Prof. Gianfranco Cavazzoni, Prof. Luca Bartocci
University of Perugia, Italy
1. Introduction
Johann Wolfgang von Goethe, noted poet and German thinker who lived between the 18th and 19th century, considered the double-entry accounting system “one of the most marvellous discoveries of the human spirit”. Man has always felt the need to symbolically write down his own wealth and economic transactions, so much so that the birth of this very writing is normally dated back to the age of ancient Mesopotamian civilization, when amounts and fluctuations of assets managed were written down on special clay tablets. If it is true, then, that the history of accounting has millennial origins and development, it is necessary, however, to recognize that there is a turning point in this long journey, a break from the past which signals the birth of modern accounting. It refers to the publication of the Summa de Arithmetica, Geometria, Proportioni et Proporzionalità, in Italy, in 1494. Still today, this writing represents a point of no return for the development of theories and general accounting rules the world over and, furthermore, it is considered amongst the greatest works of the last millennium; its author, Franciscan friar Luca Pacioli, is universally recognized as the “Father of Accounting”, as also attributed some years ago in the Wall Street Journal (“The Most Influential Innovations of the Millennium”, January 11th, 1999).
But, let us ask ourselves: What is the revolutionary content of this work? And who really was its celebrated author? By which courses of experience and thought did Pacioli arrive at his accounting theorization? What impact could his influence have exercised on the evolution of accounting studies and practices in other historical and geographical contexts? And finally, what significance can recalling his works have for the contemporary world and for the future development of our studies?
In an attempt to offer useful elements to answer these questions and in the knowledge that such questions merit much more space than that which is consented in this occasion, the present writer intends to bring to light the principle aspects of the complex figure and the precious work of the great Italian Master.
2. Man and His Scientific Journey
In Europe, the 1400’s were essentially a transition period rich in ferment in which something new was brewing. The end of the Middle Ages leads into the birth of a new era spurred by vital political and environmental forces which made their influences felt in the world of culture. Throughout the field of knowledge a progressive re-emergence and growth is witnessed arising from the studies of mathematical works from the ancient world (Plato, Pythagoras, Euclid), just as in the literary environment, the research by humanists restore lustre to the ancient codes of Virgil, Horace and Cicero and the treatises of Archimedes, Diophantus, Apollonius and Heron. If we glance at the history in those days, we find ourselves immersed in the transition period that leads from the Middle Ages to the Renaissance through a corridor of humanism.
In this foreshortened period, it is in Sansepolcro, ancient village in the Upper Tiber River Valley which unites Umbria with Tuscany (in central Italy), that glory is due for having given birth to Luca Pacioli around the early 40’s of the 15th century. It is the city which, to this day, indelibly conserves the signs of its continuity, where the atmosphere of the place evokes respect, where the silence is prayer and where the sacredness becomes tangible. The Franciscan churches, the 15th century squares, the masterpieces of Piero della Francesca bear witness to the profound ties which have always united man to nature.
Today we have a good amount of biographic information about Pacioli drawn from archives which notably enrich that deduced from the numerous works that have reached us. Although some periods of his life remain obscure, it has been possible to reliably piece together the course of events.
We know for a fact that as an adolescent, he is a guest of Messer Folco de’ Bifolci’s family, in whose home he receives his first teachings in algebra and arithmetic by Piero della Francesca, with whom Pacioli remains in contact even afterwards.
At an early age, he moves to Venice in the care of the family of the merchant, Antonio Rompiasi. Here Pacioli teaches the merchant’s sons and studies at the school of Rialto Domenico Bragadino, public mathematics lecturer, and learns much of what is needed to master the art of mercantilism. In 1470, Pacioli writes his first work, knowed as the Trattato di Venezia, a purely didactic, paper manuscript not known to us, dedicated to Rompiasi’s sons, Bartolo, Francesco and Paolo, as a sign of acknowledgement. The work illustrates some notions of mathematics, algebra and geometry which Paciolo considers important to the future activities of Rompiasi’s young children.
