Question: What first comes to your mind when someone says “accounting?”
The most common thing that comes to mind to non-accountants when accounting comes up is… well actually probably “bean counting.” But the second most common would be… hmm probably something to do with taxes. Ok, so I don’t know where this falls in the minds of the average person, but one thing that always comes up is the infamous debits and credits.
Now I say infamous, because as simple as these words are, they are automatically misleading, because we use them in our everyday life in other ways. When I had my first accounting class, and the teacher asked what the difference between the two were, I tried to draw some kind of a comparison to debit cards and credit cards.
The first step to understanding debits and credits is to ignore that. The second step is to learn a tiny history about a man called Fra Luca Bartolomeo de Pacioli… let’s call him Luca for short. Luca was a brilliant mathematician who worked with Leonardo da Vinci back in the 15th century, and he is referred to as the father of accounting and bookkeeping.
Luca devised a system for automatically catching any errors in the records of an entity. The system is called double-entry accounting, and it just means that, whenever you record an amount in one account, you have to record the opposite amount in another account. These opposites are debits and credits. For example, if someone pays you $100 for a product you gave them, you would debit the cash account and credit the revenue account.
All accounts then retain either a debit or credit balance as various transactions affect them, and if the debits every don’t equal the credits (in a single entry or for an entire year), you know something is wrong. Luca said you should never go to sleep at night until the debits equal the credits.
The final thing to note is that, because of how ledgers are actually recorded on paper (and now on computers), debits are entered in the left column, and credits in the right, so you will sometimes hear them defined as simple left and right. So there you have it—a simple, yet brilliant, way to account for a transaction.