Debit and credit are the opposite sides of an accounting journal entry. When accrual accounting is applied, they are used to adjust the ending balances in the general ledger accounts.
Business transactions must be documented, which necessitates the creation of two accounts: debit and credit. These are the events that have a monetary influence on the financial system.
These accounting instruments, debit and credit, come into play while keeping track of this transaction. Accounting transactions have a significant impact on these two accounts.
Meanings of Debit and Credit
Debit:
Debit represents the left side of an accounting ledger. It signifies an increase in assets or expenses and a decrease in liabilities or equity. In simpler terms, when you make a debit entry, you're recording an action that either receives money or spends it. Debit entries are used for various transactions, such as when you withdraw cash from your bank account, purchase goods, or pay off a debt.
Credit:
Credit, on the other hand, is positioned on the right side of an accounting ledger. It represents an increase in liabilities, equity, or revenue and a decrease in assets or expenses. When you make a credit entry, you're recording an action that provides money or represents an income or increase in obligations.
7 Golden Rules of Debit and Credit
Debit and credit follow a set of rules in accounting, which provide a structured framework for recording financial transactions accurately. Given below we have provided the golden rules of Debit and Credit:
1. The Accounting Equation:
At the heart of debit and credit rules lies the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always remain in balance. When you make a transaction, you need to ensure that this equation continues to hold true.
2. Debit What Comes In, Credit What Goes Out:
In the world of accounting, we follow a general principle: "Debit what comes in, and credit what goes out." When you receive something valuable, like cash or assets, you record it as a debit. Conversely, when something valuable leaves, such as cash payments or assets sold, you record it as a credit.
3. Debit Left, Credit Right:
Imagine an imaginary line down the middle of an accounting ledger. Debit entries are made on the left side, and credit entries are made on the right side. This visual representation helps accountants maintain clarity and consistency in their record-keeping.
4. Debit Increases Assets and Expenses:
Debits are used to increase assets and expenses. When you purchase an asset or incur an expense, you make a debit entry. This reflects that your resources have either increased or been utilized.
5. Credit Increases Liabilities, Equity, and Revenue:
Credits are employed to increase liabilities, equity, and revenue. When you take on a liability, earn revenue, or make an owner's investment, you record it as a credit. This signifies an increase in your obligations or resources.
6. Opposite Actions Require Opposite Entries:
If you increase an asset, you must decrease another asset or increase a liability or equity account to balance the equation. Similarly, if you decrease a liability, equity, or revenue account, you must offset it by decreasing an asset or increasing another liability or equity account.
7. Debit and Credit Must Balance:
Every transaction you record should have equal debit and credit amounts. This ensures that the accounting equation remains balanced. If you debit one account by a certain amount, you must credit another account by the same amount.
Differences Between Debit and Credit
The differences between Debit and Credit determine how financial transactions are recorded and categorized. We have provided a clear comparison of both in the following table:
|
Aspect
|
Debit
|
Credit
|
|
Position on the Ledger
|
Left side
|
Right side
|
|
Effect on Assets
|
Increases assets
|
Decreases assets
|
|
Effect on Liabilities
|
Decreases liabilities
|
Increases liabilities
|
|
Effect on Equity
|
Decreases equity
|
Increases equity
|
|
Effect on Expenses
|
Increases expenses
|
Decreases expenses
|
|
Effect on Revenue
|
Decreases revenue
|
Increases revenue
|
|
Transaction Example
|
-
Cash payment (money goes out)
-
Purchase of an asset
-
Expense incurred
|
-
Cash receipt (money comes in)
-
Sale of an asset
-
Revenue earned
|
Debit and Credit Examples
Example 1: Cash Purchase of Office Supplies
Suppose a business purchases office supplies for ₹5,000 in cash:
|
Account
|
Debit (₹)
|
Credit (₹)
|
|
Office Supplies
|
5,000
|
|
|
Cash
|
|
5,000
|
Example 2: Loan Taken from Bank
Imagine a company secures a bank loan of ₹50,000:
|
Account
|
Debit (₹)
|
Credit (₹)
|
|
Cash
|
50,000
|
|
|
Bank Loan
|
|
50,000
|
Example 3: Sale of Products on Credit
Suppose a business sells goods to a customer on credit for ₹20,000:
|
Account
|
Debit (₹)
|
Credit (₹)
|
|
Accounts Receivable
|
20,000
|
|
|
Sales Revenue
|
|
20,000
|
Effects of Debit and Credit on Different Business Accounts
The effects we have provided below serve as the foundation for accurate accounting practices, ensuring that financial transactions are recorded and categorized correctly:
Debit:
Assets:
Increases the balance.
Expenses:
Increases the balance.
Drawings (Owner's Withdrawals):
Increases the balance.
Losses:
Increases the balance.
Liabilities:
Decreases the balance.
Revenue:
Decreases the balance.
Owner's Equity:
Decreases the balance.
Credit:
Assets:
Decreases the balance.
Expenses:
Decreases the balance.
Drawings (Owner's Withdrawals):
Decreases the balance.
Losses:
Decreases the balance.
Liabilities:
Increases the balance.
Owner's Equity:
Increases the balance.
Revenue:
Increases the balance.
Gains:
Increases the balance.