At the beginning of 1471, he is in Rome where his relationship with Leon Battista Alberti, illustrious representative of the culture of the day and Florentine humanist also devoted to figurative arts, is documented. It is presumed that after his Roman stay, he enters into the religious order of St. Francis’ Frati Minori in Sansepolcro.
In 1475 he is called upon by noblemen from Perugia to teach in the city. The Master can be said to be the creator of that school which was the first to enable him to rise to the post of teacher and to address the youths to whom, in 1478, he affectionately dedicated his first treatise on algebra and geometry, the Tractatus Mathematicus ad Discipulos Perusinos.
On October 14th, 1477, for the first time Pacioli is assigned to teach at the Studio Generale at an annual salary of 30 fiorini. After ascertaining the opportunity to have a «similem magistrum doctorum et expertum ad docendum» (fellow master of scholars and expert in teaching), his assignment is renews for another two years through June, 1480. His being called to teach mathematics at an important university like the University of Perugia points to the certainty of his fame, on the one hand, and of the fundamental importance that merchandising and exchange had acquired in the economic life of the free municipality.
The Tractatus Mathematicus is a 396-sheet manuscript, written in vernacular and conserved in the Vatican Library under number 3129, which was rendered legible thanks to a 12-year laborious process of substituting ancient script with common wording. Pacioli starts this work on the eve of St. Lucia (December, 13th) in 1477 and finishes his efforts on April 29th, 1478.
His didactic commitment is so engrossing that he writes «solo la notte m’era bisogno a scriverlo» (it was only possible for me to write at night). The Treatise, divided in parts, is prefaced by a proem in which he prides himself for having brought dignity of teaching to the faculty of mathematics in the city of Perugia. Luca compiles his work with the purpose of teaching those who want to dedicate themselves to the art of mercantilism. Here the need arises to examine “general and detailed rules” that govern mercantile activities so that through them, merchants «possa pervenire a notizia de’lecita e giusta mercantia in la quale spessissime volte casca in fraude e peccato solo per non intendere el modo de ragione» (can achieve knowledge of a lawful and just way to do business in an activity in which, all too often, one can fall into fraud and commit sin simply by not understanding the method of reasoning). The aim of Treatise is clear: the application of mathematics and geometry «regine di tutte le altre scientie commo testificano tuti degni filosophi» (queens of all the other sciences as deemed by all worthy philosophers) to the art of mercantilism, because such disciplines indicate the first degree of certainty. Only through complete knowledge of these arguments will the merchant be able to «a presso l’onore» (achieve managing his affairs).
In this work Pacioli represents a brief anthology of anecdotes and some amusing mathematical games. The most significant anecdotes have the aim of pointing out the difficulties tied with the practice of mercantilism: «vol più punti a fare un mercante che a far un dottore de’ leggi» (it is more difficult to train a merchant than to train a doctor of law); «in mercato vanno più pelli de’ volpe che pelli d’asino» (fox pelts are more widespread in markets than ass pelts). The Master compares the merchant to «al gallo quale è fra gli altri il più vigilante animale che sia, e d’inverno e d’estate fa le sue notturne vigilie» (a rooster which is the most vigilant of all the other animals and which, both in winter and in summer, keeps his nightly vigil), and maintains that his head is similar «ad una che abbia cento occhi che ancora non gli bastano né in dir, né in fare» (to one which has a hundred eyes but still isn’t enough to speak or do) for which the merchant «bisogna altro cervello che beccaria» (needs more brains than a butcher) even if «chi non fa non falla e chi non falla non impara» (he who doesn’t do anything doesn’t make mistakes and he who doesn’t make mistakes doesn’t learn).
