I personally think that trying to understand the debit and credit concept in accounting is near impossible when you are first confronted with it. Learning how to apply the debit and credit concept is far easier. You can be an outstanding bookkeeper or accounting student by just learning the application rules that are taught in courses.
Still, while I have been involved with teaching accounting students for many years and have ‘kept the books’ for my own businesses, it always bothered me that I never really understood the rationale behind the debit and credit concept in accounting.
Also, in my opinion, the dictionary definitions do very little to aid in understanding.
- Debit – an entry in the left hand column of an account (“T” account) or the left hand side of the Balance Sheet.
- Credit – an entry in the right hand side of an account (“T” account) or the right hand side of a Balance Sheet
Adding to the confusion is the fact that the debit and credit concept and terminology was developed over 500 years ago, with the first accounting textbook being actually written in Latin. English as a language has morphed incredibly in the past 500 years since the Venetian method of accounting was first translated, producing many different meanings for the terms ‘debit’ and ‘credit’. I have identified eight different meanings and applications in English for the term ‘credit’ alone. Is it any wonder then that the debit and credit concept is a difficult one for students to understand with 21st century English.
So, I wrote an article in an attempt to provide a better understanding for myself of the debit and credit concept in accounting and here it is … http://basicaccountingconcepts.w…
Summarizing that rather long article I would offer the following explanations when trying to better understand the debit and credit concept:
- to help understand the terms ‘debit’ and ‘credit’ in accounting, you should not try to link these terms with any other meanings or uses in every day English.
- ‘debit’ and ‘credit’ does not automatically mean: “plus” and “minus”, “good” and “bad” or “increasing” and “decreasing”.
- ‘debit’ and ‘credit’ are accounting terms used to acknowledge and record the duality that naturally occurs with financial transactions. i.e. finance is a closed system and money just doesn’t appear or disappear in a business. For example, if money is received by a business then it must have been given by others and vice versa (so two/dual entries of equal amounts are required to record the complete transaction and the transaction’s affect on financial resources = ‘credit’ the source of funds and ‘debit’ the destination of the funds)
- ‘debit’ and ‘credit’ are accounting concepts that capture in the books of a business the flow of economic resources from a source (credit) to a destination (debit). i.e. a bank provides funds to a business as a loan … Bank loan is the source of funds so it is recorded as a ‘credit’ and the Bank account of the business is the destination of the funds so it is recorded as a ‘debit’. Applying this principle will help you identify the ‘credit = source’ and ‘debit = destination’ of every transaction.
- ‘debit’ and ‘credit’ is a recording system that ensures that the accounting equation always remains in balance after each and every transaction. i.e. Assets = Liabilities + Equity. The Venetian merchants that developed this system 500 years ago decided that increases on the ‘assets’ side would be called a ‘debit’ and increases on the ‘liabilities’ and ‘equity’ side would be called a ‘credit’ with corresponding ‘debit’ and ‘credit’ entries for decreases. If every transaction is recorded with an equal amount for the ‘debit’ and the ‘credit’, then the accounting equation will always remain in balance. A balanced accounting equation allows business managers to accurately calculate and split the claims that all parties have over the assets of the business. (Liabilities = external parties like banks and suppliers, Equity = owners)
- ‘debit’ and ‘credit’ is always recorded from the perspective of the business. This is why if the ‘Cash-at-bank’ account in the books of the business is a ‘debit’ balance then the bank balance on the bank statement will be a ‘credit’ balance. Because while cash is an assets to the business (an item of value that the business owns) it is a liability for the bank (money owed to a customer, you)
This article may also help you understand the ‘debit and credit concept’ better: