In a business there are many financial transactions that need to be recorded and then further processed for the calculation of its profit or loss. When recording the financial transactions in business books, we need to know to the accounting language to record its transactions. According to dual aspect concept of accounting, each transaction taking place in a business has two aspects and we need to record both aspects to completely record that transaction. When both aspects of financial transaction are recorded separately it is called a double entry. In a double entry one entry is called debit and other is called credit.
This article looks at explaining the meanings of debit and credit and also differences between the two.
Definitions and meanings
Debit
Debit is a term used for recording elements of financial statements in a double entry system. Whenever a transaction takes place in a business it affects any one or more of the elements the business. There are five main elements of a business:
- Assets
- Liabilities
- Incomes
- Expenses
- Capital
Whenever there is an increase in assets as result of a transaction it is recorded as debit. Similarly increase in expense is also recorded as debit entry in business books. However if a liability, income or capital decreases it is also recorded as a debit entry in the books of the business. It means that debit is an accounting term that shows an increase in as asset and expense or decrease in a liability, income or capital.
For example if a business buys an asset, the increase in asset will be recorded as a debit entry. Similarly if a business incurs some expense it will also be recorded as a debit entry in the books.
Credit
Credit is also a term used for recording the second aspect of a business transaction. If an asset or an expense decreases as a result of a business transaction it is recorded as a credit entry. However if there is an increase in an income, liability or capital it is also recorded as a credit entry. It means that credit is a term in accounting that shows an increase in a liability, income or capital or decreases in an assets or expense.
For example if a business takes a bank loan that is a liability, it will be recorded as a credit entry. Similarly if a business earns an income, it will also be recorded as a credit entry in the books of the business.
Debit and credit are basically two aspects of any business transaction. In any business there will always be a debit and a credit and both debit and credit will always be equal.
For example a business buys a plant for $2,000 paying by check. This transaction will be recorded in the form of double entry as:
Dr Plant account 2,000
Cr Bank account 2,000
Here plant has been debited because it is an asset and has been increased and any increase in an asset is recorded as a debit entry. Bank account has been credited because it is an asset that has been decreased and decrease in an asset is recorded as a credit entry.
Difference between debit and credit
The main points of difference between debit and credit are explained below:
1. Purpose
Debit and credit are the terms used to record two aspects of any financial transaction and are opposite to each other. If one aspect of a transaction is debit, other aspect will always be credit. After recording the both aspects, a transaction completes.
2. Recording of assets
Debit shows an increase in an asset whereas credit shows a decrease in an asset. For example if a business pays cash in its bank account, it is recorded as
Dr Bank account
Cr Cash account
3. Recording of expenses
Debit shows an increase in an expense whereas credit shows a decrease in an expense.
For example if a business pays an electricity bill by cash, it is recorded as
Dr Electricity expense
Cr Cash account
4. Recording a liability
Debit shows a decrease in a liability whereas credit shows an increase in a liability. For example if a business takes a bank loan it is recorded as
Dr Cash account
Cr Bank loan account
5. Recording an income
Debit shows a decrease in an income whereas credit shows an increase in an income. For example if a business receives rent from letting its property it is recorded as
Dr Cash account
Cr Income account
6. Recording introduction of fresh capital and withdrawals
Capital is always recorded as a credit entry in the books of the business. For example if a proprietor puts $1,000 in his business as capital, it will be recorded as
Dr Cash account
Cr Capital account
Drawings or withdrawals are always recorded by a debit entry in the books of the business. For example if a proprietor takes $100 from his business as drawings, it will be recorded as
Dr Drawings account
Cr Cash account
Debit versus credit – tabular comparison
A tabular comparison of debit and credit is given below:
|
||||
| Recording an assets | ||||
| Shows an increase in an asset | Shows a decrease in an asset | |||
| Recording an expense | ||||
| Shows an increase in an expense | Shows a decrease in an expense | |||
| Recording an income | ||||
| Shows a decrease in an income | Shows an increase in an income | |||
| Recording a liability | ||||
| Shows a decrease in a liability | Shows an increase in a liability | |||
| Recording of capital and withdrawals | ||||
| Drawings or withdrawals causes a reduction in capital which is recorded as debit | Injection or introduction of new capital in the business causes an increase in total capital of the owner which is entered as credit | |||
Conclusion – debit vs credit
Debit and credit are two fundamentals of accounting which are also called alphabets of accounting. In a business each financial transaction is recorded in the form of a double entry under double entry books keeping system. When making a double entry both aspects of a business transaction are in the form debit and credit which are two terms to record the financial transactions in books of the business. Debit and credit have no definitions rather these are just terms to record the changes in elements of financial statements.
