2. Debit and Credit

Although the financial information that has so much power over our lives is ultimately recorded in the binary language of debits and credits, very few people, including many accountants, actually understand what these terms mean.

For most accounting departments in academia, it is sufficient to disregard any meaning that the inventors of double-entry bookkeeping may have intended for the concepts of debit and credit and to have their students simply memorize the position where the debits and credits are placed in the books. No regard is made for the possibility that the terms were selected by the ancients because of a true conceptual significance.

The term “debit” is derived from a Latin root that means “to owe,” while the term “credit” is from a Latin root meaning “to be owed.” As this etymology indicates, the debit of a transaction is applied to the account that receives a financial resource and a credit is applied to the account that is the source of that financial resource, the “debtor” and “creditor” respectfully.

During the time when a business is viable, the accounts that represent the resources that are available to the business, it assets, are net receivers of resources. The company has existing assets because it has received more than it has distributed – it is a net receiver and the accounts that represent what it has received typically have debit balances.

During this time of business viability, the outside world is the source of the company’s assets, either through ownership contribution, loans, sales, or some other form of internal flow of resources into the company. The accounts that represent these outside sources therefore have net credit balances, indicating that they have served as sources and, in the case of the business’s liquidation, may possibly have returned what they contributed and are owed as “creditors” or “owners.” See The Tao of Financial Information.