Planet Money – Summer School 3: Accounting and The Last Supper

Intro

In this episode of “Planet Money,” the hosts explore the fascinating history and impact of accounting. They trace the birth of accounting back to Luca Petoli, a monk and mathematician in Venice during the late 1400s. From there, they delve into the invention of double entry bookkeeping and the widespread use of spreadsheets, revolutionizing the field of accounting. The hosts also discuss the power and potential pitfalls of spreadsheets, as well as the role of accounting in running a business. Join them on this journey to uncover the hidden superpower of accounting.

Main Takeaways

Accounting as a Revolutionary Skill

• Accounting is a revolutionary way of thinking about the world, not just about business.
• Accounting is more than just taxes and numbers, it’s a skill that can be used to interpret and assess how a company or business is performing.
• Accounting is a superpower that every person can use to make better decisions.

The Birth of Accounting in Venice

• The birth of accounting can be traced back to a monk who made an innovation possible in the late 1400s in Venice.
• Venice in the late 1400s was a wild and exciting place, equivalent to Silicon Valley and New York wrapped up together.
• Double Entry Bookkeeping was invented in Venice, allowing business people to keep track of their finances in a new way.
• Luca Petoli was a monk and mathematician who was entranced by the Arabic numerals and the fancy way merchants were using them to keep their books.
• Petoli wrote down how to do Double Entry Bookkeeping and buried it in his encyclopedia of math, which became a huge hit and was read by Leonardo da Vinci.
• Petoli arrived in Milan while da Vinci was painting the Last Supper to help him with the mathematics of perspective paint.

The Spread of Double Entry Bookkeeping

• Luca Petoli’s book, “Particularis de Computus a Scripturus,” introduced double entry bookkeeping.
• The book’s chapter on double entry bookkeeping became an instant hit and spread across the world.
• Double entry bookkeeping is now the basis of business and accounting worldwide.
• Luca Petoli would be astonished to see the widespread use of double entry bookkeeping today.

The Revolution of Spreadsheets

• Electronic spreadsheets revolutionized accounting by making it faster and more efficient.
• Spreadsheets used to be physical sheets of paper that had to be taped together.
• Spreadsheets allow for a detailed analysis of a business’s finances.
• Building a spreadsheet used to take days and any changes required manual recalculations.
• Dan Brickland invented the electronic spreadsheet for the Apple II computer, inspired by a professor’s blackboard calculations and the need for a more efficient way to do accounting.
• The electronic spreadsheet was a godsend for accountants as it could do in seconds what used to take an entire day to do and was better at it without making mistakes.
• The spreadsheet software was sold under the name VisiCalc and Alan Snyder became the first registered owner, making him spreadsheet user number one.

The Power and Pitfalls of Spreadsheets

• Spreadsheets basically gave birth to modern Wall Street, where it became the center of the world and the way people in finance talk to each other.
• Spreadsheets can be deceiving because they look precise and feel like truth, but they are just models and guesses.
• They are easy to use and can lead to overconfidence and even fraud.
• Spreadsheets give us the power to ask “what if” questions and make judgment calls in business.
• Fraudsters try to find areas of opportunity or discretion to make their books look better, such as under-reporting expenses.

The Superpower of Accounting

• Enron’s fraudulent behavior is a case study of accounting gone wrong.
• Accounting can be a superpower for running a business.
• The fundamental equation of accounting is assets equal liabilities plus equity.
• Assets are everything of value to the business, liabilities are everything owed, and equity is what’s left over.
• Don’t be seduced by spreadsheets that seem too good to be true.

Summary

The Birth of Accounting in Venice

In the late 1400s, Venice was a bustling hub of innovation and commerce, equivalent to today’s Silicon Valley and New York City combined. It was in this vibrant atmosphere that Luca Petoli, a monk and mathematician, became fascinated by the Arabic numerals and the way merchants were using them to keep their books. Petoli invented Double Entry Bookkeeping, a revolutionary method that allowed business people to track their finances more effectively. His book, “Particularis de Computus a Scripturus,” introduced double entry bookkeeping and became an instant hit, spreading across the world. Petoli’s encounter with Leonardo da Vinci while painting the Last Supper further highlights the interconnectedness of art, math, and accounting during this period.

The Revolution of Spreadsheets

The invention of electronic spreadsheets by Dan Brickland for the Apple II computer revolutionized the field of accounting. Prior to spreadsheets, accountants had to rely on physical sheets of paper that had to be manually calculated and taped together. Spreadsheets allowed for faster and more efficient analysis of a business’s finances, saving accountants hours of work. The spreadsheet software, sold as VisiCalc, became a game-changer for Wall Street and transformed the way people in finance communicated with each other.

The Power and Pitfalls of Spreadsheets

While spreadsheets have undoubtedly enhanced accounting practices, they also come with their own set of challenges. Spreadsheets can be deceiving, giving a false sense of precision and truth when they are, in fact, based on models and guesses. This can lead to overconfidence and even fraud. Fraudsters often exploit the flexibility and discretion within spreadsheets to manipulate their books and make them appear more favorable. It is essential to approach spreadsheets with caution and not be seduced by their seemingly flawless calculations.

The Superpower of Accounting

Accounting is more than just numbers and taxes; it is a superpower that enables individuals and businesses to make informed decisions. By understanding the fundamentals of accounting, such as the equation of assets equal liabilities plus equity, one gains a powerful tool for running a successful business. However, it is crucial to remember that spreadsheets and accounting models are tools that require critical thinking and judgment. Accounting can be a transformative skill when used responsibly and ethically.

Conclusion

Accounting, once seen as a mundane task, has evolved into a powerful and essential skill in today’s business world. From its humble beginnings in Venice to the invention of spreadsheets, accounting has undergone significant transformations that have shaped the way we understand and analyze financial data. While spreadsheets have revolutionized accounting, they also come with pitfalls, emphasizing the importance of critical thinking and ethical practices. By harnessing the superpower of accounting, individuals and businesses can make better decisions and navigate the complexities of finance with confidence.