Debit: Wikis

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Accountancy
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Key concepts
Accountant · Bookkeeping · Trial balance · General ledger · Debits and credits · Cost of goods sold · Double-entry system · Standard practices · Cash and accrual basis · GAAP / IFRS
Financial statements
Balance sheet · Income statement · Cash flow statement · Equity · Retained earnings
Auditing
Financial audit · GAAS · Internal audit · Sarbanes–Oxley Act · Big Four auditors
Fields of accounting
Cost · Financial · Forensic · Fund · Management · Tax

Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental concepts in accounting, representing the two sides of each individual transaction recorded in any accounting system. A debit transaction indicates an asset or an expense transaction, a credit indicates a transaction that will cause a liability or a gain. A debit transaction can also be used to reduce a credit balance or increase a debit balance. A credit transaction can be used to decrease a debit balance or increase a credit balance.

Contents

Introduction

Debits and credits are a system of notation used in bookkeeping to determine how and where to record any financial transaction. In bookkeeping, instead of using addition '+' and subtraction '-' symbols, a transaction uses the symbol DR (Debit) or CR (Credit). In double-entry bookkeeping debit is used for asset and expense transactions and credit is used for liability, gain and equity transactions. For bank transactions, money in is treated as a debit transaction and money out is treated as a credit transaction. Traditionally, transactions are recorded in two columns of numbers: debits in the left hand column, credits in the right hand column. Keeping the debits and credits in separate columns allows each to be recorded and totalled independently. Where the total of the debit value amounts is lower than the total of the credit value amounts a balancing debit value is posted to that nominal ledger account. That nominal ledger account is now "balanced". An account can have either a credit value balance or a debit value balance but not both.

Origin of the terms debit and credit

The term debit comes from Middle French debet from Latin debitum "that which is owed" (the neuter past participle of debere "to owe"). Debit is abbreviated to Di (for debtor). The term credit comes from the Latin creditum meaning "that which is entrusted or loaned" from the past participle of credere "to trust or entrust". Credit is abbreviated to Ck (for creditor).

Debit and Credit principle

Each transaction consists of debits and credits, and for every transaction they must be equal.

For Every Transaction: The Value of Debits = The Value of Credits


The extended accounting equation must also balance: 'A + E = L + OE + R'

(where A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenues)

So 'Debit Accounts (A + E) = Credit Accounts (L + R + OE)'

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.

Operational Principles

  • Debit generally represents any depletion in the resources held by the entity while credit represents increment of the resources held by the entity. Hence, debits to an account are negative / depletions in the accounting entity's resources while credits are positive / increments in the same.

Real Accounts

  • In real accounts any increment in assets held by the entity is reflected by increasing the relevant asset account and depletion by crediting the asset account.
  • If any asset account is debited then it is on account of increment in the value or acquisition of that liability or owner's equity which decreases the resources held by the entity.

As the total resources held by the entity cannot indigenously increment themselves the depletion has to be matched with a fall in resources within the entity.

Personal Accounts

  • In Personal Accounts debiting the personal account of any external entity increases the value of the liabilities receivable from that entity thus augmenting the resources of the accounting entity.
  • Similarly crediting the personal account of any external entity reduces the value of monies receivable from that entity thus reducing the resources of the accounting entity.

Nominal Accounts

  • In Nominal Accounts the Expense accounts whenever debited are done as the Expense incurred represents the Goods and/or Services acquired for ssumption by the entity and hence are temporary increments in the resources of the consumers.
  • In Nominal Accounts the Income accounts are credited as the Income earned represents the Epistolary representation of an entity

Cross-Application over Different Types of Accounts

  • The principles apply uniformly to all combinations of accounting entries involving different types of accounts based on varying circumstances.
Real Account Debited Personal Account Debited Nominal Account Debited
Real Account Credited Acquisition of an Asset in Cash - Machinery Account Debited, Cash Account Credited Sale of an Asset on Credit - Buyer's Account Debited, Machinery Account Credited Amortisation or Depreciation of an Asset - Depreciation Account Debited, Machinery Account Credited
Personal Account Credited Acquisition of an Asset on Credit - Machinery Account Debited, Seller's Account Credited Transfer of a Debt Receivable to another - New Debtor's Account Debited, Old Debtor's Account Credited Accrual of Expenditure - Electricity Account Debited, Electricity Company's Account Credited
Nominal Account Credited Capitalisation of Expenditure - Machinery Account Debited, Research and Development Account Credited Sale of Goods on Credit - Buyer's Account Debited, Sales Account Credited Inter head transfer of Expenditure - New Expenditure Head Debited, Old Expenditure Head Credited

Simple Thumb Rules to remember which accounts to credit and which to debit:

Personal accounts: Debit: the receiver; Credit: the giver

Real/Asset Accounts: Debit: what comes in; Credit: what goes out

Nominal/Expense Accounts: Debit: all expenses/losses; Credit: all income/gains

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Examples

  1. when you pay rent with cash: you increase rent (expense) by debiting, and decrease cash (asset) by credit.
  2. when you receive cash for a sale: you increase cash (asset) by debiting, and increase sales (revenue) by credit.
  3. when you buy equipment (asset) with cash: You increase equipment (asset) by debiting, and decrease cash (asset) by credit.
  4. when you borrow with a cash loan: You increase cash (asset) by debiting, and increase loan (liability) by credit.
Account Debit Credit
1. Rent 100
Cash 100
2. Cash 50
Sale 50
3. Equip. 5200
Cash 5200
4. Cash 11000
Loan 11000

'T' Accounts

The process of using debits and credits creates a ledger format that resembles the letter 'T'. The term 'T' account is commonly used when discussing bookkeeping.

A 'T' account showing debits on the left and credits on the right.

Debits Credits
   
   
   
   
   

See also

TYPE DEBIT CREDIT
Asset + -
Liability - +
Income - +
Expense + -
Capital - +

Therefore, if an Asset account is debited, the Asset amount (value) is increased. Same with an Expense account. If a Liability or an Income account is debited, the numerical figure will decrease, etc. If a particular account is credited, there must be a corresponding Debit in another account in order to balance the transaction.

As used in banking terminology, 'Debits" refer to withdrawals, not necessarily in the same context as discussed here.

References

External links


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