Tip Of The Day #97 - In The Beginning There Was Bookkeeping
Barbara Steckly
In The Beginning, There Was Bookkeeping
In the beginning, there were numbers. Then Luca Pacioli of Florence, said, “Well, let’s add them up!”, and so it came to pass that Double Entry Bookkeeping was created, and Pacioli, born in 1447, became known, in Europe, as "The Father of Accounting and Bookkeeping", publishing the first work there ever on the double-entry system.
Suddenly, people could organize their massive amounts of information into journals, and then produce summary financial statements, primarily comprised of income statements and balance sheets.
The income statement showed total revenues minus total expenses over a specific time period, resulting in either a profit or a loss. The balance sheet, compiled at a designated point in time, illustrated assets, debts, and the difference in the owners’ equity.
These amazing new financial tools enabled the entrepreneurs of old to allocate resources more effectively. As an example, if the business person owned two restaurants, he could determine, by looking at the profits or loss on each income statement, which one would benefit from further investment, and which one he’d be better just to close.
On a larger scale, trading ships were soon analyzed by company income statements, and, as the understanding of accounting principles grew, more and more decisions began to be made using these reporting tools, leading to greater efficiency of capital management that literally “saved” their society.
Out of the income statement came the intellectual miracle of the return on investment (ROI) which allowed investors to compare investments mathematically with the simple ROI formula and, soon after, the business community started to add risk to the analysis, which was another game changer. An entrepreneur could predict which potential investment would be safer by calculating which one had the least risk. This addition of “risk and return” into business analysis became the basis of modern business theory and decision making.
As they became more financially literate, people began to make wiser decisions. As markets grew around the world, wealth began to be created on a scale never seen before, lifting millions and millions of people out of poverty.
Are you using your financial information to make better business decisions and investments? If not, spend a little time with your bookkeeper, then your accountant. If the income statement can change society in the 1400’s, I am pretty sure it can make a positive difference in the jingle in your jeans today.
Preferred Client Services, professional bookkeepers in Edmonton, AB working as business partners to make a positive difference to your bottom line!