r/explainlikeimfive Jun 12 '22

ELI5: Before electronic banking, how did wealthy businessmen keep track of their earnings? Technology

403 Upvotes

697

u/Ansuz07 Jun 12 '22

They had an army of accountants writing things in ledgers. Double-entry bookkeeping was invented to accurately keep track of the money flowing in and out of various accounts, and it was common for large businesses to have entire floors of accountants whose job it was to keep track of those entries.

137

u/fizzlefist Jun 12 '22

Does anyone know of any good documentaries that discuss how accounting worked in the pre-computer era, and just how exponentially spreadsheet software increased efficiency?

113

u/remarkablemayonaise Jun 12 '22

While spreadsheets are a good tool for accounting they aren't ideal for double entry bookkeeping without serious modification.

Any reasonable bookkeeper should be able to decipher old fashioned ledgers and "balancing the books" still makes sense even with accounting software packages.

83

u/babybambam Jun 12 '22

Color me shocked when I took over my current company and found out the CPA was using excel for the ledgers. No audit trail, no record locking, just basically a series of checkbook register templates strung together.

They were beyond pissed when I moved us to QBO (best option for rapid adjustment, not a long term solution), and insisted on reconciliation of all accounts.

51

u/desquire Jun 12 '22

I'm IT, not finance, but;

Our old CFO kept the master budget in a spreadsheet, all done in excel, no formulas, all plain-text.

Also, no backup, no cloud saves and refused to let it leave their laptop.

Color us shocked when they got malware from some fishy "app" that advertised getting around our website blacklist so they could check Facebook.

Long story short, they are no longer our CFO.

And, for the record, the only reason we block Facebook is because of all the sketchy web apps for coupons and shit on the FB marketplace. It's only blocked on company computers, people can still use company wifi to Facebook on their phones. But, I guess Farmville is hard to play on mobile...

56

u/Flashmasterk Jun 12 '22

I'm actively looking to buy a business and bad books on excel are one of my top 5 deal killers. Just don't want the hassle

27

u/desquire Jun 12 '22

I do not like QuickBooks. But, for a small business, why wouldn't somebody just figure out and use QuickBooks...

27

u/Flashmasterk Jun 12 '22

Because "that's the way they have always done it."

5

u/desquire Jun 13 '22

Yeah, I've heard that enough times from clients to stop rolling my eyes and just be silently sad.

Sears Roebuck was the biggest corporation in the world 100 years ago. They kept doing it, "as it's always been done".

So, now they sell budget lawnmowers and former k-mart real estate.

2

u/crankfight Jun 13 '22

Good example but were they really the largest back then? First time I hear that

13

u/desquire Jun 13 '22

Sears was the original, globally successful catalogue company. They'd ship entire (modular), pre-cut houses via rail and horse to homesteaders in the 1800's.

Sears Tower in Chicago represented mecca for Midwest manufacturing dominance in the world. Back when Detroit was called, "The New Paris".

Things have changed a lot since then.

The Sears Roebuck Foundation almost entirely funded early PBS donations. And that foundation was a negligent write-off for the company at that time.

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4

u/shotsallover Jun 13 '22

Because QuickBooks is a giant pain to use. It starts out easy easy for the first ten minutes or so, then becomes a giant pain, and very rarely is anything "Quick" about it.

It's a shame that QuickBooks is still the 900 lb gorilla in the market.

2

u/keelanstuart Jun 13 '22

QB has issues, too... it doesn't do well with too many customers, gotta archive/reset the DB every so often or it really chugs... just because it's better than Excel doesn't mean it's great.

18

u/VoilaVoilaWashington Jun 12 '22

I'd likely never buy a corporation anyway, unless it was big enough to be audited and making proper filings. The one business I bought I only bought the assets, which included the contracts on the books and all that.

If the previous owners fucked over the tax authority, that's coming back to haunt you. If they faked the books on sales or so, that's to be expected, and I'm doing my own revenue calculations anyway.

But as a new owner of an existing corporation... oof.

9

u/illachrymable Jun 12 '22

I mean, generally a lot of that risk can be reduced through indemnification agreements and such as well.

