Debit

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Accountancy

Key concepts
Accountant · Bookkeeping · Trial balance · General ledger · Debits and credits · Cost of goods sold · Double-entry system · Standard practices · Cash and accrual basis · GAAP / IFRS
Financial statements
Balance sheet · Income statement · Cash flow statement · Equity · Retained earnings
Auditing
Financial audit · GAAS · Internal audit · Sarbanes–Oxley Act · Big Four auditors
Fields of accounting
Cost · Financial · Forensic · Fund · Management · Tax
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Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental concepts in accounting, representing the two sides of each individual transaction recorded in any accounting system. A debit transaction indicates an asset or an expense transaction, a credit indicates a transaction that will cause a liability or a gain. A debit transaction can also be used to reduce a credit balance or increase a debit balance. A credit transaction can be used to decrease a debit balance or increase a credit balance.

1 Introduction
2 Origin of the terms debit and credit
3 Principles or Rules of Debit and Credit
4 Operational Principles
- 4.1 Examples
5 'T' Accounts
6 See also
7 References
8 External links

Introduction

Debits and credits are a system of notation used in bookkeeping to determine how and where to record any financial transaction. In bookkeeping, instead of using addition '+' and subtraction '-' symbols, a transaction uses the symbol DR (Debit) or CR (Credit). In double-entry bookkeeping debit is used for asset and expense transactions and credit is used for liability and gains transactions. For bank transactions, money in is treated as a debit transaction and money out is treated as a credit transaction. Traditionally, transactions are recorded in two columns of numbers: debits in the left hand column, credits in the right hand column. Keeping the debits and credits in separate columns allows each to be recorded and totalled independently. Where the total of the debit value amounts is lower than the total of the credit value amounts a balancing debit value is posted to that nominal ledger account. That nominal ledger account is now "balanced". An account can have either a credit value balance or a debit value balance but not both.

Origin of the terms debit and credit

The term debit comes from the Latin debitum which means "that which is owing" (the past participle of debere "to owe"). Debit is abbreviated to Dr (for debtor). The term credit comes from the Latin credere/credit meaning "to trust or believe" / "he trusts or believes" via the French credit and the Italian credito. Credit is abbreviated to Cr (for creditor). ^[1]

Principles or Rules of Debit and Credit

Each transaction consists of debits and credits for every transaction and they must be equal.

' For Every Transaction: ' 'The Value of Debits = The Value of Credits'

This also means that the accounts with debits balances will equal the total value of accounts with credit balances. You can check the arithmetical accuracy of the accounts by doing a trial balance and proving that total debits equal total credits.

The extended accounting equation must also balance: 'A + E = L + OE + R'

(where A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenues)

So 'Debit Accounts (A + E) = Credit Accounts (L + R + OE)'

Debits are on the left and increase a debit account and reduce a credit account. Credits are on the right and increase a credit account and decrease a debit account.

Operational Principles

Debit generally represents any increment in the resources held by the entity while credit represents depletion of the resources held by the entity. Hence, debits to an account are positive / increments in the accounting entity's resources while credits are negative / depletions in the same.

Real Accounts

In real accounts any increment in assets held by the entity is reflected by debiting the relevant asset account and depletion by crediting the asset account.
If any asset account is debited then it is on account of increment in the value or acquisition of that asset which increases the resources held by the entity.

As the total resources held by the entity cannot indigenously increment themselves the increment has to be matched with a fall in resources within the entity.

Personal Accounts

In Personal Accounts the debiting the personal account of any external entity increases the value of the monies receivable from that entity thus augmenting the resources of the accounting entity.
Similarly crediting the personal account of any external entity reduces the value of monies receivable from that entity thus reducing the resources of the accounting entity.

Nominal Accounts

In Nominal Accounts the Expense accounts whenever debited are done as the Expense incurred represents the Goods and/or Services acquired for consumption by the entity and hence are temporary increments in the resources of the entity.
In Nominal Accounts the Income accounts are credited as the Income earned represents the

Cross-Application over Different Types of Accounts

The principles apply uniformly to all combinations of accounting entries involving different types of accounts based on varying circumstances.

	Real Account Debited	Personal Account Debited	Nominal Account Debited
Real Account Credited	Acquisition of an Asset in Cash - Machinery Account Debited, Cash Account Credited	Sale of an Asset on Credit - Buyer's Account Debited, Machinery Account Credited	Amortisation or Depreciation of an Asset - Depreciation Account Debited, Machinery Account Credited
Personal Account Credited	Acquisition of an Asset on Credit - Machinery Account Debited, Seller's Account Credited	Transfer of a Debt Receivable to another - New Debtor's Account Debited, Old Debtor's Account Credited	Accrual of Expenditure - Electricity Account Debited, Electricity Company's Account Credited
Nominal Account Credited	Capitalisation of Expenditure - Machinery Account Debited, Research and Development Account Credited	Sale of Goods on Credit - Buyer's Account Debited, Sales Account Credited	Inter head transfer of Expenditure - New Expenditure Head Debited, Old Expenditure Head Credited

Examples

when you pay rent with cash: you increase rent (expense) by debiting, and decrease cash (asset) by credit.
when you receive cash for a sale: you increase cash (asset) by debiting, and increase sales (revenue) by credit.
when you buy equipment (asset) with cash: You increase equipment (asset) by debiting, and decrease cash (asset) by credit.
when you borrow with a cash loan: You increase cash (asset) by debiting, and increase loan (liability) by credit.

	Account	Debit	Credit
1.	Rent	100
	Cash		100

2.	Cash	400
	Sale		400

3.	Equip.	500
	Cash		500

4.	Cash	1000
	Loan		1000

'T' Accounts

The process of using debits and credits creates a ledger format that resembles the letter 'T'. The term 'T' account is commonly used when discussing bookkeeping.

A 'T' account showing debits on the left and credits on the right.