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Debit
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Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental concepts in accounting, representing the two records that one party in a transaction makes on its records, transferring a money balance from one account to another, one representing a reduction of liability or increase in asset, and the other representing a balancing increase in liability or reduction of asset.
ts and credits are a system of notation used in accounting to keep track of money movements (transactions) into and out of an account.
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Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental concepts in accounting, representing the two records that one party in a transaction makes on its records, transferring a money balance from one account to another, one representing a reduction of liability or increase in asset, and the other representing a balancing increase in liability or reduction of asset.
Introduction
Debits and credits are a system of notation used in accounting to keep track of money movements (transactions) into and out of an account. Traditionally, an account's transactions are recorded in two columns of numbers: debits in the left hand column, credits in the right. Keeping the debits and credits in separate columns allows each to be recorded and totaled independently. The smaller of the two totals is then subtracted from the larger to give the account balance. An account may thus have a balance either the debit or credit side.
In double-entry bookkeeping assets and expense accounts, which represent the resources used by the business, are debit accounts. Their balance increases with entries made in the debit column and decreases with entries in the credit column. Liability, owner's equity and revenue or income accounts, which represent the source of funds for the business, are credit accounts. Their balance increases with entries in the credit column and decreases with entries in the debit column.
A "T" account showing debits on the left and credits on the right.
Origin of the terms debit and credit
The term debit comes from the Latin debitum which means "that which is owing" (the past participle of debere "to owe"). Debit is abbreviated to Dr (for debtor). The term credit comes from the Latin credere/credit meaning "to trust or believe"/"he trusts or believes" via the French credit and the Italian credito. Credit is abbreviated to Cr (for creditor). In bookkeeping, debit is defined as "an entry of a sum owing"; "side of an account (left-hand) on which such entries are made". Credit is defined as "the sum at a person's disposal in the books of a bank";"an entry on the credit [right-hand] side of an account".
The idea of income being a credit and an expense being a debit, which were opposites and balanced off against each other to determine profit or loss, is fairly straightforward, as is the tradition of always entering debits on the left and credits on the right of an account. However, as the double-entry bookkeeping system was expanded to cover assets and liabilities things became more complicated. Every transaction consists of a pair of matched opposites called a debit and credit, but they don't necessarily refer to simple concepts like income and debt which can be confusing. The debit is just the left-hand component and the credit the right-hand one.
Principles or Rules of Debit and Credit
Each transaction consists of debits and credits and for every transaction they must be equal.
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For Every Transaction
- Value of Debits = Value of Credits
This also means that in the accounts the total value debits will equal the total value of credits. You can check the arithmetical accuracy of the accounts by doing a trial balance and proving that total debits equal total credits.
The extended accounting equation must also balance:
- A + E = L + OE + R
- So Debit Accounts (A+E) = Credit Accounts (L+OE+R)
- Debits are on the left and increase a debit account and reduce a credit account.
- Credits are on the right and increase a credit account and decrease a debit account.
Examples
- when you pay rent with cash: you increase rent (expense) by debiting and decrease cash (asset) by crediting.
- when you receive cash for a sale: you increase cash (asset) by debiting and increase sales (revenue) by crediting.
- when you buy equipment(asset) with cash: you increase equip.(asset) by debiting and decrease cash (asset) by crediting.
- when you borrow cash with a loan: you increase cash (asset) by debiting and increase loan (liability) by crediting.
| Account | Debit | Credit |
|---|
| 1. | rent | 100 | | | | cash | | 100 | | | | | | | 2. | cash | 400 | | | | sale | | 400 | | | | | | | 3. | equip. | 500 | | | | cash | | 500 | | | | | | | 4. | cash | 1000 | | | | loan | | 1000 | | | | | |
All the account heads used in Accounting systems are classified under two types of Accounts i.e. Real Account and Nominal Account.
Real Account: Debit what comes in, Credit what goes out.
Nominal Account: Debit all expenses/losses, Credit all incomes/gains
An account for a building you own (an asset) could be thought of as representing how much the building owes you (or the entity, if you prefer) for future building services (shelter, etc.). In that sense, all accounts, even those pertaining to inanimate objects, could be thought of in the same way as "persons" .
Personal Account: Debit the Receiver/Sundry Debtor, Credit the Giver/Sundry Creditor.
See also
External links
- Explanation with Examples.
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