Luca Pacioli (1445–1517), a Renaissance polymath and close friend of Leonardo da Vinci, is widely regarded as the father of modern accounting. In his groundbreaking 1494 work, Summa de Arithmetica, Geometria, Proportioni et Proportionalità (“Summary of Arithmetic, Geometry, Proportion and Proportionality”), Pacioli formalized the “Venetian” method of accounting. This treatise laid out the essential components needed to record all the information required to manage a business effectively.
From an era when pen and paper were the cutting-edge tools for documentation, Pacioli’s visionary system sparks an intriguing thought experiment: What might his recordkeeping methods have looked like if he had access to modern information technology?
Pacioli’s goal in the Summa was ambitious: to describe a complete recordkeeping system, with accounting as just one of its many facets. Regarding accounting, he introduced four key components that remain fundamental today: the Journal, General Ledger, Balance Sheet, and Profit & Loss (P&L) Statement. The Journal serves to document each financial event, which is later categorized in the General Ledger under assets, liabilities, equity, revenue, expenses, and net profit.
For the historically inclined, there is yet the less well-known component of Pacioli’s accounting system called the Memorandum. However, Pacioli’s treatise goes beyond accounting; he devoted significant attention to the processes that must be in place before accounting itself can begin. His emphasis on organizing business operations highlights his understanding of the broader framework required for effective recordkeeping.
Jacopo de Barbari’s Portrait of Luca Pacioli (ca. 1500) is in the Capodimonte Museum, Naples.
Much of the Summa focuses on the work of merchants, who, according to Pacioli, must remain vigilant and “never rest.” They must meticulously record and organize every detail of their businesses across multiple books, each serving a specific purpose.
One particularly intriguing but often overlooked component of his system is the Ricordance. This record, dedicated to tracking future obligations like payments and receipts on a day-by-day basis, plays a central role in his conceptual framework. For the purposes of this discussion, we use the term Ricordance to represent all the pre-accounting records essential for setting the stage for formal bookkeeping.
Assembling the Books
Accounting books are crafted from the wealth of information found in various business records, a process that requires meticulous effort and attention to detail. The timeless advice, “never go to bed until debits and credits tally,” though not a literal quote from Pacioli, has been attributed to him and resonates with accountants to this day.
In our paper – available for download here – we explore how Pacioli’s structured approach to business recordkeeping might have been transformed if he had access to modern information technology. It includes a discussion of real-world implementation of such a system.
We argue that Pacioli’s system provides a remarkably detailed roadmap because of its clarity and organization. Using this as a foundation, we can “stand on Pacioli’s shoulders” to envision how he might have expanded and refined his framework with today’s digital tools. This thought experiment does not just celebrate Pacioli’s brilliance; it has critical implications for modern financial institutions, offering a fresh perspective on how banks and banking systems could evolve by applying principles derived from his foundational work.
Banks, Computers, and Accounting
Fast-forward about 450 years from Pacioli’s time, banks were among the first non-governmental organizations to adopt computers. As low hanging fruit, these machines proved ideal for solving the credit/debit problem – an obvious and straightforward application of their computational power.
Willi Brammertz
However, in hindsight, while this innovation addressed a basic need, it fell short of revolutionizing the entire system of recordkeeping. We believe that if Pacioli had access to modern computing, he would have devised a far more comprehensive and transformative solution.
Simply put, tackling the problem of accounting first is an inherently suboptimal starting point.
Accounting represents the endpoint of a complex system of recordkeeping and calculations. It begins with the raw facts of the business – transactions, obligations, assets, their associated payments etc. – and culminates in the Balance Sheet and P&L Statement. Starting at the endpoint focuses attention on the summary statistics contained in the Balance Sheet and P&L Statement without making any contribution to improving all the recordkeeping and data on which these summary statistics are based.
Allan Mendelowitz
This approach bears a striking resemblance to the misguided efforts of alchemists up to the 19th century. Fixated on the dream of creating gold, they mixed different substances indiscriminately, achieving nothing. How misguided this approach was only became apparent with the discovery of atomic structures and the formalization of these principles in Niels Bohr’s model. This was the point at which modern chemistry – a true science – displaced the pseudo-science of alchemy.
In the same way, true innovation, whether in science or business, must begin with the foundational elements. As Pacioli’s work reminds us, sound recordkeeping must start at the very foundation of a system, building upwards methodically to reach the desired summary reports. Starting at the foundation is not just logical, it is essential.
