On 5/4/2024 10:53 PM, flywire wrote:
David, the guide even warns that accounting debits and credits are
used contrary to the way most people understand them. The average
punter will be wrong, and if they get it right the next punter will
likely bet they are wrong.
Yes, depends on perspective, your point of view or the bank's.
But also and explaining where YOUR point of view comes from (the origin
of the terms) think of who in say 1200 CE would be needing to keep
books. What sort of business would you be in? A moneylender, of course.
And keep in mind that in 1200 in Europe, if literate, probably Latin not
a strange language (especially not when dealing across multiple local
languages).
Debit comes from "he owes" (me). In other words, your assets are debts
owed to you as well as cash on hand available to be loaned out. Thus the
money you have on deposit at some bank is a debit because the bank owes
you that money.
Credit comes from "he trusts" (me). In other words, your liabilities.
Money you owe somebody else that they are trusting you can pay back.
It's why on the statement from the bank your account balance is a credit
(you are trusting the bank will give you this money of you ask for it)
but in your books a debit because the bank owes this money to you.
Initially (way back then) there were no special accounts of type
"income" and "expense" so the other side of a transaction we would call
income or expense was equity. Immediately entered against equity. That
made it easy to see at any moment what to see what total equity was but
hard to look up the totals for any particular expense. Had to do work to
answer questions like "how much was our interest income last month?"
(remember, we are moneylenders). So a couple hundred years ago (I don;t
know exactly when) somebody got the bright idea to have TEMPORARY
accounts of type "income" and "expense" of fundamental type "equity".
Instead of the other side of the transactions immediately being main
equity use these "temporarily" and only every so often transfer to main
equity through a process known as "close thew books" with this process,
along the way, creating a report called "profit and loss" << originally
this was another temporary account, closed to equity by the net profit
or loss amount >>
BTW, a moneylender WOULD be wanting to have liabilities. These would
have come into being by exchange with another moneylender in some other
town/country. These documents were useful in TRADE, serving as a way of
transporting money without the risk of bandits stealing the gold or
silver money on the way. You are a moneylender in place A. A merchant
planning to travel to B might come to you and ask "Do you have a debt
document from a moneylender in B?" If you did, you could sell him that
debt (endorse it over to him) collecting a fee for the service. He then
could travel to B and present it there for payment. Useless for a bandit
to steal as it wasn't made out "pay to the bearer" but "pay to some
specific person" (the merchant).
Note something here. If two banks are exchanging these IOU's no silver
or gold has changed hands. Who says that the silver or gold has to
actually exist? In other words, these banks have created money and all
will be well only as long as they have enough gold and silver on hand to
pay out when any of these IOU's are presented. Does the term "he trusts"
make more sense now? There was no FDIC guaranteeing the deposits. That
is a very recent change. A hundred years ago you WERE trusting that the
bank could give you back what you had on deposit there.
Michael D Novack
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