Christopher Nobes
Accounting, Business and Financial History, Volume 5, Number 3, 1995, pp. 379-384
The context
This paper is written in response to the recently published book [1] which contains a general commentary by Basil Yamey on Pacioli, the Summa and its tractatus on bookkeeping (pp. 11 to 33); then a translation by Antonia von Gebsattel of the tractatus (pp. 37 to 94); and finally Yamey's detailed, chapter by chapter, commentary on the tractatus (pp. 95 to 171). Below, I suggest a solution to one of the remaining small mysteries about the tractatus and then I review Ymey's commentaries. Page refer- ences throughout are to the book.
The mystery
As is noted later in my review, Ymey convincingly sorts out several of the areas of controversy concerning Pacioli and his writings. However, he is still puzzled by one problem, which I believe can be solved. Yamey examines (p. 118) the following advice by Pacioli, contained in chapter 12 of the tractatus, in the context of entering the opening debits for assets on hand at the start of the journal (p. 54):
In these first entries you must distinguish clearly each item, as you did in the inventory, assigning the usual value [2] to each. Set the price [3] higher (fatter), rather than lower (leaner), so that if you believe it is worth 20, attribute 24 etc., so that you can more easily obtain a profit.
Yamey reports that Manzoni, Ympyn and Oldcastle omit this advice in their works, which seem to be based in general on Pacioli. Later, Melis (1950) concludes that Pacioli is incompetent to suggest the 'watering of capital through the fictitious inflation of values'; [4] and Zerbi (1952) is 'derisive of Pacioli's advice on the over-valuation of assets, using it as an example of his oddness'. [5]
Yamey himself (p. 119) concludes that:
Clearly, over-statement of an asset's values [sic] in the inventory [6] (or in any subsequent balance account) cannot by itself increase the merchant's real profits, contrary to Pacioli's apparent suggestion. So Pacioli was either being obtuse or fanciful, or else had something subtle and elusive in mind. . . . Pacioli's advice is undoubtedly strange.
In addressing these criticisms of Pacioli I start from the assumption that, given Pacioli's obvious intelligence and knowledge, it is more likely that we have misunderstood him on this point than that he was incompetent. Therefore, if another reasonable interpretation of his advice can be found which is less subject to criticism, then it is more likely to correspond to Pacioli's intentions. In order to understand Pacioli's advice, I believe that one must remember: (i) his intended purpose for book- keeping, and (ii) the commercial context.
The purpose of bookkeeping was not primarily for the calculation of profit, let alone for the preparation of financial statements for users. It was for the better administration of the business and better decision making by the owner-manager. So, Pacioli's advice should be examined in terms of its effect in one or both of these areas not its effect on profit measurement. It is the decision-making area which seems relevant here, as will be explained later.
The commercial context was that, in many markets, goods were not homogeneous, supply was erratic, price information was not extensive and merchants did not need to be passive price-takers. In terms of the Venice of today, such markets would be more like that for second-hand Murano chandeliers than that for grade 1 zucchini at the Rialto vegetable market. Consequently, these merchants would be trying to set prices in such a way as, on average, to ensure large mark-ups on cost. They would not be trying to clear the market each day. They could wait for the right time and the right buyer.
The merchant might not know the cost of the assets on hand at the opening of the books, so some estimation might be necessary. Of course the market price may have fallen since purchase, which would be of concern for a merchant adopting a cost-plus pricing policy. Consequently, Pacioli recommends building in a margin for error by including a 20 per cent mark-up.
To the extent that the merchant bears in mind book value (consciously or subconsciously) in order to help him determine prices, the use of Pacioli's method will help to avoid selling too cheaply. If so, then to rephrase Yamey (from above): over-statement of an asset's value in the journal might increase the merchant's real profits. The argument applies a fortiori if assistants or customers are allowed to inspect the values in the books. Of course, Pacioli's method will make the profit at the point of sale look worse, but that seems a much less important point for Pacioli's owner-manager. Melis and others seem to have got sucked into the virtual reality of the accounting system.