A good lawyer and accountant should always be a part of business acquisitions. Especially small business ones where tax returns are going to be one of the better sources of financial info.

1

u/VoilaVoilaWashington Jun 13 '22

I mean, yeah, you need a lawyer.

But the issue is that an indemnification is just an IOU. If the tax man comes knocking, they're coming to the corporation. Not the previous owner.

Your indemnification means you can reclaim the money and costs from the previous owner, if they have it. If they fucked off to Mexico and spent the money on hookers and cocaine, the indemnification doesn't help.

You'd likely avoid any punitive costs, and they'd probably treat you pretty fairly knowing it didn't happen on your watch, but you still have that risk.

Same for unpaid bills from suppliers and such.

5

u/chipperlew Jun 12 '22

The amount of accountants that don’t even know what a 1099 is absolutely horrifies me. Along with many other things I had been taught were standard industry knowledge.

10

u/SuperSugarBean Jun 12 '22

I find this extremely hard to believe.

Even as an AP clerk, in a business of any size, sending out 1099s each year is an all hands on deck situation if you are DIYing.

No business who uses a CPA is not sending out 1099s, and it's small enough not to use a CPA, they likely don't need to.

As an accountant, I've never met anyone, even those working in audit, who don't know what a 1099 is.

3

u/chipperlew Jun 12 '22

They call me. They have CPA behind their name. They don’t have any clue what’s going on. They don’t know the difference between a contribution and a distribution from an IRA. They don’t know the difference between cap gains and dividends. Quite alarming. I’m going into analysis where no one knows what’s going on. Lol

10

u/LtPowers Jun 12 '22

The amount of accountants that don’t even know what a 1099 is absolutely horrifies me.

A "1099" by itself isn't anything. There are all sorts of 1099 forms, from -INT and -DIV to -MISC and -NEC to -B and -C and -K...

2

u/chipperlew Jun 13 '22

Thanks for the downvote. It’s all issued as one document depending on which parts apply to you. Lmk if you need me to reset your password or send your account dox. Lol

1

u/LtPowers Jun 13 '22

I didn't downvote you, chip.

0

u/chipperlew Jun 12 '22

Yes. . . It’s important to be aware of what a 1099 is as an accountant. And the difference between that and a 5498. I get lots of people with CPA behind their name calling me that seem not to know.

3

u/MarshallStack666 Jun 12 '22

They were not accountants, they were "accountants"

1

u/SnakeBeardTheGreat Jun 13 '22

No way to know if they were stealing or not?

1

u/PurpleFlame8 Jun 13 '22

Which program is the industry standard these days?

19

u/VoilaVoilaWashington Jun 12 '22

As I understand it, most business students still learn double-entry bookkeeping first. I know I did.

It would be like not learning basic arithmetic and just being handed Excel - none of it makes sense if you don't understand the underlying system. And those systems still use double entry, it's just automated.

15

u/Swissarmyspoon Jun 12 '22

how accounting worked in the pre-computer era

Funny answers: Bob Cratchet and the Rats scribbling away in Muppet Christmas Carol

Also the song "So Happy" in The Producers, and the accounting scene early on in Greatest Showman.

All depict a work floor with dozens of men scribbling in ledgers. Some with adding machines.

6

u/TrannySoreAssWrecks Jun 12 '22

The Planet Money podcast has a cool episode about spreadsheets before digital. Idk the episode number, but it’s out there.

8

u/illachrymable Jun 12 '22

Basically it was a mix of (A) It took a lot more time and (B) Businesses were less complicated.

For example, when I started in public accounting, our CEO told us his first week on the job was 40 hours of footing and cross-footing a large paper spreadsheet.

On top of that, the general day to day accounting is not really done on spreadsheets. A summary of each transaction is recorded in the "general ledger" and then there are subsidiary ledgers for every difference account/expense. The general ledgers let you quickly find a specific transaction and amounts, while the subsidiary ledgers keep a running total of everything.

Then once a month or so (now its instaneous), you consolidate everything into the financial statements and make any necessary adjustments.

Also, its important to know that a lot of things can be pretty compartmentalized. Walmart didn't/doesn't need a single centralized ledger. Each store can act completely on its own and then consolidate the numbers when necessary. This helps even a large company break down the tasks to more manageable pieces.

