The accounting system has been vigorously using the terms “debit” and “credit” for decades. Debit and credit are crucial to the accounting system most entities use today, i.e. the double-entry bookkeeping system. Below we have introduced debit and credit in accounting as simple as possible.
Accounting is a method of organizing the financial data of a business by sorting its transactions into records. These records are known as accounts or books of accounts. There are different accounts to separately record every asset, liability, revenue, expense, and equity so as to determine the changes and the end balance of the business for a period of time. These accounts are known as charts of accounts and based on the business size the length of the list may vary. Charts of accounts list balance sheet accounts first and then the income statement accounts. A business can accordingly tailor its chart of accounts as per its requirements.
The following are the features of an account:
- It can be credited and debited
- It has an increase column and a decrease column
- It has a debit column (left side) and a credit column (right side)
- It is either a balance sheet account or an income statement account
- It falls under a type and can be classified as an asset, liability, equity, revenue, expense, or dividend
- It has an account for normal balance which usually is a debit or a credit balance.
The double-entry bookkeeping system is the most common accounting method used today. It records every transaction made by the business at least in two accounts; debit and credit. The entries made in the debit account will be on the left side and those made in credit account will be on the right side. This means that no matter what transaction is made by the business, it will be recorded in both the debit column and the credit column.
If an entry is made in one account of an addition in the account, then an entry will have to be made in the other account too for a deduction from that account. For example, if a business purchases furniture worth Rs. 10,000, then its asset account will be debited with furniture and its cash account will be credited with Rs. 10,000 for the same. Sometimes, there may be more than two accounts which may be affected by a business transaction.
The foremost thing to do after making a transaction is identifying the accounts which are affected by it. Upon identifying two or more accounts, at least one account of those will be debited and one will be credited. In order to debit (dr.) an account, the entry of the amount is to be made on the left hand side of the accounting book. In order to credit (cr.) an account, the entry of the amount is to be made on the right hand side of the accounting book.
Usually, the accounts which are increased with debit are asset, loss, and expense accounts. And the accounts which are generally increased with credit are stockholder’s equity, liability, gain, income, and revenue accounts. When an account is increased with debit, it is decreased with credit, and vice-versa.
A debit is an entry made on the left side of a journal or ledger which increases an asset and expense, and decreases a liability, revenue, and capital. A credit is an entry made on the right side of a journal or ledger which increases a liability, revenue, and capital and decreases an asset and expense.
The normal accounts which usually have a debit balance are asset and expense accounts. The normal accounts which usually have a credit balance are liability, revenue, and owner’s equity accounts.
The following table summarizes the rules of debit and credit for different accounts:
|Account||Debit||Credit||Normal Account Balance|
Therefore, Assets + Expenses + Dividends Paid = Liabilities + Revenue + Owner’s Equity
i.e. Normal Debit Balance Accounts = Normal Credit Balance Accounts.