To lighten the weight of repeating arithmetical and geometrical calculations, Pacioli presents some interesting “bolzoni” (a series of brainteasers), the solution to which is gotten not through general rules but detailed ones. In essence, he sets up simulated trades and pre-arranges business games in which the human mind finds itself hard-pressed to find a solution, having to turn to research laws which cannot be said to be absolute but relative since they are contingent and variable. Therefore, economic trial and error has its value only in the possibility to err, to fail and beginning again. But this is exactly what Pacioli wants, thus testing his determinations and in so doing, guaranteeing their full success. He himself declares that «gli studenti comprendono meglio un caso su cui riflettere più che se tu desse a loro mille letioni» (students understand better through a problem they have to reflect upon than a thousand lessons you could give them).
A period characterized by frequent transfers follows his stay in Perugia. In 1481, Pacioli is in Zara where he composes his third algebraic work: the Trattato di Zara, a now lost paper manuscript that addresses mathematical laws in a more profound manner compared to his previous works. Pacioli writes about having been able to acquire good commercial training in the flourishing town of Dalmazia, thanks to contacts in the merchant world, thus allowing him to face situations «più suttili e forti» (more subtle and demanding). In 1487, he is in Florence when he is called once again by the noblemen of Perugia to return to the Umbrian capital.
In 1490 in Naples, he teaches mathematics at the public highschool, then in Padua, again in Florence and then returns to Venice in 1494 on the occasion of the publication of Summa de Arithmetica, Geometria, Proportioni et Proportionalità to which special attention will be paid in the course of the present study.
After having overseen the publication of his masterpiece, between 1496 and 1499, Pacioli is at the court of Ludovico Sforza in Milan where he completes the writing entitled De Divina Proportione, which does not get printed until 1509 by Paganino Paganini in Venice.
Three manuscript codices exist of this work. The first one, completed in December, 1498, and dedicated to Duke Ludovico Sforza, is kept in the public library of Geneva. The second one, donated to Giangaleazzo Sanseverino by Pacioli himself, is kept at Ambrosiana Library in Milan. The third one, which was offered to Piero Soderini, has gone lost although it is most probably the copy used to realize the printed work. This could explain the dedication of the whole volume of De Divina Proportione to the Florentine Soderini.
In the numerous pages of De Divina Proportione, Pacioli presents the propositions of the 13th book of Euclid, on the study of the properties of semi-regular polyhedrons, offering praise to mathematics which he considers the base for understanding the other sciences, and recommends the use of Euclid’s elements as an indispensible guide.
The work is founded on the platonic idea that every natural element has a corresponding regular polyhedron: fire has the tetrahedron, air has the octahedron, the earth has the cube, water has the icosahedron and the universe has the dodecahedron. After having described the twelve solids that depend on regular bodies, the discourse turns to prisms, cylinders, pyramids, cones and their frustums. The work is supported by 60 drawings made by the great Leonardo da Vinci, depicting the solid figures described in the text.
Pacioli also dedicates particular emphasis on the study of the “golden section” conceptualized as a divine manifestation. On the basis of such a relationship, any quantity can be divided into two unequal parts so that the smaller one is to the larger one as this one is to the entire quantity. The qualification of “divine relationship” would be justified by the presence of characteristics that belong to the divinity: it is “unique” in its genre, “trine” in that it embraces three terms and “indefinable” in that it is irrational and invariable.
The golden relationship is a ratio which is also deeply rooted in the ideal figure of man, in which one can identify different golden sections: the length from foot to navel is proportional between the total height and the length from navel to head; the measure of length from navel to chin is proportional between the distance from navel to head and the length of the face. The length from knee to navel is proportional between the measure from foot to navel and that of foot to knee. (In the famous painting by Botticelli, Venere is 173 cm tall and the measure from foot to navel is 107 cm, two measurements that have a golden relationship between each other.)
Later, the master writes the De Viribus Quantitatis, a manuscript written in vernacular probably between 1496 and 1509 and filed under code 250 at the University Library of Bologna. In this work, Pacioli illustrates numerous mathematical and physio-mechanical games as problems with amusing solutions and geometrical questions and he enriches the text with proverbs, recipes, riddles and anecdotes.
