Debits and credits
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Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental concepts in accounting, representing the two records that one party in a transaction makes on its records, transferring a money balance from one account to another, one representing a reduction of liability or increase in asset, and the other representing a balancing increase in liability or reduction of asset.
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Debits and credits are a system of notation used in accounting to keep track of money movements (transactions) into and out of an account. Traditionally, an account's transactions are recorded in two columns of numbers: debits in the left hand column, credits in the right. Keeping the debits and credits in separate columns allows each to be recorded and totaled independently. The smaller of the two totals is then subtracted from the larger to give the account balance. An account may thus have a balance either the debit or credit side.
In double-entry bookkeeping assets and expense accounts, which represent the resources used by the business, are debit accounts. Their balance increases with entries made in the debit column and decreases with entries in the credit column. Liability, owner's equity and revenue or income accounts, which represent the source of funds for the business, are credit accounts. Their balance increases with entries in the credit column and decreases with entries in the debit column. [1]
A "T" account showing debits on the left and credits on the right.
Debits Credits
[edit] Origin of the terms debit and credit
The term debit comes from the Latin debitum which means "that which is owing" (the past participle of debere "to owe"). Debit is abbreviated to Dr (for debtor). The term credit comes from the Latin credere/credit meaning "to trust or believe"/"he trusts or believes" via the French credit and the Italian credito. Credit is abbreviated to Cr (for creditor). [2] In bookkeeping, debit is defined as "an entry of a sum owing"; "side of an account (left-hand) on which such entries are made". Credit is defined as "the sum at a person's disposal in the books of a bank";"an entry on the credit [right-hand] side of an account". [2]
The idea of income being a credit and an expense being a debit, which were opposites and balanced off against each other to determine profit or loss, is fairly straightforward, as is the tradition of always entering debits on the left and credits on the right of an account. However, as the double-entry bookkeeping system was expanded to cover assets and liabilities things became more complicated. Every transaction consists of a pair of matched opposites called a debit and credit, but they don't necessarily refer to simple concepts like income and debt which can be confusing. The debit is just the left-hand component and the credit the right-hand one. [1]