A modem analogy has been the inflation accounting controversy. Cur- rent cost accounting (CCA) made profits (look) worse than under historical cost accounting. However, CCA supporters argued that if managers and investors used CCA information they would make better decisions and therefore be better off That is, real profit would increase even though CCA made things look worse. Of course, CCA was misunderstood and derided by those managers who were experiencing the virtual reality of accounting or, at least, thought that other people were.
Of course, Pacioli might still be criticized [7] in this context because:
(a) He ignores the fact that the merchant will know that he has overstated the asset. However, we note that, in practice, many people deliberately set their watches a few minutes fast in order to avoid being late for appointments. They know they have done this, but they still think that it works.
(b) The merchant may miss sales at the best possible price if he concentrates on any historically based value. However, general acceptance of the insight that bygones are forever bygones is rather modern.
Pacioli should presumably have followed his logic through by
(c) suggesting the recording of inflated values for all stock not just opening stock at the beginning of the first ledger. However, Pacioli is recommending this procedure only when the original cost may be unavailable.
Despite these remaining worries, if my interpretation [8] is followed, it may not be fair to say that Pacioli's advice to the merchant was incompetent, odd, obtuse, fanciful, subtle, elusive and strange. By contrast, like much of his other advice, it was just intended as a piece of practical common sense for the merchant as businessman rather than as accountant. Further, I suggest that a more literal translation (see below) of Pacioli's words [9] might support my conclusion better than the English version above or some other versions (e.g. Antinori, 1994).[10] For the above quotation from Pacioli, I propose:
For these first entries, you must distinguish clearly each item, as you did in the Inventory, assigning them a current value. And make it fat sooner than lean. That is, if it seems to you to be worth 20, you say 24, etc. So that you may more readily achieve profit.
A review of the commentaries
Yamey's general commentary provides an excellent introduction to the tractatus. There are clear summaries of the life of Pacioli and the shape of his Summa. Yamey is even-handed throughout. Following the anniversary year of 1994, perhaps we need to be reminded that Pacioli's treatment was often erroneous, used a mixture of bad Latin and bad Italian, added little (if anything) to well-known practices, and would not have been clear enough for anyone to learn double entry from (pp. 18, 28). There is also a balanced discussion of the charge of plagiarism. Besta's (1909) version of the charge is that Pacioli copied an earlier Venetian manuscript. Furthermore, rather than Pacioli being the inspiration for Manzoni, Oldcastle and Ympyn, the earlier Venetian manuscript was. This attacks Pacioli's reputation on two fronts, but Yamey thinks little of many of Besta's arguments.
Turning to the tractatus itself, on reading this book's flowing translation, we are reminded of some features of Pacioli's system and advice:
(a) always number the pages in your books,
(b) beware because some Italian merchants keep two sets of books(!),
(c) the business is not separate from its owner's activities but there is a capital account,
(d) barter transactions should be recorded at fair values,
(e) take precautions against 'the bad faith which one finds nowadays',
(f) treat a branch operation as a debtor,
(g) keep the accounts in one currency only.
Incidentally, just as there were typographical errors in Pacioli's original book, so there are a few in this translation: four in the examples of entries (p. 94), including the size of a credit entry. Turning to Yamey's commentary on the thirty-eight chapters of the tractatus, we find a display of the author's renowned scholarship and clarity. Yamey achieves his objectives, which were to:
(a) explain obsolete or unfamiliar practices in the tractatus,
(b) suggest interpretations where the text is obscure,
(c) relate Pacioli's practices to those of surviving account books of the fifteenth and sixteenth centuries, and
(d) indicate similarities to and differences from the works by Manzoni, Oldcastle, Ympyn and others.
