Is Accounting the Key to Human Progress?

If you asked the public, or indeed, a majority of informed figures, ‘what is the most important development in the history of civilisation’, very few would say accounting.

However, if you were to start with the realisation that the modern era began with the codification of accounting and ‘double-entry’ bookkeeping in the 15th century: you might get a different answer.

Early versions of double-entry were developed in ancient Samaria, but accounting achieved a very high level of sophistication in the 9th century, during Islam’s Golden Age. From an historical point of view, the adoption of modern accounting from its originating Islamic sources was a major turning point in Western history.

So, what’s so special about double-entry bookkeeping?

Double-entry bookkeeping is an accounting system rooted in the premise that at the base of the Income Statement, which records all the inputs and outgoings of a business, lays an underlying duality, represented by its assets and liabilities.

Accounting for commercial transactions properly on the balance sheet allows for both the identification and valuation of a company’s assets (the causal source of future earnings), shareholder equity and its (potentially) bankable collateral. 

In other words, accounting is central to the identification of the most potent force on earth: capital. Accounting is vital, because we would not have any idea about capital if we did not first have modern accounting and formal balance sheet assets.  

Assets are capitalism’s secret sauce, its unique storehouse for value. Assets are institutional ‘vessels’ that we invent to store human energy and other forms of economically important value.

The reinforcement that assets enjoy from society at large, particularly in accounting, law and with the business managers who deal with them day to day, creates a kind of institutional buoyancy. These special qualities allow the value stored within assets to rise or fall with the ebb and flow of economic currents. 

Assets buttress the economy because the stored value in assets can be owned by an individual, public body, or corporation, and leveraged to create liquidity (i.e. turned into cash or credit) for all kinds of productive purposes. 

Sadly, assets get no respect. 

The vast majority of us are either unaware of assets or consider them boring accounting entries. But closer examination reveals a different story, and a much more important role for assets in the history of civilisation. 

Assets may be unassuming, but they also have near mystical qualities that allow value to be stored and to accumulate. In fact, capital accumulation in the West only began in any meaningful sense with the consolidation of mercantile (trading) assets in the 16th century. 

Today, you could say we are all beneficiaries of assets and their remarkable properties. Modern civilisation is able to organise itself to higher purpose and great complexity because it can draw upon the accrued value stored in our rapidly expanding asset foundations.

So, yes, you can make a case that accounting and double-entry bookkeeping provide the critical bridge between the modern and ancient worlds; as a result, they are ‘the most important development in the history of civilisation’. 

More importantly, it has been accountants’ ability to adapt, to legitimise new classes of assets that facilitated the rise of civilisation these past centuries. 

The historic innovations inspired by the introduction of double-entry bookkeeping sparked the rise of trade in medieval Venice, Florence, and Genoa, eventually triggering the Italian Renaissance. 

It is equally clear that accounting innovations in the early industrial era codified the value of ‘real’ capital - the plant, equipment and machinery that underpinned the Factory System - and drove the industrial age. 

Which makes the present inertia in the ‘practice’ of accounting so troubling. 

The economy today is nothing like the economy of our fathers and grandfathers. We are in a post-industrial (digital) economy that is being driven by new value drivers like software, big data, artificial intelligence algorithms and networks-of-value like Facebook.  

Ironically, Accounting Standards permit capitalisation, but modern accountants continue to refuse to recognise these new value drivers as formal balance sheet assets, expensing all related development costs for tax purposes. 

They are essentially flushing our new economy with all its capital potential down the accounting drain.

New developments in Normative Accounting hold out some hope; for capitalising intangible assets on the balance sheet could reward (instead of penalise) investments in Green Energy Futures or launch a ‘thousand ships’ of innovation presently trapped in SMEs or accelerate the adoption of circular planning regimes to eliminate plastic and other harmful waste. 

Accounting innovation, rather than accounting per se, is truly ‘the most important development’, and we need it now more than ever, if we are to rebound from lockdown and achieve our own 21st century renaissance.