Accounting Debit & Credit terms

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.

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 and gains 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 the Latin debitum which means "that which is owing" (the past participle of debere "to owe"). Debit is abbreviated to Dr (for debitor). The term credit comes from the Latin credere/credit meaning "to trust or believe" / "he trusts or believes" via the French credit and the Italian credito. Credit is abbreviated to Cr (for creditor)

Principles or Rules of Debit and Credit

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

' For Every Transaction: ' 'the Value of Debits = the Value of Credits'

This also means that the accounts with debits balances will equal the total value of accounts with credit balances. You can check the arithmetical accuracy of the accounts by doing a trial balance and proving that total debits equal total 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) = Accounts Credit (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.

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.

'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.