On the Details of Reckonings and Their Recordings
These chapters are excerpted from Fra Luca Pacioli's text, published 1494 in Italian vernacular: Summa de arithmetica, geometria, proportioni et proportionalita. His Summa is a comprehensive synthesis of mathematics and its many applications at the time.
In 37 of the chapters, Pacioli describes the Debit & Credit Method from which today's GAAP-Generally Accepted Accounting Principles are derived.
Here are the chapters in outline form:
1 - Things Necessary to the Successful Businessman. Methods of Keeping a Ledger and Journal in Venice and Elsewhere.
Three keys to successful operation of a business:
- Cash, or some equivalent economic power.
- Be a good accountant and a ready mathematician.
- All business affairs should be arranged in a systematic way.
The debit and credit method should be used.
- The system employed in Venice is recommended over all others.
- If one knows the Venetian method, all others will be understandable.
"Where there is no order, there is chaos."
These chapters were written so that "...the respectful subjects of the Duke of Urbino may have all the rules that successful businessmen require."
2 - The Inventory--What It is and How It Should be Taken by Businessmen.
- Relationship between God and Profits--
- Since the objective is to make a "lawful and satisfactory profit so that he may remain in business..." every businessman should beginning each book with the name of God.
- Preparation of an Inventory (Listing of all assets)--
- The businessman should make a complete inventory of all possessions both personal and business. (Note: the example in Chapter 3 indicates that receivables and payables should be listed in the inventory, thus creating a listing of net assets.)
- Concept of Inventory Cutoff!
- "The entire inventory must be completed on the same day, otherwise there will be future difficulty in managing the business."
3 - An Example of an Inventory with All Its Formalities
(This wasn't in the translation...)
4 - Warnings and Helpful Advice to the Successful Businessman.
Maintain inventory as detailed as possible. Nothing should be moved without a memo. Detailed records help the businessman be vigilant and alert about business transactions. A number of sayings and citations are used:
- Proverb: "More skills are required to make a successful businessman than are required to make a good lawyer."
- Municipal laws of Venice and Florence: "The law helps those that are awake, not those that sleep."
- In the original, admonitions about the virtues of work over laziness were cited from Dante's Inferno, religious verse, and Italian poetry.
5 - Disposition--What Is to be Understood by It, What It Consists of in Business, and the Three Principal Books of Businessmen.
Three Principal Books:
6 - The First Book, Called the Memorandum, Scrap Book, or Household Expense Book. What Is to be Understood by It, How Entries Should be Made in It, and by Whom.
- Memorandum (Scrap Book or Household Expense Book)--
- The Memorandum is a highly detailed record of all transactions in chronological order. Entries may be made by the businessman, his assistants, or the women of the home.
- (Essentially, the Memorandum book was a source document that formed the basis for entries in the Journal.)
- Unlike the practice of some, the businessman should not place the inventory in the Memorandum book. The Memorandum book passes through too many hands.
- Monetary Unit Assumption--
- While not necessary in the Memorandum book, monies should be standardized in the Journal and the Ledger.
- Audit Trail and Internal Control Against Fraud--
- Marking the covers of the books:
- During a time period, when multiple Memorandum books are required, place a different mark on the cover of each one to preserve order. Do likewise for Journals and Ledgers.
- For Christians, the first mark should be the Sign of the Holy Cross; successive marks should be in alphabetical order: A, B, and so on.
Numbering the pages of the books:
- All pages of each book must be numbered. Even though the Memorandum and Journal books are chronological, transactions for a given day may fill more than one page. In this case, "...if someone wished to defraud, he could tear a page out and this fraud could not be discovered by reference to dates, because the days would follow chronologically and the page would not be missed."
- Time Period Assumption--
- "Many businessmen in different localities are accustomed to balancing all of their books annually even though they have not been filled."
7 - The Manner in Which All Business Books Are to be Authenticated, Why, and by Whom.
