WHAT IT MEANS TO DEBIT AND CREDIT IN ACCOUNTING

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Double-entry accounting and its accompanying system of debit and credit are some of the important aspects of GAAP.

"Debit" and "credit" are important accounting terminology. All accounts have a debit and credit side. While debits are entered on the left side of an account, credits are entered on the right side of an account. 

And If you have been using a bank account for some time now, you would have an idea that debit means decrease while credit means increases. But, this is not exactly correct.

Why?

Debit or credit may increase an account depending on the account involved.

So, are bank recordings wrong?

Of course not, banks applied perspective. 

Think about the bank's perspective for a moment. How do they view the money you just deposited? Who owns the money? It's yours, hence, from the bank perspective, it's a liability. 

Therefore, your bank will credit your account to increase the balance and debits the account to decrease the balance.
 
Like I said before, debit or credit may increase and decrease an account depending on the account involved.

But, What are these accounts?
They are:

Before we proceed, let's first define "account".

An account is an accounting record of the relevant details of a business transaction that bring about increases and decreases in the monetary value of a particular asset, capital, liabilities, expenses, revenue. 

More appropriately, an account is a record, with a debit and credit side, which serves as evidence of a business transaction.

Asset, liability, and capital have been explained extensively here,  let's look at the last two accounts.

Revenue
In accounting, revenue is the income that a business earned from its normal line of business, usually from the sales of goods and services. 

Revenue increases equity. Examples of revenue are fees earned, service revenue, Interest revenue, sales, commission income.

Expenses
This is the cost that a business incurred to support its usual operation. Expense decreases equity. 

It is usually deducted from revenue to derive net profit. Examples include employee wages, rent expenses, repair expenses, salaries and wages expenses, advertising fees.

So, how do debits and credit affect each account?

Like I told you before, whether debit or credit increases an account depends on the account involved. This table summarizes how each account is affected by debits and credit.

Accounting element

To Increase

To

decrease

Asset

Debit

Credit

Expenses

Debit

Credit

Revenue

Credit

Debit

Liability 

Credit

Debit

Capital

Credit 

Debit



I know that this might seem difficult to memorize. Perhaps, you just need to take note of the normal balance of each account.

The normal balance of an account is the side of the account on which the balance of the account is located.

Placing an amount on the normal balance side of an account means you are also increasing the account. 
 
What is the normal balance of each account?

All assets and expenses have debit normal balances. On the other hand, liability, capital, and revenue all have credit normal balances. 

This means that increases in the asset, expenses are recorded on the left side of the account while increases in revenue, expenses, capital are recorded on the left side of the account.

Now, try these: guess if it is debit or credit.
1. To decrease furniture
2. To decrease trade payable
3. To increase drawings
4. To decrease purchases
5. To decrease sales
6. To increase interest received

Answers
1. Credit 
2. Debit
3. Debit
4. Credit
5. Debit
6. Credit

I know you got that right!

Ok, let take a look at a few more examples and see how they would be recorded in the T-account.

Example 1
Purchase delivery van worth €70,000 with cash.

Analysis 
There are two accounts involved here: (1) delivery van and (2) cash. The delivery van account has increased by €70,000 while the cash account has decreased by €70,000. Since the delivery van(asset) account is increasing, it is debited. On the other hand, the cash(asset) account is credited since it is decreasing 

     Delivery van account

              €

Cash.  70000

               

           Cash account

              


                       €

Delivery van 7000


Example 2
Brought in €40,000 cash into his business

Analysis
Capital and cash are the two accounts involved. Both accounts are increasing, So these are the entries:
Debit: cash
Credit: capital

               Cash account.

                    €

Capital  40,000

             

             Capital account

              

                       €

Cash.      40,000


Example 3
Sold goods worth €10,000 on credit.

Analysis
The two accounts involved here are sales and trade receivable( or debtor) accounts.
Sales(revenue) account is increasing, thus, it is credited. Also, the trade receivable(asset) account is increasing, thus, it is debited.

     Trade receivable account

                €

Sales 40,000

                   



              Sales account

    

                      €

Trade rec. 40,000



Example 4
Purchased goods worth €10,090 on credit

Analysis
Purchase(expense) and trade payable(liability) are the two accounts involved. Both accounts are increasing. These are the entries
Debit: Purchase
Credit: Trade payable

              Purchase account

                      € 

Trade pay. 10,090


                      


         Trade payable account

                      

        € 

Purchase 10,090




Example 5
Paid €2,000 cash as salaries

Analysis
In this case, the salary account is increasing, the ash account is decreasing. Thus
Debit: Salaries
Credit: Cash

            Salary account

             €

 Cash  2000

            


            Cash account

             

                         €

Salaries    2000


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CONCLUSION
Debits and credits serve as the balancing aspect of every accounting transaction. When the accountant says that "debit must equal credits", they mean the total debit must equal the total credits when all accounts involved are totalled.

Debit and credit are important terms for Journalizing. You will learn more about journalizing in my next blog post.

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