debit-vs-credit

Debit vs Credit | The Crucial War Between Two Accounting Terms

Debits and credits are the accounting terms that play an essential role in bookkeeping and accounting for double-entry.

Debits vs.Credits : what is the main difference in it? Many people don’t know the difference. Every transaction requires debit and credit entry. Debit and credit are used in bookkeeping to book the balance of a company.

Do you know when to debit or credit an account?

This blog will give you all the essential information about debit and credit terms.

Sr. no.AccountWhen to debitWhen to credit
1.Bank accounts and cashWhen a customer is paying for the product or serviceWhen we pay the bills
2.Account receivableIn the case when we use credit for the saleWhen the payment made by customer
3.Expense accountsWhen we purchase something or pay the billWhen we receive the refund.
4.Accounts payableWhen we pay the billEntering the bill for further(future) payment
5.RevenueWhen we take back the product (returned) or discount is offered.When we sell something.

Debits boosted assets and expense accounts and dropped the liabilities and revenue account. On the contrary, the credit increases the revenue account and liabilities with decreased assets and expense accounts.

See also  Top 10 Types of Financial Models : A Student Must Know

Meaning of debit vs credit

In brief, when the money comes into an account, we use debit to record it, and when the money goes out from an account, we use credit for the recording. Both the terms debit(Dr) and credit(Cr) are taken from Latin words “debitum’ and “creditum’, which mean “payment” and “loan,” respectively. A jump to the shareholder’s equity is a credit donated by CR, and a drop in liabilities is a debit presented by DR.

On a company’s balance sheet, we state each debit and credit in two places using the double-entry system.

Debit- comes in

Credit– goes out

Basic template of debit and credit in a balance sheet.

DateAccountDebitCredit
31-05-2021Mr. KapoorRs 5,00,000 lakh
ABC corporationRs 5,00,000 lakh

Difference between debit vs. credit

In order to balance the bookkeeping entries, we use debit and credit entries. In other words, every transaction should be interchanged for something of the exact equal value. Debit and credit make sure that you are stick to the accounting equation-

See also  Top 17 Basic Accounting Terms to Know by the Students

Assets= Liabilities + Equity

We use two accounts, one for debit and one for credit, to record in double-entry accounting. Debit is represented on the left side, whereas credit on the right side of the entry. And to ensure balancing, both debit and credit should always be equal.

Suppose we have to record a rupees 50,000 payment received on account of a company (ABC) from a user/customer (Mr. Singla) as on the date 15-03-2020, the entry for this would be like-

DateAccountDebitCredit
15-03-2020CashRs. 50,000
15-03-2020Accounts receivableRs. 50,000

In this entry cash is debited(decreased) and accounts receivable is credited(increased).

DebitCredit
It represents an increased asset account.Credit represents a decreased asset account.
It boosts the expense account.It drops the expense account.
Debit is responsible for revenue decrease.Credit makes the revenue increase.
Debit lessens the liability account and equity account.It enhances the liability account and equity account.
Represented on the left side of the entry.Credit is represented on the right side of the entry.

Also Read

See also  Top 7 Interesting Uses of Accounting That Business Students Must Know

How do we use debit vs. credit?

We use debit and credit to record a company’s transaction. Here income and expenses are classified by a chart of accountants. We will discuss about five primary accounts below-

Account of Asset

Assets are something that you own for your business and gives you future benefits such as-

  • Cash
  • Inventory
  • Accounts receivable
  • Prepaid Expenses
  • Property(computer furniture) and tools
  • Transport vehicles

Expense Account

Expenses are referred to as cost of doing business or charges related to the regular operations of a business-like-

  • Advertisements
  • Utilities
  • Rent
  • Office supplies
  • insurance
  • Travel 
  • payments(salary)

Revenue Account

Revenue is the money your business obtains for its products or services or other investment interests. some examples are as follows-

  • Income’s interest
  • Investment profit
  • sales capital
  • Services profit

Liability Account

Liabilities are what you owe or the obligations that the company needs to pay. such as-

  • Accounts Payable
  • Income tax 
  • loans
  • Bank charges

Capital/Equity Account-It is the value of non-operational assets when liabilities have been paid to a company. It includes-

  • Stocks
  • Bonds
  • Mutual funds
  • Available for sale securities
  • debt securities
  • Retirement plans and pension

Wind-Up

In a nutshell, you should know how to use debit vs. credit when making a budget for the company or tracking your net income. In order to get the proper analysis of your turnover capital, accounting ratios, and other aspects, you need to bank upon the proper use of credit and debit. It gives you an error-free analysis of your business operations.

In this blog, we have provided you the different characteristics of debit and credit to understand the use of these terms in accounting. I hope this blog will be helpful for you to get knowledge of different accounts and the use of debit and credit. Still have some doubts? Get the best financial accounting homework help from the experts to clear your doubts.

Frequently Asked Questions