During those years, he also compiles the De Ludo Schacorum manuscript rediscovered in 2006. The 48 papers of the book contain 114 practical demonstrations for the game of chess with notes for their solution. The figures are finely designed and coloured in black and red.
A Latin version of the Elements of Euclid written by Pacioli is printed in Venice in 1509 and dedicated to Cardinal Francesco Soderini. The Master takes a copy of the work translated by Giovanni Campano from Novara, printed in Venice by Ratdolt in 1482, and enriches it with new annotations as well as an opening lecture which he gives in the city of lagoons on August 11th, 1508 in front of a gathering of more than 500 students.
A reproduction of the Summa with a few additions, Tractatus XI– Distintio IX, entitled “La Scuola dei Mercanti” (The School of Merchants), appears in Venice in 1504. Since the copyright to the Summa expired that very year, it is possible that the work was printed by a local editor without the master’s consent. For the very reason of safeguarding the copyright to his works, Pacioli petitions the Venetian Senate to obtain the rights of ownership.
On February 22nd, 1510, Pacioli becomes chief of San Sepolcro’s convent and in 1514 is back in Rome as Mathematics teacher at the papal Court of Leone X after which he returns to his birthplace of Sansepolcro. There is no certainty about the date of his death but it was probably in 1517.
Pacioli is a man of science, a lover of communication, of popularization and diffusion of knowledge and reflects the many sides of one of the most ingenious minds of the 15th century. The master represents the Renaissance ideal, capable of moving between different disciplines in search of unity between nature, art and science, in which the characteristics of his homeland of Tuscany, meeting point for the diffusion of culture to the mass, come together.
3. The Birth of the First Accounting Theory in the World
The Summa de Arithmetica, Geometria, Proportioni et Proporzionalità, printed in Venice in 1494, is considered Pacioli’s principle work of art. In it, he practically overturns the entire contents of the Tractatus Mathematicus ad Discipulos Perusinos addressing such arguments as algebra, mathematics, calculus, bookkeeping for mercantile entries and geometry. The wide scale diffusion of the work is followed by a reprint in 1523. Its fame among scholars – accounting and non – is attributed to the presence of Tractatus XI in the beginning of the work, entitled “De Computis et Scripturis” in Distinctio IX, dedicated to the art of bookkeeping and mercantile entries. In fact, it is the first official diffusion of the double-entry accounting method to be printed.
This Distinctio IX is completely dedicated to administrative problems and to those arising from mercantile and calculation techniques, subjects already addressed by Pacioli in his preceding work. Pacioli explains these in a correct and logical sequence: companies, “soccide” (a sort of farm business) and leasing contracts; barter and monetary exchange; interest and discount rate; alloy and metal monetary exchange; determining a merchant’s gains or losses during business trips and relative activities; maintaining journal entries; and weight-based tariffs, measures and exchange rate.
By reading these topics, one can therefore note that the Tractatus XI, doubtless the most famous of his works, is part of a systematic context and it would be reductive to extrapolate it from the whole. In fact, as a whole, the Distinctio IX constitutes a theoretical-practical manual for mercantile economics, developed as part of a “sum” of pure mathematical principles in order to demonstrate its practical usefulness for business life in those times.
In the beginning, Pacioli addresses those who intend to undertake the complex activity of mercantilism, warning them that three things are required: to possess «pecunia numerate e ogni altra facultà substanziale» (money and any other patrimonial wealth)in order to have adequate owner’s equity, that is, an adequate debt to capital ratio especially during a historic period afflicted with the scourge of usury; to be «bono ragioniero et pronto computista»(a good accountant and an able bookkeeper) in order to understand the technique of drawing up journal entries and to interpret business results in order to make the most opportune decisions; and to keep «bello ordine tutte le sue faccende disponga» (your business dealings in good order), enabling one to have quick access to information that is needed on a daily basis. Thus, the merchant, making the best use of the Paciolian maxim «chi fa la mercanzia e non la conosca i suoi denari diventan mosca» (he who does business and doesn’t know the double-entry system is left with nothing), must know how to manage his, and others’ monetary resources. This makes him not just a simple businessman but an investor, in the first place, and in the second place, a true administrator that uses accounting to constantly monitor business trends and to measure his own profit.
