What are Debit and Credit?
In accounting, “debit” and “credit” are terms used in the double-entry bookkeeping system, which is the standard method for recording financial transactions. In this system, every transaction affects at least two accounts, balancing debits and credits to maintain the ledger’s integrity. Debits and credits have specific rules and their impact depends on the type of account involved.
Detailed Definitions and Rules
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Asset Accounts:
- Debits increase asset accounts.
- Credits decrease asset accounts.
-
Expense Accounts:
- Debits increase expense accounts.
- Credits decrease expense accounts.
-
Liability Accounts:
- Debits decrease liability accounts.
- Credits increase liability accounts.
-
Revenue Accounts:
- Debits decrease revenue accounts.
- Credits increase revenue accounts.
-
Capital Accounts:
- Debits decrease capital accounts.
- Credits increase capital accounts.
Examples
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Asset Account Example:
- Purchasing equipment worth $5,000: Debit Equipment (asset) $5,000, Credit Cash (asset) $5,000.
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Expense Account Example:
- Paying for office supplies worth $1,000: Debit Office Supplies Expense $1,000, Credit Cash $1,000.
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Liability Account Example:
- Receiving a loan of $10,000: Debit Cash $10,000, Credit Loan Payable (liability) $10,000.
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Revenue Account Example:
- Earning $15,000 from sales: Debit Accounts Receivable $15,000, Credit Sales Revenue $15,000.
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Capital Account Example:
- Owner investing $20,000 into the business: Debit Cash $20,000, Credit Owner’s Equity (capital) $20,000.
Frequently Asked Questions
Q1: What is the fundamental principle of double-entry bookkeeping?
A1: Every transaction is recorded in at least two accounts, where the total debits must equal the total credits for each transaction.
Q2: Can an account have both debit and credit entries?
A2: Yes, accounts can have both debit and credit entries and the balance can be determined by subtracting smaller side’s total from the larger side’s total.
Q3: What is the purpose of using debits and credits?
A3: The purpose is to ensure the accounting equation (Assets = Liabilities + Equity) is always balanced.
Q4: How do debits and credits affect the income statement?
A4: Debits increase expense accounts and decrease revenue accounts, while credits decrease expense accounts and increase revenue accounts, impacting the net income.
Q5: What happens if debits do not equal credits in a transaction?
A5: The books are out of balance, which suggests an error in the recording that needs to be corrected.
Related Terms
Double-Entry Bookkeeping
A system where every financial transaction affects at least two accounts, maintaining equilibrium in the accounting equation.
Asset
Resources owned by a business that have economic value.
Expense
The cost of operations that a company incurs during the process of earning revenue.
Liability
Financial obligations or debts of a business that need to be settled in the future.
Revenue
Income earned from the sale of goods or services.
Capital
The financial resources provided by the owners of a business used for investment.
Online References
Suggested Books for Further Studies
- “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
- “Horngren’s Accounting” by Tracie L. Nobles, Brenda L. Mattison, and Ella Mae Matsumura
Accounting Basics: “Debit and Credit” Fundamentals Quiz
Thank you for exploring the foundational concepts of accounting with our comprehensive explanation of debits and credits!
