In recent years, many business houses have come to use the "three-column balance" account form that is here given. When this is used the balance of the account is a continuous record carried in the • treme right-hand column. Whenever a record of a customer's purchase is made in the account, it is added to the previous balance against that customer. Whenever he makes a payment, that payment is de ducted from the balance at the time it is entered in the payment column. Thus no time is lost in com puting the balance when reference is made to the ac count and, what is equally important, the computa tion is more likely to be correct since it is not hurriedly made.
5. Classifying information in the account.—In order that all the information regarding each transac tion might be included in these accounts, the date, a brief description of the transaction, and the amount were entered, each in a separate column. The check ing column was used to prove the accuracy of the transfers from the shopkeeper's diary to the account itself. By numbering the pages of his diary and his ledger the shopkeeper could cross-reference each transaction. He would enter beside the record of the transaction in his diary, the page number of the account in the ledger. He would also enter in the ledger account the page number of the diary from which the transfer was made.
If a dispute arose in regard to an account, he could trace each entry back to the original record in his diary where full details could be obtained. At the same time, this check in his diary showed him what transactions had been transferred. Therefore, when in spare moments, he transferred further transactions he was in no danger of omitting any, or recording some twice in his ledger. He need only begin with the first unchecked item.
6. Recording purchases on account.—When the merchant began selling on credit to his customers, he soon found it necessary, because he often lacked. ready cash, to make his own purchases on credit. A record of such purchases and of payments to his creditors (people to whom he owed money, or the people whose customer he was) naturally became necessary. These records were first entered monthly in the diary or journal with the record of the merchant's sales. But the confusion that resulted soon made it neces sary for him to keep separate records of his purchases and his sales.
Since the indebtedness of the customer to the busi ness was recorded on the left-hand side of the ac count, it became natural, for the sake of contra-dis tinction, to indicate a debt payable by entering it on the right-hand side of the creditor's account. For the
same reason, since the customer's payment was writ ten on the right-hand side of his account—i.e., set against the record of sales charged against him—so a payment to a creditor was recorded on the left-hand side of his account, in order that it might be dis tinguished from the purchases made from him and previously recorded on the right-hand side of the account.
7. Position of debits and credits.—As a result of arbitrary practice the left-hand side of the customer's account is known as the "debit" side, from the Latin "debit," meaning "he owes." The right-hand side of the creditor's account is called the "credit" side, from the Latin "credit," meaning "he trusts," or "he has faith." When a customer pays $10 of. his debt, for example, he may in a certain sense be said to trust the business. A payment on his debt affects their relations the same as if the vendor had purchased something from his customer with the understanding that this purchase should constitute a reduction in the amount due him. In the account of the debtor the creditor records such payments as a reduction in the former's indebtedness; he records the payment on the right-hand side because the debtor trusts the creditor with money to apply on his debt.
As soon as a credit system was instituted, it be came necessary to make a record of every transaction which affected an account, or which either vendor or purchaser wished to have recorded. Each separate record of a transaction came to be known as an entry, and when the record was transferred to the ledger account the term entry was still applied.
Since the left-hand side of an account known as the debit side, entries made on that side were called debits or charges. For a similar reason, entries on the right-hand side were called credits, since that was the credit side of the account. The course of a com plete entry for a sale of goods, then, was (1) a record of the sale in the diary, (2) the transfer of this record to the purchaser's account, (3) the entry of date, ex planation, number of the diary page, and amount in the ledger account, and (4) a record opposite the memorandum in the diary, showing the ledger page to which the transaction was posted.