Thursday, June 22, 2017

"Momentum Accounting & Triple Entry Bookkeeping"

From Hacker Noon:
You’ve never heard of Yuji Ijiri. But back in 1989 he created something incredible.

It’s more revolutionary than the Internet, the cotton gin, the steam engine, the PC and the smart phone combined.

When people look back hundreds of years from now, only the printing press and the Internet will have it beat for sheer mind boggling impact on society. Both the net and the printing press enabled the democratization of information and single-handedly uplifted the collective knowledge of people all over the world.

So what am I talking about? What did Ijiri create that’s so amazing?

Triple entry accounting.
Uh, what?

Yeah. I’m serious.

But don’t feel bad if you slept through the revolution. It wasn’t televised or posted on Reddit. When professor Ijiri died in 2017, most people didn’t catch his obituary. His most famous book, Momentum Accounting & Triple Entry Bookkeeping, has a grand total of zero reviews on Good Reads. So you’re not alone if you missed it.

Go ahead and Google “triple entry accounting” and see what comes up.
232,000 results. In the age of Google that’s like not existing. Minor Instagram celebrities and memes invented last week have more hits.

The number two link is a Wikipedia article that’s barely a stub. The 4th down is a paper from 2005. Ijiri isn’t even mentioned on the first page.

So why is it so important if nobody knows about it?

Because the first application for it didn’t come along until 2006 and so it’s real impact is still to come. But make no mistake, it’s coming like a tsunami that will remake every aspect of our lives and societies.

How do I know?

To understand why you just have to know a little about history’s sexiest subject. 

Accounting: History’s Sexiest Subject
Here’s the thing, without accounting, you wouldn’t be reading this article on your Ipad, or driving to work in a new car or listening to music on Pandora. Without accounting there’s no commerce, no trade. Without commerce there would be no planes, no trains, no tractors, no steam engine, no skyscrapers or computers. There would be no nation states, no boats, no shipping containers traveling all over the world ferrying goods from the far corners of the Earth.

In fact, without accounting you’d still be subsistence farming or hunting in the forest.

You see, there’s only been two accounting breakthroughs in the entire history of the world before now.

Both of them presaged a massive uptick in human societal complexity and innovation.
The first breakthrough was single entry accounting.

Before that we were running around the forest chasing animals, following the moon or farming. Our prospects were limited. You lived with your tribe or clan and you hunted and gathered. Your parents before you did the same thing and theirs before them and theirs before them in an endless cycle down through the years.

Accounting broke that cycle.

For the first time we had the ability to bootstrap ourselves into a different kind of life, one that didn’t involved every single person on the planet living hand to mouth.

The earliest examples of single entry accounting go back to Summerians about 5000 years ago on Cuneiform tablets. Yeah, those Summerians, the ones who gave us the Epic of Gilgamesh, the world’s oldest recorded story. These systems were simple but effective. You just put one note in a ledger. So and so owes me $50.

Once you can keep track of who owns what, trading starts to happen at a much larger scale. That’s why the kings and queens of ancient times could build castles and establish professional armies and create great wonders of the world.

But single entry accounting wasn’t very good. It could only take us so far. The only accountants back then were the king’s brother because you really had to trust that guy. All he had to do was wipe away a line in the ledger and that money no longer existed. There was no way to verify, no way to audit, no way for two people to agree.

That meant trade was a family affair. The kings and queens traded with the dukes and mostly they kept all the money for themselves and left the rest of us to starve. Powerful clans dominated the Earth. 

Double Entry to the Rescue
It wasn’t until the 1400s that the single entry system really started to show its age though. For the first time you had boats that could travel from near and far. That meant they could trade with people they never met. Since boats became the most important way to carry goods to distant lands, port cities like Venice became the center of the ancient world and the nexus of world trade. But with so much trade going on, single entry accounting showed even more cracks. It’s easy to make data entry errors. After short periods of time people’s books were a hopeless mess of conjecture and lost money. The more trades that stacked up, the more errors...MORE, including the answer to the question: WTH?
We've had a few posts on Fra Luca Pacioli and/or double entry bookkeeping:

In 1994 there was great gaiety and celebration to mark the 500th anniversary of the publication of Luca Pacioli's treatise on, well, everything, hence the title: Summa. Accounting nerds around the world paid homage to the section on bookkeeping. You had to be there.

Unfortunately Benedikt Kotruljević had plowed the ground 36 years earlier with his Delia Mercatura et del Mercante Perfetto (Of Trading and the Perfect Trader) and the accounting profession had actually missed the quincentenary of the presentation of double entry bookkeeping to the world....

From Credit Writedowns:...


...The headline is clickbait.
This post has nothing to do with trading as it is usually covered on this blog.

In fact, the title is a poor translation of "Della Mercatura et del Mercante Perfetto", the first known work on double entry bookkeeping.

I was thinking of ...del Mercante Perfetto's author, Benedetto Cotrugli, because in the post we are about to visit, Izabella Kaminska mentions the more famous proponent of the double entry, Luca Pacioli.

There's a simple reason Pacioli is more famous: he was a better communicator with a better system. As The Accountant's Magazine said in 1906: "Cotrugli may have been most estimable as a man of affairs, but as a writer he was an old woman".*
That is one harsh review.

By comparison, Pacioli's "Summa de arithmetica, geometria, proportioni et proportionalita", of which his distillation and memorialization of the "Venetian method" of bookkeeping is a part, is a work of art.
Here's a good translation.

With that rather meandering introduction here's Izabella at FT Alphaville:

If you call it a blockchain, it’s not a single-entry system

Which brings us back around, as if you haven't guessed already, to the subject of today's Hacker Noon link.