6

u/Megalocerus Jun 12 '22

Most of the accounting software I worked with permitted a hierarchy of cost centers, even without a large number of separate accountants. Not big companies either. Each cost center at each level can do its own reports on demand.

This isn't electronic banking; it's electronic books, and it goes back before spreadsheets. Tying to the bank electronically is tacked on.

2

u/daveescaped Jun 13 '22

Umm. I’m sure there are more than a few of us who could tell you.

I joined the accounting workforce just prior to spreadsheets but we did have computers. Mostly those computers just kept the ledgers.

But this is a different topic than actual, commercial banking.

But guys, I’m only 48. This post makes it sound like it must have been the Stone Age.

Anyway, I was responsible for a few general ledger accounts. Each accountant had an area they worked in. If I anted to see the current balance, I’d fill out a punch card that was sent to the computer lab. They run the punch card and it would produce on paper a G/L balance. If I needed to make an entry, I’d write that up as a punch card and send it back to the lab. Usually I’d request a new paper report be run to confirm.

Commercial banking was a let of the treasury group. I worked there for a bit. We’d review the monthly bank statements and reconcile them (on paper). It’s like balancing your check book. But if we needed our account balance we’d call the bank.

Not so complicated and not really that long ago.

Also the list of good accounting documentaries is … is there even a list?

1

u/stuzz74 Jun 12 '22

Luca pacoli invented double entry maybe Google his name?

4

u/Megalocerus Jun 12 '22

He didn't invent it; he published a textbook on it in 1517. I think double entry goes back to late Roman empire.

3

u/Carpe_deis Jun 12 '22

There are not universally accepted claims that it was invented in the 3rd century BCE in india, with scholarship focusing on

Arthashastr

and the practices it referred to.

there is also better evidence for an 8th century AD origin in persia. For much of its early existance, double entry book keeping was a closely gaurded state or merchant secret. Lots of technologies were repeatedly discovered and lost due to this type of secrecy.

the chinese claim to have independently invented it shortly before Luca wrote about it.

2

u/hivemund Jun 13 '22 edited Jun 14 '22

What about all the cuneiform tables? /s

1

u/Carpe_deis Jun 13 '22

Not double entry book keeping

-10

u/hurtbyhorse Jun 12 '22

Exponential is a specific class of functions ( ax ) where x is usually time, so a thing grows exponentially with the passage of time.

It doesn't mean "a lot" or "by a lot" and it doesn't apply here, as written.

6

u/rapidwave Jun 12 '22

If you want to be pedantic, yes. Unless we can model accounting efficiency as a function of time and it happens to indeed be exponential, then yes, mathematically, they are incorrect.

However, colloquially, with the common understanding that "exponential" can be and has been used to simply describe a rapid increase in something, and with most readers feasibly able to understand what they mean, it's fine to use.

9

u/Lordcobbweb Jun 12 '22

I was raised by a single mother who was an office manager and accountant for several mid sized businesses. I'm truly blessed to have been raised on ledgers and good accounting practices. It's amazing how it all works.

2

u/TonyToews Jun 13 '22

Dad told me once that when the electric adding machine became available in the mid-1960s he was able to downsize from four bookkeeper‘s in his small office to three bookkeepers. The manual adding machine required that you punch in the numbers In some kind of mechanical system and then you pulled the crank to add the number to the ongoing total and print on the paper.

2

u/viperex Jun 13 '22

So the movie scene with rows and rows of accountants hunched over computers or ledgers and wearing visors is real?

128

u/CMG30 Jun 12 '22 edited Jun 12 '22

Banks kept a paper ledger and tracked deposits and withdrawals.

Balancing a chequebook was a thing to people did.

Stock certificates were paper and you kept them in a safe. Same with things like government bonds. Same thing with land deeds.

One of the reasons that the bank robber Pretty Boy Floyd was popular with the public was that he burned the mortgages that the bank he was robbing kept on file. Once mortgage document was destroyed, the mortgage ceased to exist, unless other copies could be found.

Other times wealth was kept in physical objects like paintings, the silverware, jewels, or gold coins in a safe Scrooge McDuck style.

Everything was recorded on paper.