- Attestation of Official Set of Books--
- Take the books to a Commerce Officer. Have the Officer's clerk write a description of the book (number of pages, kinds of monies and weights, etc.) and affix the officer's seal on the first page of the book.
- Business Ethics--
- Others who are shown the books can be assured by the attestation that the books are authentic. "Unfortunately, there are many who keep their books in duplicate, showing one to the buyer and the other to the seller."
8 - How Entries Are to be Made in the Memorandum, With Examples.
- "No point should be omitted in the Memorandum. If it were possible, everything that was said during the transaction would be noted." "...transactions can never be too clear to a businessman."
9 - The Nine Ways in Which It Is Customary for Businessmen to Buy. The Goods Which It Is More or Less Necessary to Buy on Time.
- Customary ways to make purchases:
- First, in cash;
- Second, on time;
- Third, by the exchange of goods;
- Fourth, by draft;
- Fifth, partly in cash and partly on time;
- Sixth, partly in cash and partly by goods;
- Seventh, partly by goods and partly by time;
- Eighth, partly by draft and partly on time;
- Ninth, partly by draft and partly in goods.
(A tenth way was omitted above but mentioned in Chapter 19)
"Note that there are as many ways to sell as to buy. Knowing the ways of buying, you will understand how to sell. Therefore, I need not explain ways of selling."
Audit Trail Revisited--
- A full description of the purchase transaction should be made in the Memorandum book.
- Not all of the detail must be transferred from the Memorandum to the Journal, since references could be made later from one book to the other.
- Nothing must be entered in the Journal that has not been first entered in the Memorandum.
10 - The Second Important Business Book Called the Journal. What It Is and How It Must be Kept in an Orderly Way.
- Place the date and day at the beginning of each page.
- Enter your inventory first since the Journal is the businessman's private book.
- Enter Journal entries "...in a neat and systematic way, neither superfluously nor too briefly."
11 - The Two Expressions Used in the Journal, Especially in Venice: One Called Per, and the Other A, and What Is to be Understood by Them.
- "Per always indicates a debit, one or more as the case may be."
- "A denotes a credit, one or more as the case may be.
- The debit is described first, then the credit.
- The debit and credit are separated by "//."
12 - How to Enter and Arrange Items in the Journal by Means of Debit and Credit Entries, With Many Examples. The Two Other Expressions Used in the Ledger, the One Called Cash and the Other Capital, and What is to be Understood by Them.
"In the name of God enter in the Journal the first item of your Inventory which is the quantity of money that you possess."
Concept of Capital--
- The inventory entry in the Journal for cash is a debit to cash and a credit to capital. "Capital means the entire amount of what you now possess."
Natural Account Balances--
- "Cash may never have a credit balance, but only debit (unless it balances). If, in balancing the book, you find that Cash has a credit balance, an error in the book is indicated."
Non-Cash Asset Valuations--
- Values must be established for non-cash inventory items (jewels, silverware, featherbeds, etc.).
- "Make the prices high rather than low. If it seems to you that something is worth 20, put it down at 24, so that you will make a larger profit."
Recording and Posting Marks--
- When the Memorandum entry is recorded in the Journal, make a single diagonal line through the entry in the Memorandum book.
- While other marking expressions could be used, "you must nevertheless attempt to use those common to other businessmen, so that you will not appear deficient in the usual business customs."
13 - The Third and Last Principal Business Book Called the Ledger. How It is to be Kept Double With Its Index, or Single Without.
- Alphabet (Index)
- "Enter in the Index all debits and credits in alphabetical order, together with the numbers of their respective pages." (Chapter 15 clarifies that Pacioli is describing an alphabetical listing of accounts, not entries.)
- Ledger Accounts
- "...enter Cash as a debit on the first page as it is in the Journal." (Capital would be placed on the second page of the Ledger).
14 - Posting Entries from the Journal into the Ledger, and Why for Each Entry in the Journal There Are Two Made in the Ledger. How Entries in the Journal Should be Cancelled. The Two Ledger Page Numbers Which Are Placed in the Margin of Each Entry.
