The formation of the debit and credit concept
In this simplified form we can begin to see what the mathematician and Father of Accounting (Luca Pacioli) saw in 1494 when he codified the double-entry bookkeeping system. It is his codified system that outlined the rules for applying debits and credits when recording the financial transactions of a business in the double-entry bookkeeping system. Now remember that Luca’s book in 1494 was written and published in Latin and at a time when the concept of negative numbers was not yet accepted in Europe. So he spoke of the terms ‘Debere’ and ‘Credere’ which means To maintain this fundamental truth that the value of the net assets of the business must be equal to the value of the owners equity, Luca introduced the concept that the net assets side of the equation would be represented as Debere (Debits = funds owed to the owners) and the owners equity side would be represented as Credere (Credits = funds entrusted). Consequently, he could also see that financial activities that caused net assets to increase should be debited (more funds owed to the owners) and credited if decreased (less funds owed to the owners). The same principle applies to the owners equity side. An increase in owners equity would be credited (more funds entrusted in the business) and a decrease debited (less funds entrusted in the business). Treatment of expenses and revenues
Finally, the treatment of expenses and revenues in the double-entry bookkeeping system. As mentioned earlier, the profits of the business are claimed by the owners. Now profits are the net result of the revenue earned less the expenses incurred in earning that revenue. This means that revenue has the potential to increase profits and thereby increases the owners equity side of the equation. This in turn will lead to more money entrusted in the business, so revenue is credited. Conversely expenses, by being offset against the revenue will reduce the profits and so reduce the...
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