Next, we venture to 15th century Venice, Italy, where business is commonly conducted using currency rather than barter (goods). The arabic number system is widely used, enabling addition and subtraction to be done easily, and illiteracy is greatly reduced, allowing more people to become involved in business. The double-entry accounting system—in which for every "debet dare" there is a "debet habere"—has evolved to the point where it is very much like the present-day system. Debet dare and debet habere are Latin terms meaning "should give" and "should have," respectively.
The first published work on the double-entry accounting system occurs in 1494 when several chapters concerning accounting are included in a mathematics book written by Luca Pacioli, who is commonly called the father of accounting. Pacioli is well respected in Italy and his book is one of the first printed works using movable type. Pacioli does not invent double-entry accounting. Rather he reports what merchants are commonly doing. This accounting method becomes known as the method of Venice. Because movable type allows easy reproduction, the availability of Pacioli's work encourages the use of the double-entry system throughout Europe.
At this point, two other important accounting concepts emerge: (1) the monetary unit concept and (2) the periodicity concept. The monetary unit concept asserts that money is the common measurement unit of economic activity. This concept is crucial to accounting because it enables records to be kept based on a common denominator. For example, rather than recording the number of cows and sheep available for trade, the accounting system reflects the monetary value of the livestock, whether it is lira, pesos, francs, yen, or another designated monetary unit. This makes determination of profit easier because monetary values, unlike sheep and cattle or other bartered goods that differ, can be added and subtracted.
The periodicity concept requires that the profits of the business be determined at regular intervals throughout the life of the business. This means the business does not have to end before determining its profits. This concept makes admission of new partners and departure of old partners easier because business profits are calculated at regular intervals. Thus, partners and potential partners can evaluate the success of the business while the business remains in operation.
I. Answer the questions.
What is business?
How has the need for accountability evolved?
What is accounting system?
Have the accounting system changed?
How did a merchant in Babylonia conduct?
When were arabic numerals first used?
What two very important theories were developed?
Who was the author of the first published work on the double-entry accounting system?
Why is this method called the method of Venice?
What does the periodicity concept require?
II. Complete the sentences with the right world or world combination from the box.
a) service firms b) money c) economic events
d) accounting systems e) partnership
1. The need for account ability has evolved over time into the need for … .
2. Banks are business enterprises operating as … .
3. A … is a business owned by two or more individuals who agree to share both risks and rewards of the business.
4. The business entity concept requires that an accounting system reflect information that summarizes … that pertain to a particular entity.
5. The monetary unit concept asserts that is the common measurement unit of economic activity.
III. Make a summary of the text “Pacioli and the Method of Venice”.
IV. Talking points.
1. Accounting systems have evolved over many centuries. Explain the main changes in accounting.
2. The four basic accounting concepts (business entity, going concern, periodicity, and monetary unit) are related. Describe how.
3. Describe why the four basic accounting concepts (business entity, going concern, periodicity, and monetary unit) are necessary in order for corporations to exist.