D – Accounting Glossary
Debit is an accounting and bookkeeping term that comes from the Latin word debere which means “to owe.” The opposite of a debit is a credit. Debit is abbreviated Dr while credit is abbreviated Cr. A debit can be either a positive or negative entry to an account depending on what type of account is being debited. Asset and expense accounts increase in value when debited, whereas liability, capital, and revenue accounts decrease in value when debited.
Debt is that which is owed. People or organisations often enter into agreements to borrow something. Both parties must agree on some standard of deferred payment, most usually a sum of money denominated as units of a currency, but sometimes a like good. For instance, one may borrow shares, in which case, one may pay for them later with the shares, plus a premium for the borrowing privilege, or the sum of money required to buy them in the market at that time. There are numerous types of debt obligations. They include loans, bonds, mortgages, promisary notes, and debentures.
A budget deficit occurs when an entity (often a government) spends more money than it takes in. The opposite is a budget surplus.
Depreciation is a decrease in the value of an asset, caused by wear and tear or by obsolescence. In accounting, the act of depreciating an asset is also supposed to create a reserve for the replacement of the asset. The use of depreciation affects a company’s (or an individual’s) financial statements, and, more importantly to them, their taxes.
A dividend is the distribution of profits to a company’s shareholders. The primary purpose of any business is to create profit for its owners, and the dividend is the most important way the business fulfills this mission. When a company earns a profit, some of this money is typically reinvested in the business and called retained earnings, and some of it can be paid to its shareholders as a dividend. Paying dividends reduces the amount of cash available to the business, but the distribution of profit to the owners is, after all, the purpose of the business.
Double-entry book-keeping is the standard accounting practice for recording financial transactions. It was invented by Luca Pacioli, a close friend of Leonardo da Vinci, in a 1494 footnote to a scientific paper. The system is based on the concept that a business can be described by a number of different variables or accounts, each describing an aspect of the business in monetary terms. Every transaction has a ‘dual effect’—increasing one aspect and decreasing another, in such a way that all of the different variables always sum to zero.