![]() ![]() This is the equation (assets=liabilities+equity). While some people would argue that in the age of computers the double entry system is outdated, it's far too ingrained into the everyday practices, software, models, methods and rules of accounting to simply get rid of, so you basically have to learn it.Īnother important element of double entry accounting is its relationship to the "accounting equation". There have been some changes since then but overall the methods have stayed the same now as then. The system was first invented in Milan by Luca Pacioli, the father of accounting, who was a Franciscan monk in 1494. So it's truly a marvel of an invention and it's what's allowed "accounting" as a profession to exist for hundreds of years. It seems asinine and pointless in the computer age but the accounting principals and models we are dealing with were put in place during the paper bookkeeping age. This method is record keeping is what helps find mistakes when you are dealing with thousands or millions of transactions. BALANCE between debits and credits is very important to accounting. ![]() You might get +1 Debit, -1 debit and 0 credit, again that's in balance. So you might get a +1 debt and a +1 credit, that's in balance. Within that 2 item entry, there will be some combination of debit and credit and those 2 columns will be in balance. This means for every individual thing that you do, you must record 2 items. Accounting is based on an ancient system known as "double entry". So even though these words are spelt and pronounced the same, they really have a separate definition. But they also have finance meanings where people will say something like "I bought a call option". Another common example is something you will encounter in Finance class, the words "put" and "call" have common meanings (to put something somewhere, or to call someone over). This will happen frequently in business school (as well as other disciplines) and is known as a "trade" definition. ![]() Debits and Credits in terms of accounting are unrelated to the English word "debit" or "credit" as you've known them up till now. So the best advice I can give you is this. Those common meanings are related to the accounting meanings, but it's kind of in a round about way. But there are also things like "getting a credit check, and so on. First of all, the words "debt" and "credit" have common meanings in the English language, most commonly the "Debit card" or "Credit card". ![]()
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