Terminology

Thus a creditor is one who has credit, i.e. one who has money available for a client to borrow. The term creditor is always used in exactly this context, and is not technically an accounting term, although this word comes up regularly in business and therefore accounting. The same is not true for the accounting term "credit". In the academic field of accounting (bookkeeping), such dictionary definitions are misguiding. In this context, the modern definitions of the words "debit" and "credit" seem to have little connection with the etymology of these words in English. One must not confuse the layman's understanding of "credit" with its intended meaning in accounting terminology. This may seem confusing at first, but one will find when studying bookkeeping that this is the best possible system to use. Without it, one will not be able to use the double-entry system of bookkeeping.

When recording numbers in accounting practice, a debit number would be placed on the left side of a ledger account and a credit number would be placed on the right side of a ledger account. A debit or a credit would either increase or decrease the total in the account, depending on what kind of account it is.

A key point is that any transaction (say, of value £x) is recorded by a debit entry of £x in one account and a credit entry of exactly £x in another account. Therefore when people say "debits must equal credits" they do not mean to say that the two columns of any T-account must be equal. That would be ridiculous, since if that were the case, every account would have a zero balance (no difference between the columns). The value of a transaction can, in some cases, be spread over more than one account:[clarification needed]

Example

I owe creditors A and B £x each. Thus my liability account for Creditor A has a credit balance of £x and the same for Creditor B. I pay them off from my bank account. I am of course going to withdraw £2x from my bank account and split it to pay off the two liabilities, shown by the following concise notation:



Therefore for this transaction, the total value debited = 2x and the total value credited = 2x. They match. To be clear, in the above example, "Bank" is one account, "Creditor A" is another, and "Creditor B" is a third. 3 different accounts were affected. Nonetheless, "debits equals credits", regardless of which accounts were affected. The above example is exactly what this expression means.

And because of this, the two sides of any single T-account have no relation in terms of how the values were derived. They correspond to two completely separate/unrelated sets of transactions. But at the end of any financial period (say at the end of the quarter or the year), one may sum each side, whereby the difference of the two sides is called the balance. If the sum of the debit side is greater in value, then we say the account has a "debit balance" and if the sum of the credit side is greater, then we say the account has a "credit balance". If the two sides do equal each other (this would be a coincidence, not as a result of the laws of accounting), then we say we have a "zero balance".

Debit cards and credit cards are creative terms used by the banking industry to market and identify each card. These are unrelated to the terms used in formal accounting. A debit card is used to make a purchase with ones own money. A credit card is used to make a purchase by borrowing money.


Definition: The general ledger is the term for the comprehensive collection of T-accounts. Before the advent of computerised accounting, manual accounting procedure used a book (known as a ledger or a journal) for each T-account. The collection of all these books was called the general ledger, i.e. it does not refer to any particular ledger and the term may be misleading. Nowadays a 'ledger' can refer to a single spreadsheet on an accounting software. The different ledgers can be saved under the same file (which will be called the 'general ledger').[citation needed]

"Day Books" were used to list every single transaction that took place during the day, and the list was totalled at the end of the day. These day books did not use the double entry system and were simply a way of recording the transactions immediately. Nowadays we have receipts for this purpose. Note that not every single transaction is entered into a T-account. Usually only the sum of transactions for the day is entered, so that each entry in the account has a different date.