PART 1 – What is the origin of Debits and Credits?
In more primitive trading times, bookkeeping was not such a big issue because the person who manufactured or produced the goods was usually the person selling or trading the goods in the market place. However, the Renaissance period saw a huge increase in both trade and banking systems brought about by the Roman-built transport systems and the growth of more sophisticated societies like those in Italy (particularly Venice). So, the merchants of Venice in the 1400’s, developed an accounting system to accurately record these more complex financial dealings that were prevalent of the time.
Now a Franciscan friar and mathematician from that era, Luca Pacioli (1446–1517), is widely regarded to be the “Father of Accounting” because he was the first to codify and publish this accounting system in his book titled , “The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality” (translated). The book was published in 1494 (about the time that Columbus discovered America) and it was one of the earliest books published on the Gutenberg press.
Luca makes no claims about inventing the system but he does present it in a way that others can easily understand it. His motive for recording the bookkeeping system that was used by the Venetian merchants during the Italian Renaissance period was to help Guidobaldo, the Duke of Urbino, in the management of his financial affairs.
This documented system, described in only one section of the five-section book, has become known as the ‘double-entry accounting’ system. The 36 short chapters on the accounting system contained in the book, became the only accounting text-book for the next hundred years and its principles have been continuously followed by accountants right up to today.
Interestingly, Luca Pacioli was actually a colleague of Leonardo da Vinci and it was Leonardo who helped him illustrate his second most important manuscript De Divina Proportione (“Of Divine Proportions”).
This fact was mentioned by the author and Leonardo Da Vinci mentions Pacioli many times in his notes. Opposite is a drawing of the Polyhedra which was one of the illustrations by Leonardo in Luca’s book. Other interesting facts are uncovered by Marcino Guerrero in his Knol Pcaioli and Da Vinci#
Most of Luca’s work still underpins the accounting system we use today. Those basic accounting concepts from his book in 1494 that are still practiced today include;
The accounting cycle
The use of journals and ledgers
Debits equalled credits – ‘double entry bookkeeping’
The account groups of assets (including receivables and inventories), liabilities, capital, income, and expenses
Year-end closing entries
The trial balance, which he believed should be used to prove a balanced ledger.
In Part 1, we learned about the 500 years history of Debit and Credits and the significant contribution made to the world of accounting by the Franciscan friar and mathematician Luca Pacioli with his ‘double entry bookkeeping system.
PART 2 – Why was it called Debit and Credit?
Now remember, Luca was more a mathematician than an accountant, so his mind would have been trained to look for the key principles, concepts and symmetry that underpinned the Venetian merchant’s financial recording system.
Key concepts he would have identified were (1) that in the accounting world, the business (or firm) was an entity in its own right and that that entity was separate and distinct from the owners. Another principle he would have seen is that (2) the financial world is a closed system. That is, money just doesn’t just materialise form nowhere. If money is received by someone it must have been given by someone else and vice versa.
This closed system of giving and receiving would have led him to see the concept of ‘duality’ in financial transactions relating to a firm. For example, when an amount of money is entrusted by someone to a separate and distinct firm, then that firm would now have an obligation and owe that person the same amount of money in return.
Using his native Latin, Luca named the act of entrusting – ‘Credre’ (which means ‘to entrust’) and the corresponding obligation on the firm – ‘Debere’ (which means ‘to owe’). So, from the point of view of the firm, he could see that this principle of duality held true for every financial transaction entered into by the firm. For him, it was not just a formula but an aspect of existence where one side could not exist without the other. In a closed system, every ‘Debere’ must have a corresponding ‘Credre’ and vice versa. In other words, ‘Debere’ and ‘Credre’ were two sides of the same coin. (In finance – when someone ‘entrusts’ money then someone else ends up ‘owing’ it’).
Luca would also have noted that this duality of financial transaction extended to the fact that financial resources transfer from one place to another. In other words, for every financial transaction there must have been a transfer of economic resources from a source to a destination. Again he applied the concept where the source would be credited and the destination debited as financial resources flowed from one place to another.
He was so convinced of this concept of duality, that he is said to declare that no one should go to sleep at night without ensuring that the ‘credre’ equalled the ‘debere’. (credits = debits)
Note: The English translators used the Latin roots for these concepts and so named them Debits and Credits. It is highly probable that we also got the abbreviated forms of these terms (Dr and Cr) from the Latin roots as well, because there is no ‘r’ in the English word Debit but there is one in its Latin form ‘Debere’.
In Part 2, we see the emergence of the concept of duality where debits and credits are just two sides of the same coin in the way that the Chinese concept of ‘yin and yang’ are complementary opposites within a greater whole. We begin to see the concepts that underpin the application of Debits and Credits and the link to the original Latin root with its original meaning.