Why is it so difficult to grasp the idea of debit vs credit without confusing the two?

Answer by Peter Baskerville:

Why is the idea of debits and credits so difficult to grasp? It is clearly the most confusing concept to understand in accounting, which is why most students simply learn the 'debit' and 'credit' rules by heart and then apply them according to the rules. But I still think it is important to fully understand the concept if you are going to get the best out of your accounting knowledge and skills. Here's why I think 'debits' and 'credits' is such a difficult concept to grasp and some explanations that should help you to better understand it:
  • Confusion about the terms: The terms 'debit' and 'credit' have unique meanings in accounting and they have no relationship with any other meanings of the terms. The accounting terms 'debit' and 'credit' are always going to be difficult to grasp if you keep trying to relate them to other uses of these terms in everyday life.
  • Confusion created from a long history: The concept of 'debit' and 'credit' originated over 500 years ago with the Venetian merchants. The first double-entry bookkeeping textbook was written in Latin by Franciscan friar Luca Pacioli (1445 – 1517) in his Summa and published in 1494. If you don't understand that the terms 'debit' and credit' originated in Latin as 'debere' and 'credere', then you wouldn't realise that these terms mean (to owe) and (to entrust). See Luca Pacioli saw that external funders and owners entrust  (credit) money to a business so it can acquire assets. But  the business then in turn owes (debit) the value of these assets back to the funders. If you don't understand the history of accounting then the concepts of 'debit' and 'credit' will be difficult to grasp. This animation and narrated story may help in this regard.
    https://www.youtube.com/watch?v=caNGir_fhUQ&list=TLHhV9NMwYE4BTwe2MbU9g5UQPwXfrVMce
  • Confusion about '+' and '-': A review of history will also tell you that negative numbers were not a generally accepted mathematical concept in Europe when Luca Pacioli codified the double-entry bookkeeping system in 1494. So it was an incredibly innovative concept at the time of getting the books of a business to balance by using 'debit' and 'credit' rather than '+' or '-', which must be very confusing to 21 century students today where the concept of negative in mathematics is so mainstream. 
  • Confusion about the role of business: The concept of 'debit' and 'credit' is built on a fundamental truth that a business is created by the owners for the owner's benefit. So the value of all the assets (less the liabilities or debts that the business has incurred) are owed to the owners. This truth can be formulated into an equation of: Assets – Liabilities = Owners Equity or rearranged into what has become known as the accounting equation: Assets = Liabilities + Owners Equity. The role of 'debits' and 'credits' is to accurately maintain this fundamental truth, as represented by the accounting equation. If you didn't understand this vital role of 'debit' and 'credit' then you wouldn't understand why certain accounts are debited and others credited, nor would you understand why the treatment of a recorded transaction would change depending on what was needed to ensure that the balance in this equation is always maintained.
  • Confusion about different treatments of the same transaction: Luca Pacioli's double-entry bookkeeping system was designed so that the owners of the business could get a constantly updated report on the financial position and performance of their specific business. So financial transactions in the double-entry bookkeeping system are recorded from the perspective of the individual business. If you did not understand this principle then it would be difficult to understand why say a deposit to the bank account of a business is recorded as a debit in the Cash at Bank account of the business but recorded as a credit on the bank statement produced by the bank. See while Cash at Bank is an asset account in the double-entry bookkeeping system of the business, the bank must treat the deposit as money owed to another business and therefore records it as a liability in their double-entry bookkeeping system for their owners.
  • Confusion about the application of 'debits' and 'credits': I remember asking questions of my teachers about the reason why 'debits' and 'credits' were applied in the way they were and always got the same response … because that's the system. In accepting that answer I learned to apply 'debits' and credits' long before I understood the why. I have explained previously much of the reasoning behind the 'debit' and 'credit' concept, with the final explanation being that 'debits' and 'credits' really represent the flow of economic resources that takes when a financial transaction occurs in the closed system that is the world of finance. See financial transactions cause economic values to flow from something to something else. We see this concept represented in the Latin meanings of the words 'debere' and 'credere', where economic value is entrusted 'credere' to a business which then creates an obligation on the business to owe 'debere' the equal amount of economic value back to the entrusters. Rather than simply apply the 'debit' and 'credit' rules, you can explain all financial transactions in terms of the first-principles of economic value flow: from (credit) to (debit). Here is the full story on how you could do that – Basic Accounting Concepts 2 – Debits and Credits

The truth is, you will be better off in your student years to just learn the rules of 'debit' and 'credit' and then apply them correctly. Still, if understanding 'the why' drives you to insanity as it has me, then make sure you follow my accounting answers on Quora or my blog (above) because I am determined to figure it all out before I shuffle off this mortal coil.

Why is it so difficult to grasp the idea of debit vs credit without confusing the two?

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Debits & Credits – History and definitions

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FAQ – Basic Accounting Concepts

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How can I better understand debit and credit?

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:

http://basicaccountingconcepts.w…

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Financial statements

A description of the three different financial statements: Balance Sheet, Income Statement, Cashflow Statement.

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The history and definition of ‘Debits and Credits’ in accounting.

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.

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