- Journal entries should be posted twice in the Ledger, one to the debit and the other to the credit.
- The debit entry should be on the left side and the credit entry on the right side.
- In the Ledger, cross-reference the debit and credit entries to each other.
- In the Journal, make vertical lines in the margins to indicate that the respective debits and credits have been posted.
- In the Journal, indicate the page numbers of the Ledger where the debit and credit postings can be found.
- In the Ledger, "...the closer the credit is posted to the debit, the nicer it
- Self-balancing Ledger--
- Unless both debit and credit entries are posted to the Ledger, the Ledger will not balance.
- "The books cannot be closed unless the debits equal the credits."
15 - The Way in Which Cash and Capital Entries Should be Posted in the Ledger. The Date Which Is Written at the Top of the Page According to Ancient Custom. Changing the Date. How to Arrange the Space on the Pages for Small and Large Accounts in Accordanace With the Requirements of the Business.
- Enter the year at the top of the Ledger page in roman numerals (the ancient letters). Do not place the day at the top since a page of the Ledger will cover several days.
- If the year changes from the top of the page, enter the new year just before the
entry. "This happens only when books are not balanced and transferred at the end of
- Accountability and Confidentiality--
- Ledger entries may be brief, especially regarding those things that are private to you, and "...about which you do not have to give an account to anyone."
- Be more descriptive "...for those things about which an account must be given to
- Internal Control--
- "...if the Ledger were lost for any reason, such as robbery, fire or shipwreck, but either of the other two books remain, (the Memorandum or the Journal), you would always be able to make up another Ledger..."
16 - How Entries Relating to Merchandise Should be Posted to the Debit and Credit in the Ledger.
- "Always keep in mind numbers, weights, measurements, and values, in accordance with the different ways that it is customary to do business in the Rialto, and different geographical locations."
- Enter other inventory items from the Journal to the Ledger in the manner that was described previously.
17 - The Keeping of Accounts With Public Offices, and the Municipal Loan Bank in Venice, Which Is Governed by Districts.
- The businessman should keep careful account with banks. The bank's clerks can "...sometimes mix up the accounts of these offices in such a way that they do not correspond with anything."
- Clerks who do harm can be punished by the High Signoria of Venice.
18 - How to Keep Your Accounts With the Office of Exchange in Venice. How to Make Entries Relating Thereto in the Memorandum, Journal, and Ledger. Information About Loans.
Doing Business with the Office of Exchange--
- The Office of Exchange had brokers through which a businessman purchased merchandise.
- For the brokering service, the Office of Exchange was due a percentage of the purchase price (say 4%).
- When the purchase is made, debit merchandise for 4% and credit the Office of Exchange for the same amount.
- The seller should pay half of the broker's fee.
- Pay the seller 98% [100% - (4%/2)], debiting merchandise and crediting cash.
- Pay the broker 4%, debiting the Office of Exchange and crediting cash.
- The full cost (102%) ends up in the merchandise account.
A common proverb says: "One who does nothing makes no mistakes; one who makes no mistakes does not learn."
19 - How to Make the Entries in Your Principal Books for the Payments Which Have to be Made by Draft or Through the Bank.
- Payments partly through the bank and partly by draft: "...deliver first the draft and then settle through the bank. This is much safer."
Recording payments of liabilities--
- Payments for previously recorded purchases: debit the seller [liability] account and credit the account used to make the payment.
Recording of sales--
- Debit the different buyers and credit merchandise.
20 - The Well Known and Peculiar Entries in Business for Trading and Partnership and How They Should be Entered in the Business Books. Simple Tradings and Dates, Then Complex Tradings, Examples of Each in the Memorandum, Journal, and Ledger.
Three kinds of trades [exchanges of goods]--
- On time.
Two methods of recording trades--
- Separate accounts:
Maintain an asset account for each lot of traded goods received. In this way, one can subsequently know how much profit or loss was made on each separate lot.
- Regular merchandise accounts:
Enter the traded goods received in the appropriate merchandise account with other purchases.
