ORY OF 
 NO CREDIT 
 
THE LIBRARY 
 
 OF 
 
 THE UNIVERSITY 
 OF CALIFORNIA 
 
 HENRY RAND HATFIELD 
 MEMORIAL COLLECTION 
 
 PRESENTED BY 
 
 FRIENDS IN THE ACCOUNTING 
 PROFESSION 
 
THE THEORY OF 
 
 DEBIT AND CREDIT 
 
 IN ACCOUNTING 
 
 by 
 Robert Gardner McClung 
 
 Boston 
 
 Morgan, Mills and Company 
 1913 
 
Copyright, 1913, by 
 Kobert Gardner McClung 
 
 All Eights Reserved 
 for all countries 
 
 Published November 1913 
 
PREFACE 
 
 Every student of accounting experiences 
 difficulty in seeing any principle on which im- 
 personal accounts are debited and credited. 
 At the outset, he wonders why "Cash" 
 should be debited when money is received, 
 and credited when money is paid out; and, 
 as the other impersonal accounts are taken 
 up, his difficulty increases. Various ex- 
 planations for the debit and credit of im- 
 personal accounts have been given. None 
 of them ever seemed to the writer satisfac- 
 tory. After long and careful consideration 
 of the subject, he submits the explanation 
 contained in the following pages as the cor- 
 rect one. 
 
 R. G. M. 
 
 Boston, Aug. 6, 1913. 
 
 M513286 
 
THE THEORY OF DEBIT AND 
 
 CREDIT IN ACCOUNTING 
 THERE cannot be a debtor unless there is a 
 creditor, and there cannot be a creditor un- 
 less there is a debtor. The terms are cor- 
 relative; the one implies the other. An im- 
 personal thing cannot be either a debtor or 
 a creditor, except by a fiction. A thing, 
 however, may stand for a person who is a 
 debtor or a creditor. In other words, it 
 may represent him. 
 
 A. deposits one thousand dollars with me. 
 He is a creditor; I am a debtor. I open an 
 account in his name and credit him one 
 thousand dollars. To complete the record, 
 I might open an account in my name and 
 debit this account one thousand dollars. On 
 my books, however, there is no object in 
 opening the second account.* If A. is cred- 
 ited on my books, the implication is that I 
 am the debtor. The second account would 
 give me no additional information . If money 
 were the only thing by reason of which A. 
 could be credited, and with which I could be 
 charged, there would never be any object in 
 opening the second account.* 
 
 * Except to put the books in balance. 
 
Instead, however, of depositing one thou- 
 sand dollars with me, A. might have deliv- 
 ered to me, for safe keeping, a valuable 
 picture, worth one thousand dollars. Or, 
 again, he may deposit with me one thou- 
 sand dollars in money, and may also de- 
 liver to me, for safe keeping, a picture 
 worth one thousand dollars. Where I may 
 be charged with different things, there is an 
 advantage in showing on my records with 
 what I am charged. Therefore, after open- 
 ing an account in the name of A., and cred- 
 iting him one thousand dollars on account of 
 the money, and one thousand dollars on ac- 
 count of the value of the picture, I open two 
 additional accounts. One might be in my 
 name with the additional statement that it 
 was in the matter of (or related to) money. 
 The other might be in my name with the 
 additional statement that it was in the mat- 
 ter of the picture. It is unnecessary, how- 
 ever, to mention my name. It is sufficient, 
 if I call the one account "Cash," and the 
 other account " Picture." In the one case 
 it is understood that the account stands for 
 me in the matter of cash; in the other case 
 it is understood that the account stands for 
 me in the matter of the picture. The cash 
 
account represents me, and the picture ac- 
 count represents me. The cash account I 
 debit one thousand dollars, meaning that I 
 am debited in the matter of cash. The pic- 
 ture account I debit one thousand dollars, 
 meaning that I am debited in the matter of 
 the picture. 
 
 A. owes B. five hundred dollars, and asks 
 me to pay B. the five hundred dollars from 
 the one thousand dollars that I hold for 
 him, A. I therefore pay B. the five hun- 
 dred dollars. As to this five hundred dol- 
 lars, A., of course, is no longer my creditor. 
 To show this, I enter five hundred dollars 
 on the debit side of his account. This off- 
 sets his credit to that extent; or, to express 
 it differently, and to give a new use to an 
 old word, he is discredited to that extent. 
 I wish to show on my records, also, that I 
 am no longer charged with the five hun- 
 dred dollars which I have paid by A. 's direc- 
 tion to B., and therefore I credit the account 
 called "Cash," which represents me, five 
 hundred dollars. This credit shows on my 
 records that I am discharged, in the matter 
 of cash, to the extent of the payment. 
 