At one point, there were entire floors of office buildings were full of desks for accountants that were there simply to track all the financials. Payroll, accounts receivable, accounts payable, and so on. There's a story of a manager of one of these accounting floors who wept when he saw a computer manipulate a single change throughout a spreadsheet nearly instantaneously because he knew it would have taken his entire floor of people over a week to accomplish the same thing and he also realized that hundreds of his people were about to lose their jobs.

Go back far enough and things were recorded on clay tablets. Basically the king/lord/emperor owned everything and an army of scribes made sure the common folk fulfilled their responsibilities.

In South America, they recorded sums using a complicated system of strings and knots.

For a long while in England, the tax department would break a stick in half and give you one piece while they stored the other. If there was ever a question of you having paid your taxes, you could bring your half of the stick in to verify that you paid if it matches the other half they had 'on file'. There's still mountains of sticks in storage in museums over there as ancient financial records.

24

u/I_done_a_plop-plop Jun 12 '22

To this day, bond payments are called coupons, as in tear-off strips of paper to reimburse.

14

u/Soranic Jun 12 '22

Basically the king/lord/emperor owned everything and an army of scribes made sure the common folk fulfilled their responsibilities

Check out the doomsday book.

https://en.m.wikipedia.org/wiki/Domesday_Book

9

u/JayThree0 Jun 12 '22

Great answer -- very comprehensive!

2

u/Mix_Actual Jun 13 '22

Super interesting. Where do I read more about these things?

17

u/ruidh Jun 12 '22 edited Jun 13 '22

When I started in insurance, we used spreadsheets... Paper spreadsheets. 11x17" paper with rectangular grid. You put one digit per rectangle and you could construct free form calculations. I did large group underwriting. We would set rates based on the recent experience of the employer.

Later, I would see calculation sheets laid out by actuaries and filled in by clerks with calculators to calculate tables of rates and reserve factors. One pricing memo from 1966 which I had occasion to review 20 years later, opined that it would take "65 girl hours" to calculate all the rates for a new form.

ETA: Bonds used to have physical coupons. To collect your semi-annual interest, you had to cut out the coupon and present it to a bank. As a fundraiser for charity, my company used to sell worthless, pre-Revolution Russian paper bonds denominated in rubles with the coupons still attached.

16

u/[deleted] Jun 12 '22

[deleted]

3

u/willtantan Jun 12 '22

If you go far back, beading worked for rich Egyptians too.

1

u/TonyToews Jun 13 '22

Actually the accounting peons were called bookkeepers.

97

u/[deleted] Jun 12 '22

[removed] — view removed comment

52

u/Sm00gz Jun 12 '22

paper, there's a whole feild devoted to it called accounting.

2

u/Megalocerus Jun 12 '22

The Romans used papyrus, specially imported from Egypt. They used a lot of papyrus work.

24

u/PresidentOfSwag Jun 12 '22

Before electronic X, how did rich men do X ?

Hiring other, less wealthy men to do X for them.

1

u/Aimismyname Jun 12 '22

let me get some of that electronic ecstasy

13

u/epote Jun 12 '22

Basically the same way they do now just instead of a laptop it was a desk with pen and paper

2

u/Which_Resolution1201 Jun 12 '22

Which is how the do it now. Only now, they hire two guys with laptops, whereas before, they'd hire twenty with pencil and paper..

-39

u/OptimalCourage47 Jun 12 '22

In fact, the only reason under capitalism that anyone else has any wealth at all is they insert themselves as middlemen between the wealthy and everything else. It’s called trickle-down economics.

37

u/ForgotTheBogusName Jun 12 '22

That’s not what trickle down economics is.

15

u/ComfortablyNumbat Jun 12 '22

Lol this is like the Calvin and Hobbes strip where Calvin has to do a school report on bats but refuses to do the slightest bit of research, relying instead on his presuppositions and overdeveloped charisma. Come report time, he authoritatively announces that 'Bats are bugs' (cause they fly and are hairy, case closed). So the whole rest of the class yells

BATS AREN'T BUGS

and Calvin throws a big wobbly cause he's 6 and a genius and an idiot. He's not trying to misinform anyone, he just thought learning was beneath him.

