Why Do Accountants Use Debit (DR) and Credit (CR)?

The terms debit (DR) and credit (CR) have Latin roots: debit comes from the word debitum, meaning "what is due," and credit comes from creditum, meaning " ... CorporateFinance Accounting WhatIstheMeaningofDebit(DR)andCredit(CR)? Thereareafewtheoriesontheoriginoftheabbreviationsusedfordebit(DR)andcredit(CR)inaccounting.Toexplainthesetheories,hereisabriefintroductiontotheuseofdebitsandcredits,andhowthetechniqueofdouble-entryaccounting,cametobe. AFranciscanmonkbythenameofLucaPaciolidevelopedthetechniqueofdouble-entryaccounting.Pacioliisnowknownasthe"FatherofAccounting"becausetheapproachhedevisedbecamethebasisformodern-dayaccounting.Pacioliwarnedthatyoushouldnotendaworkdayuntilyourdebitsequalyourcredits.(Thisreducesthepossibilityoferrorsofprinciple.) KeyTakeaways: Thetermsdebit(DR)andcredit(CR)haveLatinroots:debitcomesfromtheworddebitum,meaning"whatisdue,"andcreditcomesfromcreditum,meaning"somethingentrustedtoanotheroraloan."Anincreaseinliabilitiesorshareholders'equityisacredittotheaccount,notatedas"CR."Adecreaseinliabilitiesisadebit,notatedas"DR."Usingthedouble-entrymethod,bookkeepersentereachdebitandcreditintwoplacesonacompany'sbalancesheet. UnderstandingDebit(DR)andCredit(CR) Let'sreviewthebasicsofPacioli'smethodofbookkeepingordouble-entryaccounting.Onabalancesheetorinaledger,assetsequalliabilitiesplusshareholders'equity.Anincreaseinthevalueofassetsisadebittotheaccount,andadecreaseisacredit.Ontheflipside,anincreaseinliabilitiesorshareholders'equityisacredittotheaccount,notatedas"CR,"andadecreaseisadebit,notatedas"DR."Usingthedouble-entrymethod,bookkeepersentereachdebitandcreditintwoplacesonacompany'sbalancesheet. Forexample,CompanyXYZissuesaninvoicetoClientA.Thecompany'saccountantrecordstheinvoiceamountasadebitintheaccountsreceivablessectionofthebalancesheetandrecordsthatsameamountagainasacreditintherevenuesection.WhenClientApaystheinvoicetoCompanyXYZ,theaccountantrecordstheamountasacreditintheaccountsreceivablessectionandadebitinthecashsection.Thismethodisalsoknownas"balancingthebooks." Debit(DR)vs.Credit(CR) BothofthetermsdebitandcredithaveLatinroots.Thetermdebitcomesfromtheworddebitum,meaning"whatisdue,"andcreditcomesfromcreditum,definedas"somethingentrustedtoanotheroraloan." Whenyouincreaseassets,thechangeintheaccountisadebit,becausesomethingmustbedueforthatincrease(thepriceoftheasset).Conversely,anincreaseinliabilitiesisacreditbecauseitsignifiesanamountthatsomeoneelsehasloanedtoyouandwhichyouusedtopurchasesomething(thecauseofthecorrespondingdebitintheassetsaccount). Thetermsdebitandcreditsignifyactualaccountingfunctions,bothofwhichcauseincreasesanddecreasesinaccounts,dependingonthetypeofaccount.That'swhysimplyusing"increase"and"decrease"tosignifychangestoaccountswouldn'twork. WhenitcomestotheDRandCRabbreviationsfordebitandcredit,afewtheoriesexist.OnetheoryassertsthattheDRandCRcomefromtheLatinpresentactiveinfinitivesofdebitumandcreditum,whicharedebereandcredere,respectively.AnothertheoryisthatDRstandsfor"debitrecord"andCRstandsfor"creditrecord."Finally,somebelievetheDRnotationisshortfor"debtor"andCRisshortfor"creditor." ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. Ovunda,AdumSmith."LucaPacioli'sDouble-EntrySystemofAccounting:ACritique."ResearchJournalofFinanceandAccounting,vol.6,no.18,2015,pp.132-139. Baladouni,Vahe."EtymologicalObservationsonSomeAccountingTerms."AccountingHistoriansJournal.vol.11,no.2,Fall1984,pp.108-109. Merriam-Webster."Credit." RelatedArticles Accounting AccruedExpensesvs.AccountsPayable:What'stheDifference? Accounting WhatIsDoubleEntryBookkeepingandHow'sItFitinGeneralLedger? Accounting WhatAreSomeExamplesofCurrentLiabilities? Accounting AccruedExpensevs.AccruedInterest:What'stheDifference? Tools HowtoCalculateMinorityInterest Accounting HowtoCalculateCreditandDebitBalancesinaGeneralLedger PartnerLinks RelatedTerms DebitDefinition Adebitisanaccountingentrythatresultsineitheranincreaseinassetsoradecreaseinliabilitiesonacompany’sbalancesheet. more ReconciliationinAccountDefinition,Purpose,andTypes Reconciliationisanaccountingprocessthatcomparestwosetsofrecordstocheckthatfiguresarecorrect,andcanbeusedforpersonalorbusinessreconciliations. more UnderstandingAccountsPayable(AP)WithExamplesandHowtoRecordAP "Accountspayable"(AP)referstoanaccountwithinthegeneralledgerrepresentingacompany'sobligationtopayoffashort-termobligationstoitscreditorsorsuppliers. more HowDoubleEntryWorks Doubleentryisanaccountingtermstatingthateveryfinancialtransactionhasequalandoppositeeffectsinatleasttwodifferentaccounts. more T-AccountDefinition AT-accountisaninformaltermforasetoffinancialrecordsthatusesdouble-entrybookkeeping. more HowaGeneralLedgerWorkswithDouble-EntryAccountingAlongWithExamples Ageneralledgerisarecord-keepingsystemforacompany’sfinancialdata,withdebitandcreditaccountrecordsvalidatedbyatrialbalance. more