21 - The Well Known Account Called Partnership--
- Maintain partnership capital accounts in the Ledger but separate from your own capital account.
- In the Memorandum, state all the details of the partnership, such as the
- How long the partnership is intended to exist.
- The partnership's objectives.
- The employees or apprentices to be employed.
- The partners' shares [50-50, 60-40, etc.].
- How much each invests in the business (and whether in goods or cash).
- The debits [assets] and credits [liabilities] assumed by the partnership
- If partners contribute cash initially, the entry would be a debit to cash and a credit to the respective partnership capital account.
Segregation of Cash:
- "...if you keep the Cash account [for the partnership] separate from your own, you will be able to carry on partnership business more clearly."
Segregation of Partnership Accounts:
- Partnership accounts kept in your Ledger--
All partnership transactions should be posted to separate partnership accounts that are set up--Partnership's Cash, Partnership's French Wool [merchandise], Partnership's Capital.
- Separate set of books for the partnership--
"If you keep separate books, I will not give you further instruction, because what I have said before is sufficient to guide you in all your business."
22 - The Entries for Each Kind of Expense; for Example, Ordinary and Extraordinary Household Expenses, Business Expenses, and Wages of Clerks and Apprentices.
- Maintain accounts for expenses, and for profit and loss, so that "...the businessman will always know what his capital is, and at the end of the period, how it is progressing."
Classification of expenses--
- Business expenses account:
Maintain this account "...because every small item cannot be recorded in the merchandise account."
- [Note: Pacioli's use of merchandise accounts is unclear; his collective references to the account prior to closing the books are as follows:
- Debit Merchandise with the beginning inventory.
- Debit Merchandise with goods purchased.
- Debit Merchandise with goods received in trade.
- Credit Merchandise for proceeds from sale of merchandise.
- Close Merchandise to profit and loss [income summary].
[Ending inventories are not mentioned directly by Pacioli . The balance closed to profit and loss appears to be net amount of sales, cost of sales, and beginning inventory. Since, in Chapter 34, Pacioli refers to the need to carry forward the "merchandise account" to the new accounting period, hemust be alluding, at various times, to either a "merchandise asset" and a "merchandise revenue and expense" account throughout the Treatise].
- Since laborers work on many types of merchandise, it is impractical to try to allocate such expenses to the various merchandise accounts. "If you kept separate accounts it would be too lengthy and not worth the expense."
- Some keep a separate account for salaries of shop clerks and apprentices "...so that they know how much they pay for salaries annually."
Natural Account Balances:
- Expense accounts always have debit balances. If an expense account has a credit balance, "...there would be a mistake in the books."
Ordinary Household Expenses:
- Maintain this account for "...such expenses as grains, wines, wood, oil, salt, meat, boots, hats, expenses for tailoring, woolen clothes, drinks, tips, barbers, bakers, water-carriers, kitchen utensils, vases, glasses, and all the buckets, baths, tubs, and casks."
- Separate accounts for all the above items can be maintained if desired.
- "...include in household expenses all extraordinary expenses which do not occur in the ordinary course of business."
- Extraordinary items include "...that which you spend in playing various kinds of games [gambling], or for things or money which you might lose , or that might be stolen, or lost at sea or through fires."
23 - The Order and Manner in Which the Accounts of a Store Should be Kept. How the Entries Should be Made Separately in the Authentic Books of the Owner and Those in the Store.
Business Entity Concept:
- If the businessman's store receives supplies from the house, then "...imagine that the store is a person who owes you the amount you supply it..." Debit the store and credit merchandise for the amount you supply.
- In this way "...you may see whether the store is operating at a profit or loss."
- If the store has a manager, some owners debit the manager for items supplied to the store.
- "...this should not be done without his consent, because you should never enter any person's name in your books as a debtor without his knowledge.
- Fixtures placed in the store should be charged to the store.
- "In the case of a drugstore, you would have to furnish it with such things as vases, boiling pots, and copper utensils with which to do the work."