The Memorandum – and the Records That Came Before It
Pacioli’s system of double-entry accounting begins with the Memorandum (or daybook), Journal, and General Ledger. Of these foundational books, the Memorandum, where accountants recorded daily actions derived from the Ricordance and other sources, has largely faded from memory, leaving modern accounting reliant primarily on the Journal and Ledger.
Also largely forgotten are the rich details in Pacioli’s Summa that emphasize the essential records that precede the Memorandum. Pacioli repeatedly stresses the need for extensive note-taking and organization. In section 35 of the Summa, he meticulously outlines the process: all letters and agreements must be carefully collected, ordered, marked, and stored in “a little desk until the end of the month” from where they must be organized into pouches, indexed, and clipped together in chronological order.
Of the many books he mentions, the Ricordance was especially critical, functioning as a timeline of all promised future events. Pacioli devotes an entire chapter to the Ricordance in section 38, underscoring its importance. He lists 10 specific items that must be recorded, many of them agreements unfolding over time, such as future payments or obligations tied to loans. In short, all facts, if lost, would result in “great danger.”
Entries from the Ricordance were then transferred into the Memorandum when these commitments were executed on a specific day.
Pacioli’s system is methodical, starting with the raw facts of the business recorded in the Ricordance and other pre-Memorandum sources. The Memorandum, built day by day as obligations were fulfilled, became the foundation for the Journal and General Ledger, which were updated periodically, perhaps weekly. Finally, the Balance Sheet and P&L Statement were derived on longer cycles from the information in the Journal and Ledger.
The Consequences of “Starting at the End”
Bankers begin with a focus on the balance sheet and P&L statement, both in Pacioli’s time and now. By solving the debit/credit problem first, this focus of the bankers was carried over to the IT world. Only later were systems added in an ad hoc manner that used computers to manage business activities, such as the registration and life cycle management of loans, deposits, derivatives etc., information that would be part of Pacioli’s Ricordance.
These systems, while supplying essential information to the accounting system, were never designed as part of a cohesive, integrated architecture. Instead, their ad hoc evolution has left modern banks with fragmented and chaotic IT infrastructures – a challenge that other industries have largely managed to avoid.
This raises a compelling question: What solution might Pacioli have devised for bankers if he had access to modern information technology?
Given his methodical approach to recordkeeping and his insistence on starting with foundational elements, it is likely he would have advocated for a comprehensive, integrated system – one that mirrors the structured logic of his Ricordance. Such a system would not only streamline operations, but also provide a seamless flow of information from initial business activities to the final accounting outputs.
An Approach Based on Pacioli’s System
We believe Pacioli, armed with the principles laid out in his Summa, would have approached modern banking with the same methodical rigor he applied in his time. First, he would have carefully studied the business of banking, recognizing its vastly increased complexity compared to the simple current accounts of his era. He would encounter long-term loans and mortgages, leasing contracts, fixed and variable rate loans (potentially with caps), swaps, futures, options, and securitizations like ABS, MBS, and CDOs.
Studying these instruments, Pacioli would identify their common foundation: financial contracts are essentially exchanges of cash flows – promises detailing how much will be paid, to whom, and when. He would also observe that these cash flows are ultimately just numbers, a realization that might have initially surprised him, given that money in his time was tied to physical gold in various currencies.
As a brilliant mathematician, Pacioli would immediately understand the algorithmic nature of these obligations. Each payment or action follows a set of mathematical rules – some straightforward, others dependent on external factors like floating interest rates. Yet, once the state of these external factors is determined, the algorithms can be applied with precision. He would recognize that calculating these payment obligations is precisely the kind of task computers are designed to handle.
Pacioli would also observe that many financial contracts share similar patterns, regardless of the names devised by lawyers or marketing staff. For example, an amortizing mortgage, a leasing contract, and a life annuity all follow essentially the same structure. He would realize that the payment obligations of most financial contracts could be distilled into a limited number of patterns – perhaps half a dozen core structures, with fewer than three dozen covering nearly the entire financial universe. (For reference, see the ACTUS taxonomy.)
From this understanding, Pacioli would likely see that the cash flow obligations generated by these algorithms represent the modern evolution of the Ricordance – a perfect fit for computers. Computers excel at handling time-ordered patterns, where each pattern is defined by an initial state (such as a financial contract’s parameters like maturity date, interest rate, and notional) and state transition functions (algorithms that determine the next state). These patterns could be standardized, codified, and executed flawlessly by machines.
By limiting the number of exchange patterns to a manageable set, Pacioli would understand the possibility of not only standardizing the data but also the associated algorithms. This would allow computers to perform, with unparalleled accuracy and efficiency, the repetitive and error-prone tasks of manual computations and recordkeeping in finance.
