What exactly is a balance sheet?….

 

Well, it is an accounting convention, first recorded by the Franciscan friar Dominic Luca Pacioli in his 1494 blockbuster, Summa de arithmetica, geometria, proportioni et proportionalità. Pacioli didn’t invent the set of accounting techniques he described, which were in use in mainly Venetian banking circles, but he was the first person to write them down. It’s a remarkable fact that every business in the world uses them on a daily basis more than five hundred years later. The fundamental feature of Pacioli’s system, known as double-entry bookkeeping, is that everything is recorded twice, as an asset in one place and a liability in another, and that the two sides of the balance sheet are always equal: assets = liabilities + equity.

There’s a beautiful description of the system’s impact in James Buchan’s book Frozen Desire:

To be able to keep books in double-entry is to have a machine for calculating the world. Understanding the technique is the work of a few days—practising it no doubt requires longer—but one feels one has mastered an ancient and far-flung language: one seems to see better into the nature of things. That soon reveals itself to be illusion. In reality, all one is seeing is a coded money value for all objects and preoccupations. Yet its influence on our thought has been almost without parallel. Our conversation is replete with assets and liabilities, depreciations, profits and loss, balance sheets: all echoes of Luca’s system. Above all, Luca laid the foundation of the modern conception of profit, not as some vague increase in possession, as in antiquity, but as something hard, even crystalline, mathematical and open to empirical test at any time whatever through an interlocking system of books.

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