With these rules in hand, the Master identifies the characterizing elements of a company structure, understood as a complex of human resources, of productive and functional factors, which should be organized such that the merchant can attain an adequate income through his business dealings. Pacioli furthermore believes that for a merchant, being able to “settle accounts” or to “crunch numbers” does not necessarily mean the unconditional surrender to the shortsightedness of the numbers but rather his indispensible need to avail himself of clear moral principles, in order to distinguish good from bad and of discipline and rigor, first with himself and then with others. This is the most logical explanation of his ideas to coordinate the rules for business accounting which derives inspiration, food and force from a mathematical concession.
Pacioli first explains how to take inventory. It is necessary to identify all the goods owned on a specific sheet or a special book, beginning with the highest-valued items, or those most at risk of loss, reporting the date, location and name of the asset. The entire process must be completed on a single day to prevent errors or omissions. According to the Master’s instructions, inventory concerns all the merchant’s goods, including personal goods to which no value is assigned, with the exception of debts payable, recording only weights, measurements and amounts of the single assets and liabilities.
In describing the bookkeeping technique, Pacioli refers to the “Venetian method”, in which there are three essential books: “Memoriale” (a sort of journal) , “Giornale” (a sort of general ledger) and “Quaderno” (a sort of balance sheet). Notwithstanding the fact that the life of a merchant was not particularly complex, we can suppose that at the time in which Pacioli explains the method, it had reached a good level of in depth study.
In the “Memoriale”, also known as the “Vacchetta” or “Squartafoglio” every operation is written down in detail. Pacioli warns that it is also possible to record inventoried goods, even if he recommends against it as anyone working for the merchant has free access to the book and that it might not be opportune to let them see the owner’s assets. It is a book which is kept strictly on the basis of the speed with which business deals are made and can be edited by whomever completes the operation, and, in the absence of the merchant, even by women, says the Master (provided they knew how to write).
The entries are then recorded in the “Giornale” by an accountant. This is tied to the fact that the transfer of the entry to the ledger must follow very precise rules, those of the double-entry system, something only someone who had completed calculation studies could do.
Pacioli goes on to show the accounting process according to the double-entry method with the use of specific language and specific accounts deemed fundamental for understanding the entire system. Particularly, he specifies the use of the term “per” to designate debtors, and the term “a” to designate creditors. The first entry concerns money owned, using the accounts “Cassa” (Cash) and “Cavedale” (Capital) as shown in the following representation:
«Per Cassa di contanti: A Cavedal de mi tale, ecc., che di contanti mi trovo in quella al presente, fra oro e monete, argento e rame di diversi conti, commo appare nel foglio dell’inventario posto in cassa ecc., in tutto ducati tanti d’oro, e monete ducati tanti, valgono in tutto, al modo nostro veneziano a oro, cioè grossi 24 per duc. e piccoli 32 per grosso a lira a oro… dove: Per la Cassa s’intende la tua propria ovveri borsa, per il Cavedal s’intende tutto il monte corpo di facoltà presente».
(“Per” Cash on hand: “A” Owner’s Capital, etc. whereas in cash on hand at the present, I find , among gold and coins, silver and copper of various accounts as appears on the Inventory sheet placed the safe etc., many gold ducats and many ducat coins, are altogether valued, using our Venetian method, at gold, that is big ones 24 per duc. and small ones 32 per gross per gold lira… where: “Per” Cash it is understood that of your own property, that is, your purse, for the Capital it is intended all your bodily worth in your present power).
