Category Archives: Technology

Brief History of Bookkeeping

Bookkeeper - Woodcut

Wikipedia

In 1494 an Italian mathematician by the name of Luca Pacioli published “Summa de arithmetica, geometria, proportioni et proportionalità” (Venice 1494), a textbook for use in the schools of Northern Italy. It was a synthesis of the mathematical knowledge of his time and contained the first printed work on algebra written in the vernacular (i.e. the spoken language of the day). It is also notable for including the first published description of the method of bookkeeping that Venetian merchants used during the Italian Renaissance, known as the double-entry accounting system. The system he published included most of the accounting cycle as we know it today. He described the use of journals and ledgers, and warned that a person should not go to sleep at night until the debits equaled the credits. His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses — the account categories that are reported on an organization’s balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. He is widely considered the “Father of Accounting”. Also, his treatise touches on a wide range of related topics from accounting ethics to cost accounting.”

It has often struck me that a system described so eloquently more than 500 years ago, could somehow be reproduced in software and used by publishers to create an annuity. However that is precisely what software publishers like Intuit Inc. and The Sage Group, plc have done with their popular accounting software.

The fundamentals of accounting theory are basically unchanged since Pacioli’s day. In spite of this, by simply updating tax tables and changing the format of data files, the publishers force small companies – and their accountants – to upgrade their accounting software every year.

As a public accountant this is particularly irksome since most of us use audit software – called Caseware™ – and only purchase low-end desktop accounting software to accommodate our clients. What’s more, the bookkeeping done by our smaller clients is most often done very poorly. In fact it is often so badly done that I am frequently better off to export the bank account from within the accounting software to a spreadsheet, and use that as the framework for a more accurate set of books.

Thankfully the current crop of online accounting software allows companies to “invite” their accountant to collaborate and access their accounting data online – without purchasing a license.

The Institute of Certified Records Managers (ICRM)

You’d probably be surprised to learn that there is an international certifying organization of and for professional records and information managers http://www.icrm.org/about/ – clearly they work in the shadows at very large governmental and multinational organizations. Otherwise we’d have bumped into them more often.

For small companies the records management functions are typically outsourced to lawyers, accountants, bookkeepers and payroll services. However they are rarely described as records management services. By default bookkeepers typically end up with the lion’s share of the responsibilities, and many have little or no formal training.

Paper As A Secure Medium For Mission-Critical Records

Technology changes quickly – in some ways it changes too quickly. Relying on a single layer of technology for critical information is VERY RISKY. Some business records are simply too important for companies to rely exclusively on proprietary backup systems. Inconvenient as they are for sharing and manipulating, paper records can be an important backstop – as long as you don’t lose them.

Electronically readable documents are certainly more convenient than paper – however paper is less susceptible to disintegration. Ideally all records should be readable electronically. Best practices for mission critical records (eg. legal records) may include paper printouts stored off-line for greater security.

Computer source code is best stored in electronically readable form. Otherwise it would have to be re-input in the event of failure. Similarly accounting records are much more convenient in an electronically readble spreadsheet or database format. However in both cases it may also be important to make sure that the electronic version isn’t susceptible to inadvertent – or malicious – modification.

Open Source File Formats

Storing files electronically requires that software is available to read the electronic file. One of the problems with accounting software for example, is that publishers continuously update the file formats – presumably to force users to upgrade. For the most part however, there are utilities available to export data to one or more of the most popular open source options. These include text files, many image files and  Adobe Systems’ portable document format (“PDF”).

According to Wikipedia:

An open file format is a published specification for storing digital data, usually maintained by a standards organization, which can therefore be used and implemented by anyone.

In addition to these, Microsoft’s popular Microsoft Office files, has effectively become an open standard with Google and the Apache OpenOffice Foundation providing translations…

Computer-Based Financial Reporting vs Computer-Assisted Recordkeeping

Companies that report monthly or quarterly to bankers or investors, will need to invest heavily in financial reporting infrastructure…likely starting with a part-time management accountant or financial controller.

Thankfully this is exceedingly rare for a startup – and indeed many small but successful companies can fund themselves comfortably with sales and a limited amount of personal credit (eg. credit cards). Even seed stage companies with angel funding likely don’t have very onerous financial reporting requirements. While angel investors probably should push for somewhat more rigorous financial reporting standards, a great many angels fly by the seat of their pants (see “Angel Investors: Are they Flying Blind”).

The bottom line is that lenders and sophisticated investors (eg. VCs)  that are betting heavily on your company – will want to see the bottom line – often. It is this kind of financial reporting obligation that will drive a significant investment in reporting infrastructure.

A Case Study – Records Management in a Software Comany

Many years ago a client in the software development business had a catastrophic failure and had to go to his backup system. In those days backups were done offline on tape backup systems. Unfortunately the tape drive also failed. What’s worse the tape manufacturer had gone out of business.

The story had a happy ending when my client located a used tape drive. After that his company began backing up to laptops.

The point is that we keep records because the information contained in our records has – or potentially has – some value in the future. Of course that presupposes that we can read and use the information when we eventually need it. If you can’t read the record in some way, the record-keeping system is worthless.