What Is The Difference Between Debit And Credit In Accounting?
In fact, there is no proper definition of Debit And Credit. But, you can use these two Accounting Terms to show Left or Right Sides of the Accounts
involved in the Business Transactions. Debit is for left side and credit is for right side of a T-Account. For recording transactions to concerned ledger' accounts, there are Debit And Credit Rules. It is also important to note that both Debit and Credit Sides’ Balances of a t-account must be Matched, According To Double Entry System that says “For every
Debit, there must be a Credit with Equal amount”. Due to this Double Entry System, both sides of Accounting Equation must be equal otherwise Accounting Records does not show true and fair view of Financial Statements
of The Business to the Users of Financial Statements.
There are five (5) Types of Accounts or Pillars of Accounting:
Assets
Assets are Current Assets And Non Current Assets also known as Fixed Assets. The Normal Or Favourable Balance for Asset is Debit but Unfavourable or Negative Balance is Credit. We Debit Assets When
these increase and Credit and when decrease.
For Example, Cash Received From Mr. A (Accounts Receivable) For Goods Sold Worth Rs. 40000.
The above is the Business Transaction and it involves two Accounts. One is Accounts Receivable which is a Current Asset while other is Cash which is also a Current Asset that is received from our Customer, Mr. A. As Mr. A (Accounts Receivable) is decreasing by Rs. 40000 so we Credit it, while Cash is increasing
by Rs. 40000, so we Debit it. The following Accounting Journal Entry is passed in the book of Company’ book as shown below:
Cash a/c 40000
Mr. A ( Accounts Receivable)
(Cash Received From Our Customer, Mr. A For Goods Sold on Account)
Assets are transferred to Balance Sheet on Asset Side and Categorized as Current Assets And Non Current Assets or Fixed Assets according to Accounting Principles.
Liabilities
Liabilities are Current Liabilities And Non Current Liabilities also known as Long-Term Liabilities. The Normal, Natural or Favourable Balance for Liabilities is Credit but Unfavourable or Negative Balance is Debit.
We Credit Liabilities when these increase and Debit when decrease.
For Example: Cash Paid to Mr. A (Accounts Payable) for the purchased goods worth Rs. 30000 is a Business Transaction. There are two accounts involved in in this business transaction.
One is Accounts Payable And Other One is Cash. Accounts Payable is the Current Liability which is decreasing as we are making the payments for the goods purchased, so we debit it as Accounts Payable is the Current Liability. On the
Other hand, Cash is the Current Asset which is also decreasing as we are making payments in the form of cash to our Accounts Payable / Creditor, we Credit Cash, The following Accounting Journal Entry is Passed in the book
of Business:
Mr. A (Accounts Payable) 30000
Cash a/c 3000
(Paid Cash To Mr. A For the Goods Purchased on Account)
Liabilities are transferred to Balance Sheet Under Liabilities Section of Liabilities & Equity Side and classified as Current Liabilities and Non Current Liabilities or Long-Term
Liabilities according to Accounting Principles.
Capital or Owner’s Equity or Equity
Owner Equity is the amount of money or goods invested in the business to start or during the business. It is also called Capital in case of Sole Proprietorship. Owners’ Equity or
simply Equity is the rights of owners against the assets of the company. The Normal or Favourable Balance is Credit while Unfavourable or Negative Balance is Debit. We Credit Owner’s Equity when it increases and Debit
when decreases.
Capital or Owner’s Equity is transferred to Balance Sheet Under Equity Section of Liabilities & Equity Side.
Income Or Revenues
Favourable or Normal or Natural Balance for Income or Revenues is Credit while Unfavourable or Negative Balance is Debit. We Credit Income and Revenues when these increase and Debit when
these decrease.
For Example Fees Received From Mr. A Customer Rs. 50000 against the services delivered is a Business Transaction. There are two types of accounts involved in it. One is Fees Received
that is a Revenue while Other one is Cash which is a Current Asset. As the business is receiving the fees, so it is increasing and we credit revenues when these increase. Following Accounting Journal Entry is passed in the
book of Company’s Journal:
Cash a/c 50000
Fees Received a/c 50000
(Fees Received From Mr. A For Cash Rs. 50000)
Expenses
The Normal, Natural or Favourable Balance For Expenses is Debit while Unfavourable or Negative Balance is Credit. We debit Expenses when these increase but we Credit when these decrease.
For Example, Salary paid to employee for Rs. 500000 for the Month is a Business Transaction and there are two types of accounts involved in it. One is Salary (expense) that is increasing
by Rs. 50000 as the company is paying to its employee. Other account is Cash that is decreasing by Rs. 50000 as the company is paying to the employee so it is the outflow of cash for the business. We debit Salary as it increases
while we credit Cash as it decreases from the point of business. Following Accounting Journal Entry is passed in the Journal of Company’s business:
Salary a/c 50000
Cash a/c 50000
(Paid Salary To Employee Rs. 50000 During The Month)
Expenses are closed at the end of Accounting Period as these have no balances so these are transferred to Income Statement or Profit And Loss Account.
So from the above study, we can say that Debit and Credit are used to show Left or Right Side of the accounts involved in any Business Transactions.
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