Attributing value to the singular entries is done only at the time the assets are transferred from the inventory to the “Giornale”. It is calculated according to the general rule of using «comun pregio» (current price), as we will see more thoroughly later on.
Pacioli also recommends using a single currency for bookkeeping. This, in a period when commerce in Italy is characterized by the use of a myriad of different currencies.
Entries are subsequently indicated in the “Quaderno” via the double-entry system. To better demonstrate the accounting logic, Pacioli uses some specific transactions, such as merchandise sales, payments made by bank orders and with bartering, the start-up of a company, accessorial and house expenses, the sale of a shop, and debits and credits.
Closing the accounts also calls for the creation of the “Pro e Danno” (Profit and Loss) account. It is an account that only appears in the “Quaderno” in that its contents summarize the transactions recorded. Items that should be transferred to the “Pro e Danno” account, even during the course of the year, regard merchandise that has been sold in its entirety, thus not posing any valuation problems. Home and sales expenses can also be transferred to this account.
The “Pro e Danno” account is closed out to the “Capitale” (Capital) account which is then carried over to the new accounting year in two alternative methods: a) the net difference between debits and credits; b) entry by entry, due to the fact that no ending inventory count is required.
Lastly, a control is performed on a separate piece of paper to verify the total sums of the two sections “dare” (Debits) and “avere” (Credits) (Summa summarum). If the two values are identical, it means no errors have been made recording and transferring amounts to and from the various books. Otherwise, a tedious process must be undertaken to identify, and subsequently correct, the errors.
4. Towards a First Body of Rules to Create a Balance Sheet
One of the most suggestive questions regarding the useful innovation of Pacioli’s work concerns the existence, or not, of an awareness of the informative significance of the balance sheet and, therefore, bringing to light elements interpretable as red flags of a material conceptualization of annual accounts.
Such problems have provoked a particular debate between scholars, especially in Italy, and it bears noting that it still remains unsettled. It must be said that some difference of opinion arises from differing interpretations, by scholars of the expressions used and written by Pacioli in the 15th century Italian language. It has definitely been ascertained that the use of summary accounts mentioned in the Tractatus XI has a fundamental role in accounting controls, much more so than that of the external information attributed to the balance sheet nowadays. It is also true, though, that a careful examination of the work allows one to notice some important elements.
In this sense, it is wise to remember the necessary steps in the process of registering transactions in the “Giornale” which run from the opening of accounts to their closure. The order of such is as follows:
1. General opening of accounts in the “Giornale”, debiting asset accounts and crediting liability accounts of the ownership entered at inventory in the Capital account,
2. Registering business transactions in the “Giornale” as they occur throughout the year;
3. General account closing in the “Giornale” as follows:
a. Transfer of unrecorded balances for accounts related to positive and negative components of income to the “Pro e Danno” account entered in the “Quaderno”;
b. Closing the “Pro e Danno” account to Capital in the “Giornale”;
c. Closing the general accounts in the “Giornale”, debiting asset accounts and crediting liability accounts of owner’s equity to the Capital account;
d. Drawing up the “Summa summarium” summarizing ending account balances, that is, account sections.
As far as what value to assign capital assets during the transfer of Inventory to the “Giornale”, Pacioli suggests using a precise criteria for evaluation. In fact, he writes, «E fallo grasso più presto che magro, cioè: se ti pare che valgano 20, e tu dì 24, ecc., acciò che meglio ti abbia a riuscire il guadagno» (and estimate it grossly instead of meagerly, that is: if you think they are worth 20, call it 24, etc., in order to better realize your profit).
That expression has been interpreted in many different ways. For some, it is an authentic invitation to overvalue capital; for others, assigning a higher value could have had the singular scope of not undervaluing the same assets; still, for others, it is proof that the Master was less than competent in the area of valuations and that he had seen the suggested criteria used in current practice.
