This is one of my favorite topics, because I am a huge fan of accounting in its most simple, essential form. Basically, the fundamental structure of accounting that in use today is the same as when the first book on double-entry bookkeeping was published in 1494. The book was written by a Franciscan friar named Luca Pacioli. A man of the cloth, he was also a serious mathematician, and saw the value in publishing the accounting method that he was in common use in Venice at the time. It is the system of:
Double-entry bookkeeping; including
The division of accounts into one of five types (assets, liabilities, capital - now commonly known as equity, income, and expense); and
The creation of the Balance Sheet and Income Statement.
Now, of course I feel a particular affinity with Luca Pacioli, since I am both an accountant, and an Interfaith/Interspiritual minister. But that isn’t why I love accounting.
I love accounting because it provides a (relatively) simple way to make sense of personal or business finances. Double-entry bookkeeping and the accounting model help us turn numerous individual financial transactions – the purchase of paper for your computer, the invoice you send to a client, and the deposit you make of the check you receive from the client – into financial reports – the Balance Sheet, and the Income statement – that tell you a lot about either your business or personal finances.
The Balance sheet gives you a snapshot of the financial position at a moment in time, while the Income statement is a summary of income and expenditures over a set period of time.
So, while many may see bookkeeping as kind of an necessary evil – you have to do it because you have to file your taxes – I see it as a wonderful tool to provide insight into what is happening in the important sphere of our financial lives.