Random Thoughts

The CRs and DRs of Life!

I found this one on investopedia. It solved most of my doubts about the debit and credit concepts, which i gathered from various accounting text books! Have a take on this one...

Why do accountants use debits and credits instead of simple
pluses and minuses? Why is the notation for a debit "DR"?

Debits and credits, and the technique of double-entry accounting,
are credited (no pun intended) to a Franciscan monk by the name
of Luca Pacioli. Known as the "Father of Accounting," he warned
that you should not go to sleep until your debits equaled your
credits.

Let's review the basics of Pacioli's method of bookkeeping.
On a balance sheet or in a ledger, assets = liabilities + owner's
equity. An increase in the value of assets is a debit to the
account, and a decrease is a credit. On the flip side, an increase
in liabilities or owner's equity is a credit to the account,
and a decrease is a debit.

Having Latin roots, the term "debit" comes from the word "debitum,"
meaning "what is due," and "credit" comes from "creditum," defined
as "something entrusted to another or a loan." So when you increase
assets, the change in the account is a debit because something
must be due for that increase (the price of the asset). Conversely,
an increase in liabilities is a credit because it signifies an amount
that someone else has entrusted (loaned) to you and which you used
to purchase something (the cause of the corresponding debit in the
assets account). You can see why simply using "increase" and "decrease"
to signify changes to accounts wouldn't work: the terms "debit"
and "credit" signify actual accounting functions, both of which
cause increases and decreases in accounts, depending on the type
of account.

What about the terms' abbreviations? There are a few different
theories as to why debits are abbreviated "DR" and credits abbreviated
"CR".

One theory asserts that the DR and CR come from the Latin past
participles of debitum and creditum which are "debere" and "credere,"
respectively. Another theory is that DR stands for "debit record"
and CR stands for "credit record." Finally, some believe that the
DR notation is short for "debtor" and CR is short for "creditor."

The approach Pacioli devised has become the basis for modern day
accounting, and the use of debits and credits allows companies
and individuals to keep track of their transactions and manage
their money. While the origin of the abbreviations of debit and credit
(DR and CR) remain somewhat of a mystery, each theory has "credibility"!!

Labels: Knowledge-wise

posted by Ranjit @ 4/05/2006 09:39:00 am