In essence, Pacioli would have recognized the enormous potential of modern technology to transform financial systems by automating and standardizing the very processes – from origination, lifecycle management, trading – which then would extend to financial analysis which would go beyond accounting to include the full range of modern risk management.
Toward a Deeper Understanding of Finance
Building on Pacioli’s system, the algorithmic representation of a computerized Ricordance offers capabilities far beyond traditional accounting. While backward-looking accounting has long been the cornerstone of financial reporting, this system allows for seamless forward-looking financial analysis.
Since forward-looking financial analyses are fundamentally functions of state-contingent cash flows, this framework opens the door to comprehensive insights into risk and finance.
In essence, this approach creates a unified system capable of addressing every financial need: from basic accounting to cutting-edge techniques and even the most advanced forms of risk management. By following this model, financial institutions can evolve from merely recording past transactions to mastering predictive analytics and proactive financial decision-making—effectively transforming how we understand and manage finance.
Valuation and Accounting
Pacioli would have quickly grasped the transformative power of a modern Ricordance for valuation. By leveraging the future cash flows derived from the Ricordance and discounting them, fair value calculations could be performed with precision. These cash flows would reflect the “state” of the financial world – factors like yield curves, interest rates, and foreign exchange rates that shape financial contracts and their future cash flow obligations.
What’s more, amortized cost, nominal value, and other cash-flow-based accounting methods could be derived consistently from this same foundation. At any given moment, financial agreements – including loans, deposits, mortgages, swaps, and more – could be evaluated with absolute consistency, as all methods are simply alternate interpretations of the same expected future cash flows. The same technology could be extended to options and any financial instrument.
This capability would revolutionize financial accounting. Calculating values under different accounting systems – whether fair value, IFRS, nominal value, or local GAAP – would become seamless and fully consistent. By design, these differing approaches would align because they would all be rooted in the same underlying expected cash-flow.
Starting at the single contract level, automated financial accounting becomes a reality. Balance sheets could then be built effortlessly through straightforward aggregation commands like “group by” and “sum” possibly following XBRL. Similarly, profitability analyses – whether by profit center, customer, or product – would follow the same simple logic. The P&L statement would be reduced to a delta calculation between two points in time, executed with precision at any level of granularity.
Beyond the Balance Sheet and P&L
Pacioli would not stop at accounting. Recognizing the limitations of financial analysis in his time, he would see the far-reaching implications of this modernized Ricordance. He would understand that all financial analysis – from valuation to risk management – derives from the interpretation of expected future cash flows. In this sense, accounting becomes just one specific application within a broader analytical framework.
For example:
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Treasurers could gain a complete view of liquidity through granular cash-flow projections.
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Asset and liability managers could focus on interest rate gaps, duration, and convexity measures to optimize their balance sheets.
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Risk managers could calculate value-at-risk, expected shortfall, and run stress tests with ease.
This same system would support budgeting and strategic planning by incorporating insights into contracts rolling off the balance sheet, future business opportunities, time-related characteristics, and pricing dynamics.
A Revolution in Regulation
Pacioli’s system would not only improve internal financial analysis but also transform how regulators could operate. A standardized Ricordance, complete with harmonized data and cash-flow-generating algorithms, could allow regulators to build “digital twins” of the banks they oversee. Equipped with the same analytical capabilities as a bank’s risk managers, regulators could independently monitor financial institutions in real time, applying the methodology of their choice, such as stress testing.
Rather than requesting reactive reports for emerging risks, regulators could proactively conduct stress tests, analyze vulnerabilities, and track how institutions might respond to shocks in real time. This would shift regulatory oversight from a retrospective process to one focused on foresight, empowering regulators to look ahead.
In the words of Senator Chris Dodd when introducing the Dodd-Frank Act in 2010: “. . . in addition to looking in the rear-view mirror, we must look through the windshield. There will be shocks to our system in the future for certain. And we need an early warning system so that the next time it occurs our system is prepared to deal with it.”
Pacioli’s modernized system would be the foundation for such an early warning system, offering unparalleled insight and preparedness for both financial institutions and regulators alike.
Willi Brammertz (willi.brammertz@ariadne.swiss) is founder of Ariadne Business Analytics and charman of the ACTUS Users Association.
Allan I. Mendelowitz (amendelowitz@yahoo.com), a former Federal Housing Finance Board chairman, is president of the ACTUS Financial Research Foundation and the ACTUS Users Association.
Their complete white paper, Pacioli in the Computer Age, is available for download here.
Topics: Data