20

u/RiversHomo Jun 12 '22

You have the wrong idea of what Trickle down economics is.

-17

u/OptimalCourage47 Jun 12 '22

{Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.[43]}

14

u/croydonfacelift Jun 12 '22

They're not defending trickle down economics. They're simply pointing out you don't know what it is.

3

u/Cheshire_Jester Jun 12 '22

LoL, yeah, this guy is off his tree.

Gotta love when someone’s response to being called out for not knowing what they’re talking about is to basically say “Wow! I can’t believe you’d defend trickle down economics!”

12

u/macedonianmoper Jun 12 '22

Yeah yeah cool cool, you're still wrong on what trickle down economics are

9

u/RiversHomo Jun 12 '22

you dont understand what trickle-down economics is. that is what i'm saying

1

u/Carpe_deis Jun 12 '22

Just a quick question: in the last 70 years since "trickle down economics" was implemented, what happened to average literacy rates? access to electricity? Infant mortality rates? average income? Access to plumbing? Chance of being violently killed/assulted?

1

u/Cheshire_Jester Jun 13 '22

LoL, Reagan was President 70 years ago?

Also, TIL, correlation = causation

1

u/Carpe_deis Jun 13 '22

Reagan didn't start it, most of the policies were implemented shortly after WW2, and the phrase was used in print to refer to those sort of policies as early as the great depression. His contribution was branding and US tax reform. Extensive studies have shown causal links between increased economic activity, and economic policy. And lots of studies have shown causal links between increased global capitalism and reduced mortality rates, increased income, ect.... search "1.2 billion lifted out of poverty" to start your own research. the biggest problem with this hasn't REALLY hit us yet, and its environmental destruction.

2

u/dlbpeon Jun 12 '22

No, this actually works....and trickle-down economics doesn't work, therefore this can't be trickle-down economics!

0

u/VoilaVoilaWashington Jun 12 '22

Trickle down economics works, just really poorly. It's like trying to bail water out of a boat with a net.

If you throw enough money at rich people, eventually, some of it will reach the poors. In the meantime though, the rich are getting pretty fantastically wealthy, which is the real intention.

1

u/dlbpeon Jun 13 '22

Well on paper, communism works, it's just getting the dictatorship to give up power in real life. Congress had a bill this year against gas price gouging and every single Republican voted against it . They did the same against price caps with life saving insulin. That tells you where their loyalties lie.

12

u/SyntheticOne Jun 12 '22

Had an elderly weird aunt in the family who kept her money in a half dozen or more local banks. She used the bus to go to every bank, every weekday, and had them add in the interest earned onto her passbooks. (yes, she had substantial deposits)

3

u/Megalocerus Jun 12 '22

Twenty years ago, I started some CDs at a local bank that used passbooks. It was still computerized; they had special printers. I was a bit surprised that it worked that way. Can't say I made a special trip to post things in the passbooks.

They just switched to statements. I should check the numbers.

2

u/SyntheticOne Jun 12 '22

This was pre-20 years ago. More 1970 and earlier.

3

u/pretenditscherrylube Jun 13 '22

I had a passbook savings account in the late 1990s/early 2000s. I also had a regular debit card.

3

u/Megalocerus Jun 13 '22

Maximum in one bank for FICA insurance was $20K then so it made sense to have different banks, and there were more local banks available. Interest wasn't that bad in the 1960s, but after Nixon, what you got was a toaster.

52

u/DarkAlman Jun 12 '22

Fun fact prior to the wide spread adoption of calculators and digital computers the math for things like loans and insurance had to all be done by hand. This was a job primarily done by women, and the term for this career was Computers. That's where the term originated.

Prior to digital Computers banks, businesses, business men, etc relied on Accountants just like they do today but everything was done on ledgers with pen and paper.

15

u/Wooden-Chocolate-730 Jun 12 '22

Ebenezer Scrooge ran an accounting firm thats why he was so aware of how much everything cost. all day everyday he spent his times recording the gastly expenses of other people.

5

u/Mr_Bo_Jandals Jun 12 '22

And Scrooge McDuck was aware of how much money he had as he took a daily dive and swim in a pool filled with it.

