Debits and Credits Definition - Accountants in Croydon

 Business transactions are events that have a monetary impact on an organization's financial statements. We record numbers in two accounts, with the debit column on the left and the credit column on the right, when accounting for these transactions.

Debits

A debit is an accounting entry that either increases or decreases the value of an asset or expense account. In an accounting entry, it is to the left.

Credits

A credit is an accounting entry that either increases or decreases the value of a liability or equity account. In an accounting entry, it is to the right.

Use of Debit and Credit Cards

When an accounting transaction is made, at least two accounts are always impacted, with a debit entry made against one account and a credit entry made against the other. There is no maximum number of accounts that can be involved in a transaction, but the minimum is two. The totals of any transaction's debits and credits must always equal each other, so an accounting transaction is always said to be "in balance." It would be impossible to create financial statements if a transaction was not in balance. Thus, the use of debits and credits in a two-column transaction recording format is the most important of all accounting accuracy controls.

The inherent meaning of a debit or a credit can cause considerable confusion. When you debit a cash account, for example, the amount of cash on hand increases. However, debiting an accounts payable account reduces the amount of accounts payable liability. These distinctions arise because debits and credits have different effects on various types of accounts, including:

Accounts of assets. A debit increases the balance, while a credit decreases it.

Accounts for liabilities. A debit reduces the balance, while a credit increases it.

Accounts for equity. A debit reduces the balance, while a credit increases it.

The underlying accounting equation that underpins the entire structure of accounting transactions, which is:

Liabilities + Equity = Assets

In some ways, you can only have assets if you have paid for them with liabilities or equity, so you must have one to have the other. As a result, when you create a transaction that includes a debit and a credit, you are usually increasing an asset while decreasing a liability or equity account (or vice versa). Some exceptions exist, such as increasing one asset account while decreasing another. If you are more concerned with income statement accounts, then the following additional rules apply:

Accounts of revenue A debit reduces the balance, while a credit increases it.

Accounts for expenses A debit increases the balance, while a credit decreases it.

Accounts for profit. A debit reduces the balance, while a credit increases it.

Accounts for losses A debit increases the balance, while a credit decreases it.

If you are completely perplexed by these issues, remember that debits always go in the left column and credits always go in the right column. There will be no exceptions.

Credit and Debit Rules

The rules for using debits and credits are listed below.

Modifications to Debit Balances

All accounts that normally have a debit balance will have their amount increase when a debit (left column) is added to them, and their amount decrease when a credit (right column) is added to them. This rule applies to the following types of accounts: expenses, assets, and dividends.

Credit Balance Variations

All accounts with a credit balance will have their amount increased when a credit (right column) is added to them, and decreased when a debit (left column) is added to them. This rule applies to the following types of accounts: liabilities, revenues, and equity.

Totals Must Be the Same

In a transaction, the total amount of debits must equal the total amount of credits. Otherwise, an accounting transaction is said to be unbalanced, and the accounting software will not accept it.

Common Accounting Transactions Debits and Credits

The following bullet points describe how debits and credits are used in common business transactions:

Cash sale: debit cash account | credit revenue account

When making a credit sale, debit the accounts receivable account and credit the revenue account.

Receive payment in cash for an account receivable: Deduct from the cash account and credit from the accounts receivable account

Purchase supplies for cash from a supplier: Credit the cash account | Debit the supplies expense account

Purchase supplies on credit from a supplier: Debit the accounts payable account | Credit the supplies expense account

Purchase inventory from a supplier in exchange for cash: Deduct from the inventory account | Credit from the cash account

Purchase inventory on credit from a supplier: Deduct from the inventory account and credit from the accounts payable account

Employees are paid by debiting the wages expense and payroll tax accounts and crediting the cash account.

Borrow money: Debit cash account | Credit loans payable account

Loan repayment: Debit loan payable account | Credit cash account


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