Our impression is that Pacioli had purposely introduced a general principle of valuation of capital goods with the intent of making the merchant understand the first and most important consequence that the use of such criteria can generate in the final result. From this point of view, the text under consideration would have the following meaning: If an asset can assume two different values at the time it is transferred to the “Giornale”, the lower one being traced back to the purchase price and the higher being inferable from the current market price, it is suggested to use the latter as it will enable the merchant to calculate that period’s income to a more reliable degree.
The impression is that Pacioli possesses a deep knowledge of the market in which, according to the law of supply and demand, prices are set considerating eventual fluctuations in exchange rates which «raro stan ad un segno ne le patrie» (are rarely stable in countries). The criteria of historical cost is certainly the most correct when in the presence of markets that are basically stable, even if that price tends to be generally higher than the account’s balance. In large part, it means that a valuation at current value, which represents a strong analogy with the fair market value criteria adopted nowadays both by the American accounting principles (GAAP) and those recently introduced in Europe (IAS/IFRS), and that leads to an appreciation of capital assets at a value that differs from the parameter of historical cost.
As we have seen, the system foresees the creation of a statement for the “Pro e Danno” account which is an analytical demonstration of the causes that have generated gains or losses for the period and the Capital account statement that, as well as the “Pro e Danno” account, shows the debit and credit elements of equity.
Since the adjusting entries to Inventory account balances were not pointed out in the “Giornale”, the “Pro e Danno” account had to show the following analytical demonstration of the causes that generated gains or losses in the period. The following accounts faithfully make up the accounting reflections of the business transactions illustrated by Pacioli:
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“Pro e Danno” (Profit and Loss)
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Debits
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Credits
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ü Loss on sale of merchandise
ü Loss on credit
ü Devaluation of fixed assets due to natural calamity
ü Cost of goods
ü Ordinary home expenses
ü Extraordinary expenses
ü Interest payable on loans
ü Municipal taxes
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ü Gain on sale of merchandise
ü Interest receivable due on the Chamber of Loans
ü Rent receivable for land leases
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“Capitale” (Capital)
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Debits
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Credits
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ü Cash on hand
ü Precious metals
ü Merchandise
ü Fixed assets
ü Land
ü Chamber of Loans
ü Receivables
ü Pro e Danno (loss)
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ü Payables
ü Pro e Danno (gain)
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The reasoning that developed reinforces the conviction that the “Book Balance” to which Pacioli alluded does not have all the characteristics of an ordinary balance sheet as, in the course of its formation, there is no provision for any type of analysis whatsoever of the future evolution of the transactions in process nor the new ones that will be completed in the activity to come. In fact, for this very reason, depreciation does not get calculated on assets suited to assure future performance, nor do credits or other capital elements get devalued, while when an asset is perceived to have decreased in value due to a negative event, the write-down is registered in the “Giornale”. Nothing is mentioned regarding instalments or controls.
Still, it is worth noting that in the process of creating the system of values in the balance sheet, Pacioli introduces a criteria of valuation when he suggests valuing every item at current price and, particularly as far as regards unsold merchandise which can undergo continuous fluctuations on the market, to keep track of the higher value, thus measuring – upon completion of the sales transactions – the most reliable value of the gain or loss for the period.
What, then, is the conclusion of the “Book Balance” in the Paciolian works? If it is nearly impossible to qualify it in terms of the modern balance sheet, it is still important to underline the functions which the document explains in terms of informative capacity and cognitive demands that satisfy, which go much further than those offered by a mere trial balance.
The information resulting from the balance sheet certainly favors the merchant’s interests who, above all, needs to know with some reliability, the value of «competente e lecito guadagno per sua sostentatione» (competent and reasonable earnings to support his living) arrived at by managing his own dealings through «l’industria dell’intelletto che Dio (gli) ha dato e con l’artificio delle ragioni che avrà bene imparato» (the intellectual capacity that God has given him and with the art of knowledge that he would have learned well). However, in the scheme of things, the merchant’s balance sheet can yield further information with the aim of measuring the consistency of profitability of productive factors used in his own activity whether they benefit personal or collective interests; to equally divide the profit among partners who have conferred different currencies, merchandise and personal services since «sempre è buono di saldare ogni anno massime chi è in compagnia perché il proverbio dice: ragion spessa, amistà lunga» (it’s always a good rule of thumb to settle the accounts every year because, as the proverb says: short accounts, long friendships); to make economically convenient calculations; and to have a complete vision of all the available assets and, through their gauging, the possibility to assign a capital value capable of representing their evolution in time.
