If you’re even slightly familiar with the world of accounting and finance, you’ve probably heard the phrases “in the red” and “in the black” before. Even if you are not in finance, you may have heard the terms anyway—they have become a part of our everyday speech and they are often used in common conversation.
For those of you not familiar with the phrases, I’ll briefly explain. The phrase “in the black” refers to being financially solvent or profitable, or sometimes more generally, just not in debt. A business that is “in the black” is usually making a profit or, at the very least, making enough to get by without having to worry about going bankrupt. Conversely, the phrase, “in the red” means to be in debt, running a deficit, or generally just not making money—being cash negative. Although cash flow cycles for businesses and people change from year to year, a business that is “in the red” for several years in a row without a plan to get out of debt often fail. Of course, the phrases aren’t always used consistently, and there are always exceptions to the rule, but in general, being “in the black” is a positive thing, and being “in the red” is usually considered to be a negative thing.
So, now that you know what both of these phrases mean, you may be wondering where the terms came from or what their origins are? After all, there aren’t really any other fields in which these colors (black and red) are used to indicate positive and negative. So if you are guessing that these color indicators are somewhat unique to the world of finance, you would be correct.
To understand where these phrases come from, we have to go back to the days before accounting was done on computers. Before computers, accountants did everything by hand and with pen and paper. In order to help them differentiate between deposits and debits, they started using different color ink for each. Because black and red ink were two readily available colors, they were chosen for the purpose. Though it’s only speculation, some say that red was chosen to denote debits/losses/debts because red is considered a harsh color and can catch one’s attention. It also subtly reinforces the idea of negativity or something “bad.” They wanted to make debts stand out and catch people’s attention. It’s the same reason that teachers often correct homework and quizzes and tests with red pens—it grabs a student’s attention and lets them focus on what they did wrong so, hopefully, they can learn from their mistake and correct the mistake on the next test or quiz or homework assignment.
And now that everything is done on computers, the history of the phrases has still stuck around. In many cases, they really are meaningless. Most software now uses parentheses to indicate a negative number or a debit. Sometimes, they also simply put a minus sign before a number or even have a separate column in a spreadsheet for debits. It is, however, interesting to note that some computer programs still do use red type for debts and debits—a nod to the history of accounting. Again, there is really no practical purpose for this, but it fits with the history of accounting.
As mentioned earlier, businesses and people too (in their personal finances) often go through cycles of “being in the black” and “being in the red.” Maybe you had an exceptionally good year at work or in your line of business and you have a year where you are really making good money. Maybe you inherited some money and it puts you in a good place for the short term, but it’s not money you can count on as reoccurring and consistent income. These would be scenarios where you would be “in the black” for a period of time, but maybe not consistently year to year.
On the other hand, maybe it’s a large but necessary purchase that puts you “in the red” for a brief period of time. The goal, however, should be that running deficits or being heavily indebted should not be standard operating mode. If you have to run in debt, it should be briefly and for a purpose with a specific plan to get back into “the black.” Many times businesses or people can fall into a pattern of consistently running in “the red” without a plan or any practical way of turning things around.
This may be a point where one needs to consider the option of bankruptcy. Bankruptcy laws are created to protect people and give them a way to turn around their finances. The expert Milwaukee bankruptcy lawyers at Burr Law Office know the laws and can help you answer your questions, and explore your options. Contact them today to see what options are available.