There are a few theories on the origin of the abbreviations used for debit (DR) and credit (CR) in accounting. To explain these theories, here is a brief introduction to the use of debits and credits, and how the technique of double-entry accounting came to be.
Key Takeaways:
- 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 "something entrusted to another or a loan."
- An increase in liabilities or shareholders' equity is a credit to the account, notated as "CR."
- A decrease in liabilities is a debit, notated as "DR."
- Using the double-entry method, bookkeepers enter each debit and credit in two places on a company's balance sheet.
Understanding Debit (DR) and Credit (CR)
A Franciscan monk by the name of Luca Pacioli developed the technique of double-entry accounting. Pacioli is now known as the "Father of Accounting" because the approach he devised became the basis for modern-day accounting. Pacioli warned that you should not end a workday until your debits equal your credits. (This reduces the possibility of errors of principle.)
Let's review the basics of Pacioli's method of bookkeeping or double-entry accounting. On a balance sheet or in a ledger, assets equal liabilities plus shareholders' equity. An increase in the value of assets is a debit to the account, and a decrease is a credit. On the flip side, an increase in liabilities or shareholders' equity is a credit to the account, notated as "CR," and a decrease is a debit, notated as "DR." Using the double-entry method, bookkeepers enter each debit and credit in two places on a company's balance sheet.
This method is also known as "balancing the books."
Debit (DR) vs. Credit (CR)
Both of the terms debit and credit have Latin roots. The term debit comes from the word debitum, meaning "what is due," and credit comes from creditum, defined as "something entrusted to another or a loan."
When you increase assets, the change in the account is a debit, because something must be due for that increase (the price of the asset). Conversely, an increase in liabilities is a credit because it signifies an amount that someone else has loaned to you and which you used to purchase something (the cause of the corresponding debit in the assets account).
The terms debit and credit signify actual accounting functions, both of which cause increases and decreases in accounts, depending on the type of account. That's why simply using "increase" and "decrease" to signify changes to accounts wouldn't work.
When it comes to the DR and CR abbreviations for debit and credit, a few theories exist. One theory asserts that the DR and CR come from the Latin present active infinitives of debitum and creditum, which are debere and credere, respectively. Another theory is that DR stands for "debit record" and CR stands for "credit record." Finally, some believe the DR notation is short for "debtor" and CR is short for "creditor."
Account Types
A company's chart of accounts contains different types of accounts. These include:
- Assets: The asset account contains a company's resources, such as cash, accounts receivable, and inventory.
- Expenses: The expense account shows the company's cost of doing business, such as expenses for materials, labor, and advertising.
- Liabilities: The liability account reflects what the company owes, such as accounts payable and wages.
- Equity: Equity refers to company ownership, such as in the form of stock and investment.
- Revenue: A revenue account contains the income generated by the business.
How Debits and Credits Affect Account Types
Every transaction that occurs in a business can be recorded as a credit in one account and debit in another. Whether a debit reflects an increase or a decrease, and whether a credit reflects a decrease or an increase, depends on the type of account.
Account | Debit | Credit |
---|---|---|
Asset | Increase | Decrease |
Expenses | Increase | Decrease |
Liabilities | Decrease | Increase |
Equity | Decrease | Increase |
Revenue | Decrease | Increase |
Examples of Debits and Credits
For example, say Company XYZ issues an invoice to Client A. The company's accountant records the invoice amount—$1,000—as a debit, or DR, in the accounts receivables section of the balance sheet, because that is an asset account. The company records that same amount again as a credit, or CR, in the revenue section.
When Client A pays the invoice to Company XYZ, the accountant records the amount as a credit (CR) in the accounts receivables section, showing a decrease, and a debit (DR) in the cash section, showing an increase.
Why Is Debit a Positive?
A debit reflects money coming into a business's account, which is why it is a positive.
Is Accounts Payable a Credit or a Debit?
Accounts payable is a type of liability account, showing money which has not yet been paid to creditors. An invoice which has not been paid will increase accounts payable as a debit. When a company pays a creditor from accounts payable, it is a credit.
Does Debit Go on the Left or the Right?
In traditional double-entry accounting, debit, or DR, is entered on the left. Credit, or CR, is entered on the right.
The Bottom Line
In double-entry accounting, CR is a notation for "credit" and DR is a notation for debit. Credit is a term used to mean "what is owed," and debit is "what is due." Understanding how to use CR and DR will help you make sense of a company's balance sheet and gain useful insight into the increases and decreases of key accounts.
Article Sources
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Merriam-Webster. "Credit."
Ovunda, Adum Smith. "Luca Pacioli's Double-Entry System of Accounting: A Critique." Research Journal of Finance and Accounting, vol. 6, no. 18, 2015, pp. 132-139.
Sherman, W. Richard. "Where's the R in Debit?" Accounting Historians Journal.vol. 13, no. 2, Fall 1986, pp. 4.