Another proverb: "He who does business without knowing all about it, sees his money go like flies."
24 - Posting the Entries With the Bank in the Journal and Ledger. Bills of Exchange--Whether You Deal With a Bank or as Banker With Other Persons, Receipts for Drafts--What Is Understood by Them, and Why They Are Made Out In Duplicate.
- Often money is placed in a bank for greater security.
- Even though bank books are public and authentic, always require a receipt for security when depositing money.
- "Since you may have different business relations with the bankers, always keep separate accounts with them so as not to mix one thing with another."
- "Always require proper receipts."
- Give receipts when accepting payments; if you ever "complain" that payment has not been received, then the payer can show you the receipt written in your own handwriting and "...you will be embarassed."
- "All these precautions should be taken because of the bad faith of the present times."
25 - The Income and Expense Account, Which is Usually Kept in the Ledger.
"In some areas, it is customary to keep the Income and Expense account in a separate book which is balanced when the authenticated books are balanced. This custom should not be criticized, but it requires more work."
26 - How Entries Relating to Trips Should be Made in the Business Books. Why, of Necessity, There Are Two Ledgers for This.
Two Types of Trips--
- Trips made by the businessman.
- Trips made by an agent acting on behalf of the businessman.
Separate books for transactions during the trip--
- Two Ledgers should be maintained: one left at home and the other taken on the trip.
- Transactions occurring on the trip should be entered in the small Ledger taken on the trip.
- After the trip, figure up the profit or loss for the trip and enter this amount "...in the correct place in your big Ledger."
27 - The Well Known Account Called Profit and Loss, or Profit and Deficit. How This Account Should be Kept in the Ledger, and the Reason Why It Is Not Placed in the Journal as the Other Accounts.
- Close all other accounts in the Ledger to an account called Profit and Loss.
- "Entries to the account should not be made in the Journal, but only in the Ledger. They differ from other entries in that they originate from debit and credit balances in the accounts and not from exchange transactions."
- Closing Procedure: If an account has a debit balance (indicating a loss), then "...add enough to the credit so as to make the debit and credit equal."
- "The Profit and Loss account will then be closed and transferred into the Capital account..."
[Pacioli's word choice implies that all accounts should be closed to capital; logically, he meant only those accounts that contained revenues and expenses should be closed. In Chapter 34, Pacioli explains how to transfer ending asset, liability, and capital accoutns to the new Ledger].
28 - How Ledger Accounts Should be Carried Forward When They Are Full. The Place to Which the Remainder Should be Transferred, in Order to Avoid Fraud in the Ledger.
- When a Ledger page is full, carry the balance forward to the next blank page in the Ledger. Leave no any blank pages between the last account and the new transferred account. "To do otherwise, would indicate fraud in the book."
29 - How to Change the Year in the Ledger Between Entries When the Books Are Not Closed Every Year.
- If the year changes before you balance the books, then write the year in the margin just above the first entry of the new year.
- "...it is a good idea to close your books each year, especially if you are in partnership. As the proverb says: 'Frequent accounting makes for lasting friendship."
30 - How to Abstract an Account for a Debtor or an Employer if You Are the Manager or Agent for the Administration of His Property.
Statements of Account--
- Take a sheet of paper, enter transactions of the account on one side, then carry forward the balance to the other side of the sheet. The sheet should show debits and credits to the account.
- The statements of account can be used to reconcile your accounts with those of your clients.
31 - How to Correct One or More Entries in a Place Different From That in Which They Should Have Been. This Usually Happens Through Absentmindedness.
Correcting Accounting Errors--
- "The good bookkeeper should know how to correct, or deviate as it is called in Florence, an entry which he may have posted by mistake in the wrong place."
- If you make a debit entry that should have been a credit, then make a credit entry opposite the incorrect entry, then make another credit entry as it should have been made originally.
32 - How the Ledger Should be Balanced and How the Accounts of the Old Ledger Should be Transferred to the New Ledger: the Manner of Verifying It With Its Journal, Memorandum, and Other Documents.
