheet of an individual or enterprise.
More to the point, it enabled merchants and producers to understand which activities created wealth and therefore make informed decisions regarding which activities to undertake with their limited time and resources.
While this now seems intuitive, it is hard to overstate the benefits that the dissemination and use of dual entry accounting has bestowed on Western Civilization by enabling a greater number of persons to engage in activities which increase the capital stock and allowing them to more quickly abandon activities which deplete the capital stock (accumulated wealth) of society.
This facilitation of wealth generating activities is why dual entry accounting may be considered man’s greatest innovation.