The Semantics of Double-Entry Bookkeeping

The following post was written and contributed by Cornelis ("Kees") A. Los, PhD, Professor of Finance. Faculty of Management, The University of Lethbridge (Alberta, Canada).

Assets (A), Liabilities (L) and Equity (E) can each be debited and credited, but these traditional double-entry bookkeeping terms are used mirror-like in the traditional equation in order to maintain the balance equality.

These bookkeeping terms and their effect on the particular item in brackets (.), thanks to the T-accounts, are:

Asset debit (+) and asset credit (-)

Liability debit (-) and liability credit (+)

Equity debit (-) and equity credit (+)

For example, if I debit an asset by $50, the asset's value is increased by $50 and to maintain the balance I have to credit $50 to a liability (if I borrow to pay for the asset increase) or I have to credit equity by $50 (if, as an owner, I invest my own money in the asset), so that +$50 = +$50

Therefore, the accounting "problem" resides in the terms "debit" and "credit, which, in Accounting, have different meaning depending on which side of the "=" sign you are" and not in the accounting equation A=L+E. This should not come as a surprise, since every new student of double-entry bookkeeping confuses these terms "debit" and "credit," since they have different meaning, depending on which side of the accounting equation you are. That that is a "semantic problem" and "confusing," I agree with. Words with double meaning depending on which side you're on, provides an Orwellian taste. But that is not a mathematical or logical problem, since there is nothing wrong with the accounting equation or even with using liabilities or equity as negative assets. It is a semantic problem.

(Between cultures there are similar phenomena too: in the Western world white = happiness (e.g., the color of a wedding gown), but in Japan white = death. In the Western world black = death, but in Japan black = happiness. A Black belt conjures in the western world the image of a potential killer, in Japan a black belt conjures up the image of someone who protects and brings happiness to the farmers).

I prefer to stay as close as possible to the tradition of double-entry bookkeeping, without giving up logical rigor, so I prefer to write A-L-E = 0. You want to redefine the valuations of the symbols L and E and write A+L+E=0. In both cases, we talk about a balance equation. That is not confusing. What is confusing is when the same words have two, exactly opposite, meanings, like "debit" and "credit".