For example, in the case of Pacioli's chapter 1, Yamey: (i) notes that Pacioli does not use a term for double entry; (ii) speculates at length on the meaning of bookkeeping 'in the style of Venice' which Yamey says that Pacioli chose because he thought 'it is the best'; (iii) explains the apparent repetition in the three qualities of a good merchant; (iv) notes how later books copy or alter Pacioli on the above issues; (v) rebuts some of the 'proofs' of Besta concerning plagiarism; and (vi) grounds some American philosophical flights of fancy.
Incidentally, referring to (ii) above, it seems to me that Pacioli does not exactly say that the Venetian style is the 'best' (p. 97) but 'molto da commendare' (i.e. 'much recommended', according to this book's trans- lation, p. 42). It is possible that Pacioli thought that the Venetian method was best. It is also possible that he did not know much about other methods. Anyway, his phrasing was, no doubt, a sensible precaution for a book dedicated to a non-Venetian.
Yamey's enjoyable demolition of Besta's arguments continues in many other parts of his commentary. One opportunity that he misses concerns Besta's argument (reported on p. 135) that Pacioli must have used an earlier manuscript because, in his discussion of the Venetian public loan office, he fails to mention the fact that it was split in 1482 into monte vecchio and monte nuovo. However, although the Summa was not published until 1494, Pacioli's time with the merchant family in Venice was in the 1460s and he seems to have completed the Summa away from Venice by 1487 (p. 15). So, the failure to mention a Venetian technical development of 1482 proves nothing.
My favourite part of Yamey's commentary is the extraordinarily erudite discussion (p. 139) of proverbs about barter in four languages (and various Italian dialects). This would surely make Yamey welcome in the senior common room of any faculty of letters. In summary, this is a book which accounting historians and their students will enjoy learning from.
University of Reading
Acknowledgements
The author is grateful for linguistic advice from Fulvia Rocchi (University of Venice) and Stefano Zambon (University of Padua); for other comments from Bob Parker (University of Exeter), Alan Roberts (University of Reading); and for comments on the 'mystery' part from Basil Yamey (LSE).
Notes
1. Luca Pacioli: Exposition of Double Entry Bookkeeping, English translation by Antonia von Gebsattel with introduction and commentary by Basil Yarney, Abrizzi Editore, Venice, 1994.
2. Yamey (p. 118) suggests that Pacioli may mean current market price for his expression 'usual value'.
3. The translator's use of 'price' here is not helpful. The original refers to 'it', presumably the 'value' of the previous sentence.
4. These are Yamey's words (p. 118).
5. As foomote 4.
6. On the whole, Pacioli did not suggest ascribing values to items in the inven-
tory, so it is the journal (and subsequent) which matters.
7. The first sentences o f these three criticisms were suggested to me by Basil
Yamey in a letter o f 26 September 1994. Yamey believes that they undermine my interpretation.
8. Subsequent to writing this note, I received an edition of the Accounting
Historians Journal wherein Hernindez-Esteve (1994) covers this issue in one
paragraph, and appears to come to a similar conclusion.
9. ' E fallo grasso piu presto che magro. Cioe se ti pare che vaglino 20.e tu di 24 etc. Acio che meglio te habia reuscire el guadagno.'
10. 'Prendi prezzi più alti, piuttosto che bassi, cioè se ti pare che valgano 20...'.
References
Antinori, C. (1994) Luca Pacioli e la Summa de Arithmetica, Roma: Institute
Poligrafico e Zecca del10 Stato.
Besta, E (1909) La Ragioneria, Milan: Vallardi.
Hernhndez-Esteve, E. (1994) 'Comments on some obscure or ambiguous points
o f the treatise (De Computis et Scripturis) by Luca Pacioli', Accounting Historians
Journal, June: 33.
Melis, E (1950) Storia della Ragioneria, Bologna: Zuffi.
Zerbi, T. (1952) Le Origini della Partita Doppia, Milan: Marzorati.
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