But Pacioli also keeps in mind the need to correctly inform third parties when he suggests that the mercantile books (Memoriale , Giornale, Quaderno) be kept in respect of intrinsic formalities that make up the concept of orderly accounting and of extrinsic formality connected with their authentication at the appropriate office. If the accounting books ever need to be produced in a trial, they will have approbatory effectiveness only if affirmed to such formality, be it against the merchant or for him and his dealings with other merchants.
Thus a relationship of trust is established with third parties, consequently inducing them to continue to rely on the real and appropriate behavior of the merchant. It may be that Pacioli had knowledge of manipulations and alterations to books if he writes: «però che molti (mercanti) tengano i loro libri doppi: uno ne mostrano al compratore e l’altro al venditore, e che peggio è, secondo quello giurano e spergiurano, che malissimo fanno. E, però, per tal via d’ufficio degno andando, non possono così di facile dir bugia, né fraudare il prossimo» (since many merchants keep two sets of books: one they show to the buyer and the other to the seller, and what’s worse is that they swear again and again on those books, behaving very badly. Living the life of a dignified person, however, they won’t easily be able to lie to nor cheat the next one.)
5. Conclusion
These brief notes, while incomplete, are sufficient to document the breadth of Pacioli’s work. Distinctio IX of the Summa represents the arrival point of a course already begun in previous works and constitutes an expression of the idea that through mathematical symbols, natural reality and the performance (even economic) of human works can enjoy more adequate representation.
Pacioli’s work offers an organic treatment on how to manage a merchant activity with particular detail to administrative and accounting aspects. An analysis of the text lets us understand how we face something much greater than the rather revolutionary description of the workings of the double-entry system to the point of being able to check the beginnings of a useful set of rules to draw up a company balance sheet.
The Master’s work can be seen as a seed for the development of capitalism and the modern economy, requirements for the growth of the collective wellbeing.
His teachings are aimed towards ensuring that merchants become evermore knowledgeable about the fact that social living needs to have clear and moral principles, to distinguish good from bad, of self-discipline and rigor first with oneself then with others. These latter should look to the market from multiple points of view, anchored to diverse knowledge bases for which anything that tastes of culture has great value and even greater practical relief.
An ethical theme strongly permeates Pacioli’s work allowing us to reconstruct the moral axioms from his writings. The fatigue of legitimately pursuing one’s own objectives; the sincerity in carrying out transactions which oppose falseness and intrigue; the ability to evaluate and check the results achieved; the humility to admit one’s own errors; and the courage to assume one’s own responsibilities; the ability to set a good example for others; the justice to recognize that numerous potentially conflicting interests co-exist in the market.
Generally, novelties do not last in our disciplines; all that is new soon becomes old and, with the passing of time, it is covered with a patina and then with a thick layer of dust. It is for this reason that sometimes one has an uncertain and limited idea of novelty, and why one struggles to understand how Pacioli was able to bring about one that has never grown old.
The figure of Luca Pacioli remains that of a Master to whom the future will continue to yield space in the past because, as written three centuries later by Ugo Foscolo, noted poet and compatriot, «a egregie cose il forte animo accendono l’urne de’ forti» (the spirit of a man is pushed to great things by the memories of great men).
Contact details:
Gianfranco Cavazzoni
Full Professor of Business Administration
Luca Bartocci, PhD
Associate Professor of Accounting
Department of Corporate Law and Business Administration
University of Perugia
Via Alessandro Pascoli – 06100 Perugia
ITALY
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