History of Debits and Credits
‘Debits and credits’ is a financial transaction classification system that was first used by the Venetian merchants in Italy in the 15th century. While it was widely used by the Venetian merchants, its took a mathematician by the name of Luca Pacioli to document and publish this system in a book.
The book Luca wrote to codify the Venetian method of bookkeeping in 1494 was one of the first published by Gutenberg on his innovative printing press. Today Luca is revered widely as ‘The father of accounting’ . Luca’s book explained the whole bookkeeping system of which Debits and Credits were a key part. The overall system that he documented has come to be known as the “Double- entry bookkeeping” system. Now while this system was developed over 500 years ago, its principles and processes are still followed by today’s accountants and bookkeepers the world over.
Latin terms – “Credre” and “Debere”
It is interesting to note that the concept of negative numbers was not generally accepted in mathematics in the 1500s when Luca first codified the double-entry bookkeeping system. This may further explain why he used “Debits and Credits” rather than + and – which is the system that the accounting software of today uses to process financial transactions. Still, let’s not get any more confused other than point out that a lot has changed in the world in past 500 years, but the double-entry bookkeeping system is not one of them.
Luca’s book was written in the vernacular of the age – Latin. So the terms he used for Debit and Credit in his book were “Credre” and “Debere” . In Latin the word “Credre” means “to entrust” and “Debere” means “to owe”. These Latin meanings give us our first glimpse into the underlying principles that the “Debit and Credit” classification system seeks to maintain. These principles will be explained in greater detail later in the series of articles on this topic. It is also clear that we got the Debit abbreviation of “Dr.” from the Latin, because unlike the Latin term, there is no ‘r’ in the English term Debit.
The evolving English language
Other confusions that cloud the understanding of “Debits and Credits” for most accounting students, is the fact that English as an evolving language has developed many different meanings for the terms “Debits and Credits” other than the ones originally coined by Luca in 1494. In fact, look at most dictionaries and you will discover over 10 different meanings for the term credit apart from the one we use in accounting. Some students even try and assimilate the terms Debit with debt, yet the two terms have no similarity in meaning even though they may have similar sounding tones.
Definition of ‘Debits and Credits’ in accounting
The very important point for accounting students to understand is that the Debits and Credits in accounting has its own special meaning and that meaning is not to be assimilated with any other English meanings of the terms.
The definition of “Debits and Credits” that this series of presentations will adhere to is:
Debits and Credits is a classification method that is used for coding the financial transactions of a business and recording them in the bookkeeping system.
In essence, this series will show that the Debits and Credits method captures and records the flow of economic resources that take place in a financial transaction as economic resources transfer from a source (credit) to a destination (debit). The Debit and Credits classification method also ensures that the accounting equation, which is the foundation stone on which the entire double-entry bookkeeping system is build, remains in balance after each transaction is recorded.
Summary – Debits and Credits
In summary then we can say that:
- “Debits and Credits” are a key component of a 500 year old double-entry bookkeeping system.
- “Debits and Credits” are English terms that were translated from the Latin “Credre‟ and “Debere‟
- English has evolved to create many different meanings for the terms “Debit and Credit” in the 500 years since they were first coined.
- The meaning of “Debits and Credits’ in accounting is unique to accounting and is not to be assimilated with other meanings of these terms.
- Debits and credits is a classification method that is used for coding the financial transactions of a business and recording them in the bookkeeping system.
- Debits and Credits reflects the flow of economic resources that takes place in a financial transaction as the economic resources transfer from a source (Credit) to a destination (Debit).
- The Debits and credits system ensures that the accounting equation remains in balance after each new transaction entry.