 Again, suppose A. wishes to convert his 
 picture into money, and requests me to sell 
 
the picture for him. I sell the picture to C. 
 for one thousand dollars. C. pays me the 
 money, and I deliver to C. the picture. No 
 longer am I charged with the picture. The 
 account called " Picture" I therefore credit 
 one thousand dollars, the sum for which I 
 sold it. I am, however, responsible to A. for 
 the one thousand dollars which I have re- 
 ceived for the picture. Therefore I charge 
 myself with this money, in the account 
 called "Cash." The nature of my respon- 
 sibility has changed. Whereas I was pre- 
 viously charged with a picture at its value 
 of one thousand dollars, now I am charged 
 with the cash for which it was sold. A. has 
 been already credited with the value of the 
 picture, and therefore it is not necessary to 
 credit his account again. A. 's account shows 
 a credit of fifteen hundred dollars, and the 
 cash account shows a debit of fifteen hun- 
 dred dollars. 
 
 A. wishes the money. Therefore I pay 
 the fifteen hundred dollars to A. , and debit 
 his account, and credit the cash account, 
 which represents me; and the transaction 
 is closed. 
 
 In the above discussion the words 
 " debtor " and " creditor " are used in their 
 
accounting sense. In accounting, the terms 
 " deb tor" and " creditor" may express the 
 legal relation of agent and principal, as well 
 as the legal relation of debtor and creditor. 
 From a legal point of view, it is possible, in 
 the above money transactions, to regard A. 
 as a principal and me as an agent, or A. as a 
 creditor and me as a debtor. In both events, 
 however, my accounts would be kept in the 
 same way; except that, if the relation be- 
 tween A. and me is that of principal and 
 agent, there might be a statement to that 
 effect. Both in the matter of the money 
 and in the matter of the picture, we will 
 regard the legal relation as that of principal 
 and agent. 
 
 Again, suppose E. delivers to me as his 
 agent a thousand dollars, and authorizes me 
 to borrow, on his behalf, a like sum of a 
 third person. On my books, I, in the name 
 of "Cash," am debited a thousand dollars, 
 and E. is credited a thousand dollars. In 
 the exercise of my authority, and on behalf 
 of E., I borrow a thousand dollars of F. On 
 account of this second transaction, I, in the 
 name of U 0ash," am debited a thousand 
 dollars, and F. is credited a thousand dol- 
 lars. The accounts that I have kept as agent 
 
now show that I am debited two thousand 
 dollars; that E., my principal, is credited a 
 thousand dollars; and that F., a legal credi- 
 tor, is credited a thousand dollars. 
 
 In all double-entry accounting, the ac- 
 counts are kept as if there were a principal 
 and an agent; although, at the same time, 
 there, also, may be, with a third person, a 
 relation of debtor and creditor. The prin- 
 cipal is sometimes called the proprietor, and 
 the agent the manager; and in mercantile 
 transactions this is the common nomencla- 
 ture. 
 
 The cash account and the picture account, 
 in the above examples, are but illustrations 
 of a large group of accounts called " prop- 
 erty accounts " (or " real accounts "). Each 
 of these property accounts, in theory at least, 
 stands for a person, who acts as an agent, 
 and is responsible to a principal for the prop- 
 erty described in the name of the account. 
 These accounts might be called agency or 
 managership accounts. 
 
 There is no difference in theory between 
 the cash account and other property ac- 
 counts; except that cash, being a standard 
 of value, is valued in terms of itself, while 
 other property is valued, not in terms of 
 
itself, but of cash. This difference in meth- 
 ods of valuation, however, does not affect 
 the principle of debit and credit. Cash be- 
 ing also a medium of exchange, the cash 
 account is put to certain uses that other 
 property accounts are not. 
 
 A different class of accounts represents, 
 not the agent, but the principal (or propri- 
 etor). In this class are the accounts called 
 " Capital" and " Surplus;" the various 
 " reserve accounts;" the account called 
 "Profit and Loss;" and the various sub- 
 sidiary profit and loss accounts such as 
 the " rent account," the " salary account," 
 the miscellaneous expense account com- 
 monly called " Expense," the "services ac- 
 count," and the account (under whatever 
 name) recording the differences between 
 the prices at which goods are bought and 
 the prices at which they are sold. By some 
 writers on the subject, who have seen the 
 true nature of the accounts in this class, 
 they are called "proprietorship accounts." 
 Any item charged or credited to any one of 
 the accounts in this class could have been 
 charged or credited directly to the proprie- 
 tor under his own name. The subsidiary 
 profit and loss accounts may, at first glance, 
 
seem far removed from the proprietor; but 
 the items charged or credited to these ac- 
 counts might just as well, as far as the the- 
 ory of accounting is concerned, be charged 
 or credited directly to the proprietor. They 
 are charged or credited, in the first place, 
 to special accounts bearing impersonal 
 names, simply to show, by means of classi- 
 fication, the sources of losses and gains. In 
 so far as the debits exceed the credits, these 
 accounts show sources of loss to the propri- 
 etor, and, in so far as the credits exceed 
 the debits, they show sources of gain to the 
 proprietor; but, whether they show losses 
 or gains, the accounts represent the propri- 
 etor.* 
 