Transferring Balances to the New Ledger--
- "In the best known places, such as Milan, the big merchants customarily close their Ledger every year."
- Closing the old Ledger and opening the new Ledger is called "balancing the Ledger."
Procedure Prior to Transferring Balances--
- Engage an assistant to help you.
- Give the Journal to the assistant; you keep the Ledger.
- The assistant begins with page one of the Journal and calls out first the debit and then the credit of the first entry as well as the Ledger page number [the Ledger page was indicated in the Journal at the time of the original posting].
- When discovered, you make a mark by the entry in the Ledger. The assistant should make a mark in the Journal.
- Proceed in the above manner until all entries have been traced from the Journal to the Ledger.
- Finally, go through the Journal and Ledger looking for entries that are unmarked. These entries represent posting errors that must be corrected.
33 - How to Record the Transactions That Might Occur While Balancing the Books. Why No Entry Should be Changed or Made During That Time in the Old Books.
Transaction Cutoff Procedure:
- For transactions that occur when the old books are being closed, make entries in the new Journal for posting when the new Ledger is ready.
34 - The Way to Close All Accounts of the Old Ledger. The Preparation of the Trial Balance, Which Totals All of the Debits and Credits. Closing to Profit and Loss
- "Accounts such as Mercantile Expenses, Household Expenses, and all Extraordinary Expenses..." should be closed to profit and loss.
- A credit in the Profit and Loss account indicates a profit.
- A debit in the Profit and Loss account indicates a loss. "May God protect each of us who is really a good Christian from such a state of affairs."
- Close the Profit and Loss account to the Capital account.
Transferring Balances to the New Ledger--
- "Summarize all the accounts with debit and credit balances, always adding to the lesser side the amount to be carried forward..."
- For each account transferred, cross reference the respective pages of the old and new Ledgers.
- Accounts such as "Cash, Capital, Merchandise, Personal and Real Property, Accounts Receivable (debtors), Accounts Payable (creditors), and accounts with offices, brokerage houses and public weighers..." should be transferred to the new Ledger.
Preparation of a Trial Balance--
- On a sheet of paper, "...summarize all the debit totals that appear in Ledger at the left of a sheet of paper, and all credit totals at the right.
- "...sum all the debit items and likewise total all the credit items.
- If the two totals equal, "...you may conclude that the Ledger was well kept and closed."
35 - How and In What Order Manuscripts, Confidential Letters, Policies, Processes, Judgments, and Other Important Instruments Should be Kept, The Registry of Important Letters.
[In this chapter, Pacioli outlines detailed suggestions on how to mail and maintain files of correspondence, and how to keep a record book of "...those things which you might forget, and which would cause you loss."]
36 - Summary of Rules and Ways of Keeping a Ledger.
- Place credits on the right side and debits on the left side.
- All entries consist of a debit and a credit.
- Entries include the date, amount, and reason for the entry.
- The last name in the debit posting must be the first in the credit posting.
- The credit posting shall be made on the same day as the debit posting.
- A trial balance of the Ledger should be prepared to see whether the debit balances equal the credit balances.
- The sum of the debits must equal the credits. Otherwise, there would be a mistake in the Ledger.
- The Cash account will always have a debit balance, lest there be an error in the Ledger.
- No one should appear as a debtor in your Ledger without his permission and consent.
- The values in the Ledger must be recorded in one kind of money.
- The debit and credit postings to the Cash account may be abbreviated by not giving the explanation for the entry.
- To open a new account, use a new page without going back to previous pages, even if there is sufficient space.
- Correct an error by making an entry opposite it.
- When an account is full, figure the balance in the account and transfer the balance to a new account.
37 - Items Which Should be Entered in the Ledger.
[Everything, as detailed as it can be. Time is money, record all time spent or paid for. Pay your accountant 2% to tote it all up.]
Thanks to Kenneth W. Brown, Ph.D., CPA for this translation, which has been marked up with valid XHTML and posted with attribution to him.