In this article, we will learn in-depth about debit and credit in accounting, including its definition, examples, rules, differences, and much more.
What is Debit? And what is Credit?
There are two or more accounts in every transaction in accounting. One is Debit and another one is Credit. Now we try to understand what is Debit? And what is Credit?
The term debit shows the left side of the account and the credit shows the right. They are usually shortened as Dr. for debit and Cr. For credit.
It does not mean, as is generally thought, increase or decrease. In the recording process, we frequently use the terms debit and credit to describe where accounts are entered.
For example, debiting an account is called the act of entering an amount on the left side of an account. Crediting the account is an entry on the right side.
When comparing two sides, a debit balance is displayed in an account if the total amounts of the debit exceed the credits. If the amounts of the credit exceed the debits, the account will show a credit balance.
If we analyze the golden rules of accounting we will find the definition of debit and credit.
- Debit the receiver
- Debit What Comes in
- Debit all expenses and losses
- Debit denotes the Left side of the account.
- Credit the giver
- Credit what goes out
- Credit all income and gains
- Credit denotes the right side of the account.
Example of Debit and Credit
For example, a cash receipt of $25,000 (in Orange) is debited to Cash and a cash payment of $12,000 (in yellow) is credited to Cash.
Having increases on one side and decreases on the other reduces recording errors and helps to determine the totals of each side of the account as well as the balance of the account. The balance is determined by netting the two sides (subtracting one amount from the other).
The balance of the account, a debit of $11,100, indicates that Tyra had an increase of 11,100 more than the decrease in cash. In other words, Tyra started with a zero balance and now has $11,100 in her cash account.
The Rules for Identifying Debit and Credit
It is described earlier that in the double-entry system total debit amount is equal to the total credit amount. This concept is the base of the accounting equation. The primary elements of the accounting equation are assets, Liabilities, and Equity.
Therefore, it can be said that we see the following types of accounts in business:
- Income and
Method of calculating debit and credit for different accounts described below:
Due, to transactions, assets may increase or decrease. For example, the purchase of a Delivery van increases assets and selling the same decreases assets. An increase of an asset is debit while a decrease of the same is credit.
Like assets, liability can also be increased or decreased. For example, taking loans from banks increases liability while paying the installment of it decreases. The relation of liability is opposite to asset. Therefore, the increase in liability is credit while a decrease of the same is debit.
The owner brings in capital to start the business. The equity of the owner increases here. Again, the owner’s equity decreases if the owner withdraws cash from the business. The equity of the owner is a kind of business liability. Because the owner and the business have separate identities according to the principle of accounting.
Therefore, if the owner’s equity increases, like liability, it is credit, but while decreases to be debit.
4. Revenues or Income:
A business’s only goal is to earn a profit. Profit is actually the revenue portion, which is more than the expenses. We can therefore say that revenue increases the owner’s equity. Therefore, credit is an increase in revenue, while debit is a decrease of the same.
Expense is opposite to revenue since revenue increases owner’s equity, so the increase of expense is debit, and the decrease of the same is credit.
Summary of Debit and Credit Rules
Difference between Debit and Credit
The difference between debit and credit is as follows:
|1||The receiver of the account is called Debit||The giver of the account is called Credit|
|2||Debit means what comes in||Credit means what goes out|
|3||All expenses and losses are Debit||All income and gains are Credit|
|4||Debit denotes the left side of the account.||Credit denotes the right side of the account.|
|5||A brief form of Debit is Dr.||A brief form of Credit is Cr.|
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