The use of debit and credit is essentially an implementation of the double-entry bookkeeping system based on the accounting equation. Every recording of an economic transaction in accounting always involves at least two accounts, such as cash, accounts receivable, revenue, expenses, etc. Each of these accounts must have a normal balance, and this is where debit and credit play an important role. The accounts arising from these economic transactions will have either a normal debit balance or a normal credit balance. For example, cash has a normal debit balance, liabilities have a normal credit balance, revenue has a normal credit balance, and so on. A detailed explanation of normal balances will be discussed separately.
When referring to accounting textbooks, some of the definitions of debit and credit that we encounter include the following:
Strawser and Strawser (2002)
At this point, we cannot overemphasize the fact that the words “debit” and “credit” are simply terms used to identify left and right sides of an account, respectively, and have absolutely no other meaning in their accounting usage.
Williams, Haka, and Bettner (2005)
An amount recorded on the left, or debit, side of an account is called a debit, or a debit entry. Likewise, any amount entered on the right, or credit, side is called a credit, or a credit entry. In simple terms, debit refer to the left side of an account, and credit refer to the right side of an account.
Weygandt, Kieso, and Kimmel (2008)
The terms debit and credit are directional signals; Debit indicates left and credit indicates right.
Based on these quotations, we can conclude that the terms debit and credit refer to the left and right sides, respectively. In fact, financial accounting textbooks explicitly state that debit means left, while credit means right (Warsono, 2010). Accounting uses the terms debit, meaning left, and credit, meaning right, because accounting records are based on the notation of the accounting equation: Assets = Liabilities + Equity (A = L + E). This equation can be easily explained in simple terms: an entity's assets can only come from two sources, namely liabilities and/or equity.
Ultimately, debit and credit represent the left and right sides of an accounting record. However, accounting students still frequently interpret them as increases and decreases.
Why do debit and credit not mean increase and decrease? This is because debit, which means the left side, is the side used to record increases in the balances of accounts originating from the left side of the accounting equation A = L + E, namely A (Assets). Meanwhile, credit, which means the right side, is the side used to record increases in the balances of accounts originating from the right side of the accounting equation A = L + E, namely L (Liabilities) and E (Equity). Debit is the side used to record increases in the balances of accounts that are components of assets, such as cash, accounts receivable, inventory, equipment, etc. Credit is the side used to record increases in the balances of accounts that are components of liabilities and equity, such as accounts payable, share capital, revenue, etc. Accounts such as expenses, dividends, and accumulated depreciation are exceptions that will be discussed specifically in the topic of normal balances.
Why do debit and credit not mean increase and decrease? This is because not all increases in account balances are recorded on the debit side; some are also recorded on the credit side, and vice versa. For example, when a liability is settled, the decrease in that liability is recorded on the debit side, which is the opposite side from where the liability was recorded when it increased. This reinforces the fact that debit and credit do not mean increase and decrease.
The terms debit and credit, which are still used today, demonstrate the consistency of logical thinking established by accounting. By understanding the fundamental logic behind the use of debit and credit, accounting students will develop a strong conceptual foundation for studying accounting at an advanced level and for contributing to the future development of accounting.
References
Strawser, J.W. and J.A. Strawser. 2002. Financial Accounting and Reporting. 3rd ed. Dame Thomson Learning.
Warsono, Sony. 2010. Accounting Reform: Uncovering Bounded Rationality in Accounting Development. Asgard Chapter.
Weygandt, J.J., D.E. Kieso, and P.D. Kimmel. 2008. Accounting Principles. Eighth Edition. John Wiley & Sons (Asia) Pte Ltd.
Williams, J.R., S.F. Haka, and M.S. Bettner. 2005. Financial & Managerial Accounting: The Basis for Business Decisions. Thirteenth Edition. International Edition. McGraw-Hill/Irwin.
Fachmi Pachlevi Yandra, M.Sc
