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Debit and Credit are two terms which is used when business transactions are recorded in financial statements. Business transactions are evens which have a monetary impact and are the essential part of a firm in its day-to-day operations. A firm will record all these monetary transactions in two columns viz debit and credit. In general terms we say Debit is what comes in and Credit is what goes out.
The term debit is derived from Latin word debitum (What is due) and credit derived from Latin word creditum (something entrusted to another or a loan). Debit is an accounting entry that either increases an asset or decreases a liability. On the other hand, credit is an accounting entry which either increases a liability or decreases an asset.
Usage of Debit and Credit
Debits and credits are used to analyse the incoming and outgoing cash in a business account. In simple terms, a debit is cash going out of the account, and a credit is cash coming in. Most of the businesses use a double-entry book-keeping system for accounts.
In a Business Transaction there has to be minimum of two accounts. One is debit and other is credit. For example, if we buy a furniture the cash goes out and an asset comes in. So, the statement will be Cash a/c Debited, Furniture a/c credited. Debit and credit are used in Journal and Ledger entries, which are the basic financial statements pave way to the creation of final accounts.
Debit and Credit Accounts
There is double entry book keeping for every transaction. i.e., two accounts are reflected for every transaction. One is debit and the other is debit.
When it comes to bookkeeping as we said earlier there are minimum two accounts. We also separate all transactions to each account i.e., Cash transaction are recorded under cash a/c, Assets in Assets a/c etc. For that we use 5 common accounts. They are:
- Assets: These are resources owned by the firm which can be converted into cash. (Land, Vehicle, Furniture etc.)
- Expenses: These are the costs that occur during business transactions
- Liabilities: These are cash owed to another person or firm.
- Equity: Assets – Liability
- Revenue: Cash earned from sale
Debit and Credit Chart
Let us see a basic format of a Journal Entry
Example of Debit and Credit
To understand it better let us see some examples, If a company sells a product of Rs.500 to customer in cash, the revenue account will increase 500 Rs and the entry will be Cash a/c debited and Revenue a/c credited.
Some other examples:
- Starting business with cash – Cash Debit, Capital Credit
- Sell product on credit – Accounts Receivable debit, Revenue Credit
- Sale for cash – Cash Debit, Revenue Credit
- Take a loan – Cash Debit, Loans Payable Credit
Key Points to remember
- Debit Increases as Credit Decreases
- Record on the left side of the Journal
- Debits increases assets and Expense accounts
- Debits decreases liability, equity and Revenue accounts
- Credits increases as Debit increases
- Record on the left side of the journal
- Credits Increases Liability, Equity and Revenue accounts
- Credit decreases Assets and Expense accounts
The above points will make you understand about Debit and Credit. These are bookkeeping entries that balance each other out. Every transaction consists of two items of the same value. Exchange of these items can be considered as a transaction. Debits add a positive number and Credit adds a negative number (Negative number is not used in actual journal entry). Debit can be seen in the left side of the journal and Credit can be seen in right side of the journal.