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.||Account||When to debit||When to credit|
|1.||Bank accounts and cash||When a customer is paying for the product or service||When we pay the bills|
|2.||Account receivable||In the case when we use credit for the sale||When the payment made by customer|
|3.||Expense accounts||When we purchase something or pay the bill||When we receive the refund.|
|4.||Accounts payable||When we pay the bill||Entering the bill for further(future) payment|
|5.||Revenue||When 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.
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.
|31-05-2021||Mr. Kapoor||Rs 5,00,000 lakh|
|ABC corporation||Rs 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-
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-
|15-03-2020||Accounts receivable||Rs. 50,000|
In this entry cash is debited(decreased) and accounts receivable is credited(increased).
|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.|
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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-
- Accounts receivable
- Prepaid Expenses
- Property(computer furniture) and tools
- Transport vehicles
Expenses are referred to as cost of doing business or charges related to the regular operations of a business-like-
- Office supplies
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
Liabilities are what you owe or the obligations that the company needs to pay. such as-
- Accounts Payable
- Income tax
- Bank charges
Capital/Equity Account-It is the value of non-operational assets when liabilities have been paid to a company. It includes-
- Mutual funds
- Available for sale securities
- debt securities
- Retirement plans and pension
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
Debit and credit are two equal and opposite terms used in accounting. When you need financial statements and other documents for different purposes, debit and credit do this for you. These are used to record the transactions of a company.
If you are willing to track assets and liabilities appropriately, you should use accounting softwares. Here we are giving you a few names of software that are well suited for small businesses.
Sage business cloud accounting
These three softwares are very useful for small businesses to track various operations.
Debit and credit cards both have made our lives easy and convenient as they share common features. But there is a key difference between these two terms. A debit card enables you to spend money after withdrawing it, which you deposited at the bank. On the other hand, credit cards permit you to borrow money from the card provider in a limit to buy items or products.