Meaning of Credit and Debit:
- While entering business transactions, debit and credit affect two types of accounts. They are alluded to in the books of accounts as Cr. for credit and as Dr. for debit.
- The right-hand side of a record is named as the credit side and the left-hand side of a record is named as the debit side.
- These terms address either increment or decline in a specific record, dependent on the nature of a record.
- If an entry is recorded on the credit side of a record, it is supposed to be credited to the record and if an entry is recorded on the debit side of a record, it is supposed to be debited to the record.
Rules of Debit and Credit:
According to the Double Entry System of bookkeeping, each business transaction or exchange has two angles. One of them is the income or receiving aspect known as the debit perspective, and the other is the outgoing or giving aspect known as the credit aspect.
Based on these two viewpoints under the Double Entry System of Accounting, vital Rules of Credit and Debit are outlined, dependent on the idea of different accounts or records to effectively choose when to debit the record and when to credit the record. This is to guarantee the right impact and treatment for a specific exchange.
The business transaction or exchange is separated into accounts while doing the bookkeeping. The commonly affected accounts are-
- Expenses
- Liabilities
- Equity
- Revenue
- Assets
How Debit and Credit Affects Business Accounts?
The table below shows a brief overview of how debit and credit transactions affect business.
Credit | Debit |
Debit | Credit |
Debit | Credit |
Debit | Credit |
Credit | Debit |
The Golden Rules:
The golden rules of accounting or the guidelines of bookkeeping oversee the standard of credit and debit. Before we analyse further, we should know the three renowned brilliant principles of bookkeeping:
Firstly: Debit what comes in and credit what goes out.
Secondly: Debit all expenses and credit all incomes and gains.
Thirdly: Debit the Receiver, Credit the giver.
In brief, the credit is ‘Cr’, and the debit is ‘Dr’. In this way, a ledger account, otherwise called a T-account, comprises different sides. As discussed before, the left-hand side (Dr) records the charge exchange and the right-hand side (Cr) records credit exchanges.
Assume a business buys capital assets with liquid assets such as cash, this exchange will increase the capital asset account and decrease the cash account since capital assets come in and cash leaves the business. Further, this increment in a capital asset account and the reduction in cash account are to be recorded in the capital asset account and cash account separately. This transaction will likewise be recorded in the ledger account.
Difference between Debit and Credit:
Credit | Debit |
Credit is passed when there is a decrease in assets or an increase in liabilities and owner’s equity. | Debit is passed when an increase in asset or decrease in liabilities and owner’s equity occurs. |
Credit the giver | Debit the receiver |
Credit all incomes and gains | Debit all expenses and losses |
What goes out | What comes in |
Right side of the T ledger account | Left side of the T ledger account |
