Debit Vs. Credit

There are three basic rules of any transaction, namely, that there should be more than one party, two, that there should be free will and three there should be movement of money or money's worth. These three rules from the basis of our world of commerce and economics. For our discussion, the first rule holds the greatest significance.

Terminology and Origin

All us know that accountancy is a system of writing down transactions in a disciplined and organized manner so as to keep a track of ones finances and money. In the 15th century Venice Fra Luca Bartolomeo de Pacioli, more commonly known as Luca Pacioli, the Father of Accounting, came up with the basic mechanism of modern accounting which we today use. Pacioli laid down the basic rules of accounting, which is known as the double entry system on the sheer and simple logic that any movement of money or a transaction, has two sides, or effects or two parties, the dual element is thus the basis of the mechanisms of accounting. The terms debit and credit are two categories into which these transactions and movements of money are classified. Essentially the two terms are coined names of the two sides of the ledger book.

The origin of the two terms lies in the French and Latin languages. Here, debet, a middle French word and debitum, a Latin word, which mean 'to owe' or 'that which is owed', became 'debit' which we abbreviate as 'Dr'. The r in the opinion of many stands for recorded. Same is the story of credit, or creditum, which mean 'that which is entrusted or loaned' or 'to trust or entrust' in the Latin and middle European language, and is abbreviated as 'Cr'. Though these terms are closely related to debtor and creditor the two have different meanings.

Technical Meaning

As mentioned above, debit and credit are two integral terms in commerce. The mechanism of the double entry system which is based upon the difference between debit and credit, is still used throughout the world even today, as a result of its success, simplicity and a sheer simple logic. The only condition in the debit vs. credit transactions is that it should have more than one party and it should have money or money's worth.

As mentioned above, Debit and credit are mere classifications of the transactions. There are 6 simple rules for these classifications. Often known as the golden rules, they go as follows:

• Debit the receiver (personal account transaction)
• Credit the giver (personal account transaction)
• Debit what comes in (real account transaction)
• Credit what goes out (real account transaction)
• Debit all expenses and losses (nominal account transactions)
• Credit all incomes and gains (nominal account transactions)

These six rules are applicable to all possible transactions and their use starts with the first step of the double entry system.

The complete double entry system is divided into the 4 step accounting process. The first one is the journal book. In this book the two sides of a transaction are decided. The debit and credit are decided at this point. For example:

Cash A/c...Dr
To Sales A/c...Cr

After this basic step is completed the two entries are further journeyed to ledger accounts. In the sales account of the ledger book, the cash A/c...Dr entry is made and vice versa. Subsequently the ledger accounts are transferred to a trial balance which is essentially a total of all Cash A/c...Dr's that have been made in the past month or year. The trial balance is then transformed into a Final account and a simple balance sheet.

The rule of thumb is all expenses, losses and items that go out or whatever comes into the business is debited and any income or profit or anything that goes out of business is credited. Thus the comparison between debit and credit in accounting, can be confusing initially, but once you get a hand of it, it is quite simple.