 Still a third class of accounts represents, 
 not the agent (or manager), nor the princi- 
 pal (or proprietor), but third persons. The 
 important account in this class is < ' Bills 
 Payable." I buy one thousand bushels of 
 wheat of M. at one dollar a bushel. I can 
 pay M. one thousand dollars in cash; but, 
 
 * The term " nominal accounts " is frequently ap- 
 plied to the subsidiary profit and loss accounts ; but, 
 if the term is used at all, it might be well to extend 
 its use to all proprietorship accounts that do not bear 
 the name of the proprietor. 
 
 8 
 
if it is not convenient for me at the time to 
 pay him cash, and he is willing to extend 
 credit to me for, say, thirty days, I open 
 an account in his name on my books, and 
 credit him one thousand dollars. It may 
 be, however, that, although M. does not in- 
 sist upon my paying him the money at the 
 time of the transaction, he would like my 
 obligation to pay him one thousand dollars 
 to be in a more tangible form. Therefore 
 I give him a note, in which I promise to 
 pay him, or his order, one thousand dollars 
 thirty days after date. In this event, I do 
 not credit M. on my books, but I open an 
 account called ' < Bills Payable, " and I credit 
 this account one thousand dollars. This 
 account represents M. 
 
 A fourth class of accounts may be re- 
 garded as representing either the agent or 
 a third person, but primarily represents 
 the third person. The important account 
 in this class is " Bills Keceivable." I sell 
 five hundred bushels of the wheat I bought 
 from M. to N. at one dollar and twenty 
 cents a bushel, and N. gives me his note, 
 in which he promises to pay me, or my 
 order, six hundred dollars thirty days after 
 date. In this event, I do not open an 
 
 9 
 
account in the name of N. and debit it, but 
 I open an account called " Bills Receiva- 
 ble," and I debit this account. This ac- 
 count, called " Bills Receivable," represents 
 N. But this account may also be regarded 
 as representing the agent, because a bill re- 
 ceivable may be regarded as property. A 
 bill receivable may be regarded as property 
 either on account of its material character 
 or because, in a sense, any debt, due from 
 one person to another, is property of the 
 person to whom it is due. 
 
 On the " Assets " (or debit) side of a bal- 
 ance sheet, sometimes appears an item de- 
 scribed as ' ' Discount on Bonds " (to be 
 written off gradually). The amount of 
 this item has been charged to a discount 
 account, but, instead of being carried, at 
 the end of the year (or other period), at 
 once to the debit of " Profit and Loss," or 
 directly to the debit of the proprietor, it is 
 maintained on the books as a separate item, 
 and placed in the balance sheet. This item, 
 of course, represents the proprietor. 
 
 On the " Liabilities " (or credit) side of a 
 balance sheet, is sometimes found an item 
 described as " Accrued Depreciation." This 
 item has been taken from a negative prop- 
 
 10 
 
erty account, also called " Accrued Depre- 
 ciation," which account is^ in theory, only 
 the credit side (in whole or in part) of a 
 positive (or ordinary) property account. 
 Instead of being credited to the negative 
 property account, called " Accrued Depre- 
 ciation, " this item might have been credited 
 directly to the positive property account. 
 This item, of course, represents the mana- 
 ger. Depreciation, however, affects, not 
 only the manager, but also the proprietor. 
 At the same time that an account repre- 
 senting the manager is credited on account 
 of the depreciation, an account represent- 
 ing the proprietor is debited on account of 
 the same depreciation. The account rep- 
 resenting the proprietor may be called 
 "Profit and Loss," or " Depreciation, " or 
 any one of a large number of other names.* 
 
 * The item called in the text " Accrued Deprecia- 
 tion " (as well as the account from which it is taken) 
 is usually called " Reserve for Accrued Depreciation " 
 or ''Reserve for Depreciation;" but an allowance 
 for accrued depreciation (except so far as the allow- 
 ance is excessive) is not a true reserve. A true re- 
 serve represents the proprietor, while an allowance for 
 accrued depreciation (in so far as it is a credit) rep- 
 resents the manager. This item (and the account 
 
