Debits and credits
From Wikipedia, the free encyclopedia
Debit and credit are formal bookkeeping and accounting terms.
- Your debit account lists what others owe you.
- Your credit account lists what you owe others.
Contents |
[edit] Introduction
Debit and Credit have opposite meanings and come from Latin. Debit comes from debere, which means "to owe". The Latin debitum means "debt". Credit comes from the Latin word credere, which means "to believe".
It is more common to use the terms in the plural, Debits and Credits.
DEBIT is abbreviated as Dr., while credit is abbreviated as Cr.
"Debit" also refers to the left side of a general ledger account, while "Credit" refers to the right side. Due to the proliferation of bookkeeping and accounting computer software, it is now common for Debits to be mistakenly treated as positive values and Credits to be mistakenly treated as negative values. Positive and negative values allow for mathematical calculations in software programs. This has led to confusion as people do not understand why a sales amount is treated as a negative value, a credit; and an expense amount is treated as a positive value, a debit. If the value of the debits is greater than the value of the credits, then the balance on the account is a debit and should not be described as a positive value balance, but should be described as an account with a debit balance.
Debits and Credits are recorded in a T account as shown below
| Debits | Credits |
|---|---|
Debit entries are made on the left side of the vertical line and credit entries are made on on the right side of the vertical line.
Debits and credits are neither positive nor negative values. The balance on an account is either a debit or a credit, not a positive or a negative value.
Dividend, Expense, Asset and Losses (abbreviated as "D-E-A-L") accounts increase in value when debited and decrease when credited, whereas Gains, Income, Revenues, Liability and Stockholder's (Owner's) equity (abbreviated as "G-I-R-L-S") accounts decrease in value when debited and increase when credited.
This distinction is somewhat counterintuitive, until the nature of those accounts is more closely scrutinized. For example, revenue is coded as a credit. After recording a day's sales invoices, the company will have credited a certain amount in revenue, but the customer's ledger will hold a debit balance being the amount of the unpaid invoices. To fully understand this see Double-entry bookkeeping system where Debits and Credits form the core of that system.
For instance, the journal entry for paying the telephone bill might look like this:
| Description | Debits | Credits |
|---|---|---|
| Phone expense | $200 | |
| Cash | $200 |
The telephone company would record the exact same transaction (from their side) like this:
| Description | Debits | Credits |
|---|---|---|
| Cash | $200 | |
| Revenue | $200 |
Confusion also arises where the term debit is also informally referred to as a "charge" as in a charge card or a debit card and that credit is a limit set or an amount granted by a company to its customers as in a credit limit. They are used in a different context in these two cases.
It is often assumed that a debit decreases a balance, and a credit increases it, because this is how the terms are shown on bank statements and using a debit card decreases the balance in one's bank account. However, this is because bank statements are traditionally written from the bank's perspective, where the customer's account is a liability. By withdrawing money, the customer is decreasing the bank's liability. Since liability accounts normally have a credit balance, the withdrawal of cash from a banking account is reflected on the bank's balance sheet as a debit.
[edit] Principles or Rules of Debit and Credit
All the account heads used in Accounting systems are classified under three types of Accounts i.e Real Account, Personal Account, Nominal Account. 'Real Account: Debit what comes in, Credit what goes out. Personal Account: Debit the receiver, Credit the giver. 'Nominal Account: Debit all expenses/losses, Credit all incomes/gains' [1]
[edit] See also
Wiktionary, the free dictionary.
[edit] References
[edit] External links
- Debits and Credits Explanation with Examples.
Accountancy | |
|---|---|
| Basic Accounting | Bookkeeping • Generally Accepted Accounting Principles • Cost of goods sold • Accountant • Financial accountancy • General ledger • Bank reconciliation • Trial balance • Debits and credits • Double-entry bookkeeping • Invoice • Standard accounting practice • Cash basis and accrual basis |
| Basic Financial Statements | Financial Statements • Balance sheet • Income statement • Cash flow statement • Shareholders' equity • Notes to the financial statements |
| Auditing | Auditing • Financial audit • Generally Accepted Auditing Standards • Sarbanes-Oxley Act • Big Four auditors • Auditor's report |
| Other | Management accounting • Cost accounting • Fund Accounting • Forensic accounting • Tax accounting • Certified Public Accountant • FIFO and LIFO accounting • Environmental accounting |
es:Débito es:Crédito id:Debit id:Kredit (akuntansi) ja:借方 ja:貸方 ka:დებეტი lt:Debetas lt:Kreditas no:Debet pl:Debet pt:Débito e crédito (contabilidade) ru:Дебет ru:Кредит (бухгалтерский учёт) sv:Debet uk:Дебет
