The Evergreen Concept of Debit and Credit

While the majority of the population might associate the words ‘Debit’ and ‘Credit’ with payment methods, the people in finance and accounting professions would probably not want to hear any more of these words. The only common ground, there is not a day that goes by people are not using ‘Debit’ and ‘Credit’. Yes, also the cards.

Origin of Debit and Credit

Accountants have been putting up with this ‘Debit’ and ‘Credit’ for a while now, the earliest evidences going up to the end of the 13th century. The evidence shows the use of double entry accounting methods by the merchants of Venice. However, documentation of the double entry bookkeeping as a theory in books was by Luca Pacioli in 1494. A collaborator of Leonardo Da Vinci, he is often referred to as the ‘Father of Accounting’ because of his work that enabled people to study and implement the double entry methods. The word ‘Debit’ originated from the Latin word Debitum, meaning "what is due," while ‘Credit’ comes from Creditum, meaning "something entrusted to another or a loan."

How Does Debit and Credit Work?

The process of double entry follows just what the words Debitum and Creditum describe, from the perspective of the entities who the ledgers belong to. Debits record all of the money flowing into an account, while credits record all of the money flowing out of an account. An expense account is debited if there is any new expenditure, while a cash/ bank account is credited if the balance increases. In the double entry method, any transaction should touch two accounts and if one of them is debited there should a corresponding account with credit entry. To give an example, a cash transaction for purchasing a vehicle would have a debit entry on the particular fixed asset ledger and a credit entry on the cash ledger.

Significance of Debit and Credit in Accounting

Despite all the improvements and innovations made in the accounting discipline, ‘debit and credit’ or the double entry bookkeeping remains the most single important method in accounting. The first thing that this method ensures is the arithmetic accuracy due to a corresponding entry with each debit or credit entry. For every debit, there is an equal amount of credit and vice versa. Which made it easier to minimize errors, detect fraud early among other things. Through the ledgers and their debit or credit balances, it is now easier to monitor the particular account or expenses over any period of time. Which allows a management to make informed decisions in order to achieve operational efficiency and increase profitability. The financial position of a company becomes easy to monitor due to the balance sheet and profit & loss statements which are composed with the ledger accounts and their debit vs. credit balances.

While Debit and Credit are often the cause of a lot of bookkeeping (entry) dilemma, with proper knowledge and relating theory to practice they can become the right tools an accountant needs to improve the bookkeeping of a firm and use the output to carry out all the financial analysis to reduce costs and enhance the financial performance.

Date: 2023-02-02 08:38:30, | (399 views)