Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions.
Debits and credits are traditionally distinguished by writing the transfer amounts in separate columns of an account book.
This practice simplified the manual calculation of net balances before the introduction of computers; each column was added separately, and then the smaller total was subtracted from the larger.
Pacioli devoted one section of his book to documenting and describing the double-entry bookkeeping system in use during the Renaissance by Venetian merchants, traders and bankers.
When his work was translated, the Latin words debere and credere became the English debit and credit.
Under this theory, the abbreviations Dr (for debit) and Cr (for credit) derive directly from the original Latin.
Sherman goes on to say that the earliest text he found that actually uses "Dr." as an abbreviation in this context was an English text, the third edition (1633) of Ralph Handson's book Analysis or Resolution of Merchant Accompts[9] and that Handson uses Dr. as an abbreviation for the English word "debtor."
The words actually used by Pacioli for the left and right sides of the Ledger are "in dare" and "in havere" (give and receive).
[10] Geijsbeek the translator suggests in the preface: [I]f we today would abolish the use of the words debit and credit in the ledger and substitute the ancient terms of "shall give" and "shall have" or "shall receive", the personification of accounts in the proper way would not be difficult and, with it, bookkeeping would become more intelligent to the proprietor, the layman and the student.
[11] As Jackson has noted, "debtor" need not be a person, but can be an abstract party: ...it became the practice to extend the meanings of the terms ... beyond their original personal connotation and apply them to inanimate objects and abstract conceptions...[12] This sort of abstraction is already apparent in Richard Dafforne's 17th-century text The Merchant's Mirror, where he states "Cash representeth (to me) a man to whom I … have put my money into his keeping; the which by reason is obliged to render it back."
The classical approach has three golden rules, one for each type of account:[15] Debits and credits occur simultaneously in every financial transaction in double-entry bookkeeping.
It is just a transfer to a proper bank account of record in the company's books, not affecting the ledger.
For example: Accounts Receivable can be broken down to show each customer that owes the company money.
All accounts for a company are grouped together and summarized on the balance sheet in 3 sections which are: Assets, Liabilities and Equity.
Liabilities, conversely, would include items that are obligations of the company (i.e. loans, accounts payable, mortgages, debts).
The Equity section of the balance sheet typically shows the value of any outstanding shares that have been issued by the company as well as its earnings.
All Income and expense accounts are summarized in the Equity Section in one line on the balance sheet called Retained Earnings.
Most companies rely heavily on the profit and loss report and review it regularly to enable strategic decision making.
The words debit and credit can sometimes be confusing because they depend on the point of view from which a transaction is observed.
Similar is the case with revenues and expenses, what increases shareholder's equity is recorded as credit because they are in the right side of equation and vice versa.
[17] Typically, when reviewing the financial statements of a business, Assets are Debits and Liabilities and Equity are Credits.
This use of the terms can be counter-intuitive to people unfamiliar with bookkeeping concepts, who may always think of a credit as an increase and a debit as a decrease.
Totaling of all debits and credits in the general ledger at the end of a financial period is known as trial balance.
Personal accounts are liabilities and owners' equity and represent people and entities that have invested in the business.
This can also be rewritten in the equivalent form: where the relationship of the Income and Expenses accounts to Equity and profit is a bit clearer.
[25] They are Cash, bank, accounts receivable, inventory, land, buildings/plant, machinery, furniture, equipment, supplies, vehicles, trademarks and patents, goodwill, prepaid expenses, prepaid insurance, debtors (people who owe us money, due within one year), VAT input etc.
Two types of basic asset classification:[26] Liability accounts record debts or future obligations a business or entity owes to others.
Expense accounts record all decreases in the owners' equity which occur from using the assets or increasing liabilities in delivering goods or services to a customer – the costs of doing business.
[30] Telephone, water, electricity, repairs, salaries, wages, depreciation, bad debts, stationery, entertainment, honorarium, rent, fuel, utility, interest etc.
In the accounting equation form: The process of using debits and credits creates a ledger format that resembles the letter "T".