 11 
 
One class of transactions requires an ex- 
 planation; and that is, transactions with 
 third persons. One thousand dollars is bor- 
 rowed from a third person, whom we will 
 call X. X. is credited one thousand dollars, 
 and "Cash" is debited one thousand dol- 
 lars. Strictly, X. should be credited one 
 thousand dollars in his relation to the pro- 
 prietor, and the proprietor should be debited 
 one thousand dollars in his relation to X. ; 
 and then the proprietor should be credited 
 one thousand dollars in his relation to the 
 manager, and the manager, who is repre- 
 sented by < ' Cash, " should be debited one 
 thousand dollars in his relation to the pro- 
 prietor. In order to record this double 
 transaction, it would be necessary to have 
 two accounts in the name of the proprietor 
 
 from which it is taken) might properly be called " Al- 
 lowance for Accrued Depreciation " or " Allowance 
 for Depreciation " or simply " Depreciation." How- 
 ever, if, instead of charging the depreciation directly 
 to " Profit and Loss," a subsidiary profit and loss 
 account should be opened and charged with the depre- 
 ciation, this subsidiary profit and loss account would 
 naturally be called " Depreciation ; " and, of course, 
 it would not do to have two accounts each called 
 " Depreciation." 
 
 12 
 
one showing his relation to X. and the 
 other his relation to the manager. But, by 
 a fiction of accounting, there is a novation; 
 X. accepts the obligation of the manager, 
 represented by "Cash," and releases the 
 proprietor, and, in consideration of the as- 
 sumption by the manager of the obligation 
 to X., the proprietor releases the manager. 
 Of course, there is no such transaction, 
 either in fact or in law; but accounting 
 seeks to accomplish results with the least 
 expenditure of time and energy, the pro- 
 prietor's credit would be equal to his debit, 
 and the fictional novation satisfies the prac- 
 tical requirements of the situation. 
 
 Again, a thousand dollars is lent to a 
 third person, whom we will call Y. ' ' Cash " 
 is credited a thousand dollars, and Y. is deb- 
 ited a thousand dollars. Strictly, in this 
 case, the manager, who is represented by 
 " Cash," should be credited a thousand dol- 
 lars in his relation to the proprietor, and 
 the proprietor should be debited a thousand 
 dollars in his relation to the manager; and 
 then the proprietor should be credited a 
 thousand dollars in his relation to Y., and 
 Y. should be debited a thousand dollars in 
 his relation to the proprietor. But, in this 
 
 13 
 
case also, there is a fictional novation; the 
 manager accepts the obligation of Y., and 
 releases the proprietor, and, in considera- 
 tion of the assumption by Y. of the obli- 
 gation to the manager, the proprietor re- 
 leases Y. 
 
 Whether the system of accounting is 
 double-entry or not, the accounts are deb- 
 ited and credited in the same manner as if 
 it were. 
 
 There are many impersonal accounts 
 which I have not mentioned; but each one 
 of them represents a person the proprie- 
 tor, the manager, or some third person. 
 The so-called impersonal accounts are deb- 
 ited or credited because they represent 
 persons. 
 
 14 
 
INDEX 
 Accounting, system of, does not affect 
 
 principle of debit and credit, 14 
 Agent, 5, 6 
 
 Bills payable account, 8-9 
 Bills receivable account, 9-10 
 
 Capital account, 7 
 "Cash, "2 
 Cash account, 6-7 
 Creditor, 1, 4-5 
 
 Debtor, 1, 4-5 
 
 Debts, are property, 10 
 
 Depreciation account, 10-11, ll-12n. 
 
 " Discount on Bonds," 10 
 
 Discredit, 3 
 
 Double-entry accounting, 6 
 
 Expense account, 7 
 
 Impersonal accounts, debit and credit 
 
 of, 14 
 Impersonal thing, cannot be debtor or 
 
 creditor, 1 
 
 Manager, 6 
 Managership accounts, 6 
 
 Nominal accounts, 8 n. 
 Novation, fictional, 13, 14 
 
 15 
 
"Picture," 2 
 
 Principal, 5, 6 
 
 Profit and loss account, 7 
 
 Profit and loss accounts, subsidiary, 7, 8 n. 
 
 Property accounts, 6 
 
 Proprietor, 6 
 
 Proprietorship accounts, 7 
 
 Real accounts, 6 
 
 Rent account, 7 
 
 Representation, 1, 14 
 
 Reserve accounts, 7 
 
 Responsibility, change in nature of, 4 
 
 Salary account, 7 
 Services account, 7 
 Surplus account, 7 
 
 Third persons 
 
 Accounts representing, 8, 9 
 Transactions with, 12-14 
 
 16 
 
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YB 68802 
 
 M513286