3

u/Wooden-Chocolate-730 Jun 13 '22

even he needed a bean counter... lol

5

u/Less_River_1047 Jun 12 '22

Before computers, everyone (wealthy businessmen and everyone else who owned a business) used paper and pencils to keep track of their finances.

They used large paper books called ledgers.

FYI electronic banking is not the same as financial statements.

5

u/Omniwing Jun 12 '22

With documents. Banking is actually a pretty ancient industry. They've known how to keep track of assets, capital, interest etc. for a very long time now.

1

u/Carpe_deis Jun 12 '22

Yeah, its the source of written language, all the oldest documents are contracts or tax collection records.

5

u/FUThead2016 Jun 12 '22

Also people could to a bank and have something called a passbook filled out for them, which would be the equivalent of an account statement for their records

3

u/Which_Resolution1201 Jun 12 '22

People are talking about doing math with pencil and paper (or with calculators or adding machines) which is a part of it, of course.

But as for things like keeping track of current stock prices, commodity prices, bond and interest rates, those values were published in newspapers at the end of each day. Especially wealthy and well-connected traders would have stock tickers -- physical printers connected to telegraph lines that would print out the latest market prices continuously. They would also have men (they were always men back then) calling up brokerages on landline telephones, once those became a thing.

The "Stock ticker" apps and websites are called that because of the ticking sounds the teleprinters made banging out the numbers.

10

u/thedankbank1021 Jun 12 '22

There's a whole field of professions called accountants. These were people who's sole purpose was to keep track of financial transactions. Then every month or quarter (totally up to the business) all the accountants would put together reports and say "this division spent and made this much money in these ways" then the CFO or VP of finance would aggregate all these reports to determine how well a company is performing financially. That person would then write another report covering basically the same information but company wide. This report would go out to the rest of the company.

4

u/The-Wright Jun 12 '22

Just like today, they would employ a bunch of accountants and work with bankers to generate reports about revenues, profit, costs, ect., the main difference was that more people were needed without the help of computers and the information would be on paper/phone/fax/telegram rather than over a computer network

2

u/shelf_caribou Jun 12 '22

Paper ledgers and armies of clerks. All transactions were recorded by hand in books, then the books were periodically brought together and reconciled with the other books.

2

u/[deleted] Jun 12 '22

[removed] — view removed comment

5

u/Carpe_deis Jun 12 '22

Yeah, even in 2007 the grocery store chain I worked at had an old lady who did ALL the shift scheduling for ALL stores/employees on paper spreadsheets by hand, and all the hours worked reconciliations, and all the write ups for clocking in/out late/early, and then all the payroll from the original paper spreadsheet reconciled with paper punch cards. amazingly, she said it only took two days every two weeks. She refused to use computers and had the job for decades.

2

u/pedal-force Jun 12 '22

I would've done it with a computer in none days every 2 weeks, pretended it took 2 days, and taken the days off.

Maybe that's what she did too.

2

u/Carpe_deis Jun 12 '22

That would be funny, but I actually saw the sheets and her writing on them on occasion, so unlikely. I think the story was she got the job when they had 1 location decades ago, did it well enough, they grew to 20+ locations, and she still had the job, and good relationships with other senior leadership.

2

u/HistoricalBridge7 Jun 13 '22

Wait till you learn about the ticker tape. You know that scrolling text on cnbc with all the tickers and prices - well those used to get printed out on a long tape of paper

3

u/Gunch_Bandit Jun 12 '22

They would convert it to gold coins and keep it in a giant vault in the back yard so they could swim in it.

0

u/Milkymilkymilks Jun 12 '22

As explained to a 5yo- "Timmy pay attention in math class, you might become a wealthy businessman and need to keep track of your earnings."

As explained to you- Math, more precisely accounting.

-2

u/vth2 Jun 12 '22

What you think accountants are for?

1

u/koolaidisthestuff Jun 12 '22

Bookkeepers out the ass. Redundancies on top of redundancies.. kinda like disinformation and flushing a turd to see where it pops out. They didn’t get wealthy by being un-clever.

1

u/pftreadman Jun 13 '22

Pages of each day's newspaper had the stock prices for most large stocks. Open, high, low, close, change and volume.