Meaning of Credit and Debit:
- While entering business transactions, debit and credit affect two types of accounts. They are alluded to in the books of accounts as Cr. for credit and as Dr. for debit.
- The right-hand side of a record is named as the credit side and the left-hand side of a record is named as the debit side.
- These terms address either increment or decline in a specific record, dependent on the nature of a record.
- If an entry is recorded on the credit side of a record, it is supposed to be credited to the record and if an entry is recorded on the debit side of a record, it is supposed to be debited to the record.
Rules of Debit and Credit:
According to the Double Entry System of bookkeeping, each business transaction or exchange has two angles. One of them is the income or receiving aspect known as the debit perspective, and the other is the outgoing or giving aspect known as the credit aspect.
Based on these two viewpoints under the Double Entry System of Accounting, vital Rules of Credit and Debit are outlined, dependent on the idea of different accounts or records to effectively choose when to debit the record and when to credit the record. This is to guarantee the right impact and treatment for a specific exchange.
The business transaction or exchange is separated into accounts while doing the bookkeeping. The commonly affected accounts are-
- Expenses
- Liabilities
- Equity
- Revenue
- Assets
How Debit and Credit Affects Business Accounts?
The table below shows a brief overview of how debit and credit transactions affect business.
| Decreases in the account | Increases in the account |
| Expenses |
Credit | Debit |
| Liabilities |
Debit | Credit |
| Equity |
Debit | Credit |
| Revenue |
Debit | Credit |
| Assets |
Credit | Debit |
The Golden Rules:
The golden rules of accounting or the guidelines of bookkeeping oversee the standard of credit and debit. Before we analyse further, we should know the three renowned brilliant principles of bookkeeping:
Firstly: Debit what comes in and credit what goes out.
Secondly: Debit all expenses and credit all incomes and gains.
Thirdly: Debit the Receiver, Credit the giver.
In brief, the credit is ‘Cr’, and the debit is ‘Dr’. In this way, a ledger account, otherwise called a T-account, comprises different sides. As discussed before, the left-hand side (Dr) records the charge exchange and the right-hand side (Cr) records credit exchanges.
Assume a business buys capital assets with liquid assets such as cash, this exchange will increase the capital asset account and decrease the cash account since capital assets come in and cash leaves the business. Further, this increment in a capital asset account and the reduction in cash account are to be recorded in the capital asset account and cash account separately. This transaction will likewise be recorded in the ledger account.
Difference between Debit and Credit:
Credit | Debit |
| Meaning |
Credit is passed when there is a decrease in assets or an increase in liabilities and owner’s equity. | Debit is passed when an increase in asset or decrease in liabilities and owner’s equity occurs. |
| Personal Account |
Credit the giver | Debit the receiver |
| Nominal Account |
Credit all incomes and gains | Debit all expenses and losses |
| Real Account |
What goes out | What comes in |
| Appears on which side of a T-format ledger account |
Right side of the T ledger account | Left side of the T ledger account |
FAQs
A debit is an entry made on the left side of an account. Debits increase an asset or expense account and decrease equity, liability, or revenue accounts. A credit is an entry made on the right side of an account. Credits increase equity, liability, and revenue accounts and decrease asset and expense accounts.
What is debit and credit in Golden Rules? ›
The following are the rules of debit and credit which guide the system of accounts, they are known as the Golden Rules of accountancy: First: Debit what comes in, Credit what goes out. Second: Debit all expenses and losses, Credit all incomes and gains. Third: Debit the receiver, Credit the giver.
What is the difference between a debit and a credit rule? ›
In accounting, debits increase assets and expenses and decrease liabilities, equity, and revenue. Credits do the opposite, they increase liabilities, equity, and revenue and decrease assets and expenses. Debits are recorded on the left side of an account, while credits are on the right side.
What is the difference between credit debit and debit? ›
Debit and credit cards both allow cardholders to obtain cash and make purchases. Debit cards are linked to the user's bank account and limited by how much money is in there. Credit cards provide the user with a line of credit that they can borrow against as needed and pay back later.
What is debit and credit in simple words? ›
Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account.
How do you remember the rules of debit and credit? ›
Debit simply means left side; credit means right side.
Remember the accounting equation? ASSETS = LIABILITIES + EQUITY The accounting equation must always be in balance and the rules of debit and credit enforce this balance.
How do you know if its debit or credit? ›
The basics of DR and CR
The individual entries on a balance sheet are referred to as debits and credits. Debits (often represented as DR) record incoming money, while credits (CR) record outgoing money.
Why do people use credit instead of debit? ›
Credit cards often offer better fraud protection
With a credit card, you're typically responsible for up to $50 of unauthorized transactions or $0 if you report the loss before the credit card is used. You could be liable for much more for unauthorized transactions on your debit card.
Can I run my debit card as credit if I have no money? ›
If you don't have enough funds in your account, the transaction will be declined. When you choose to run your debit card as credit, you sign your name for the transaction instead of entering your PIN. The transaction goes through Visa's payment network and a hold is placed on the funds in your account.
Is it better to pay bills with credit or debit? ›
Be aware of any convenience fees you'll incur by paying your bills with credit cards. It's best to use credit only for products and services that won't charge a fee, and using cash, debit or bank transfer for the rest. And, of course, use a credit card only if you know you can pay off the balance each month.
Debits and Credits Explained
For example, if a business purchases a new computer for $1,200 on credit, it would record $1,200 as a debit in its account for equipment (an asset) and $1,200 as a credit in its accounts payable account (a liability).
Does Dr. mean I owe money? ›
A "Dr" balance means a debit balance which is an amount due for payment, whilst a "Cr" balance means a credit balance which indicates that no payment is due.
Is cash a debit or credit? ›
The cash account is debited because cash is deposited in the company's bank account. Cash is an asset account on the balance sheet. The credit side of the entry is to the owners' equity account.
Is debit the receiver and credit the giver the golden rule? ›
The rule of debiting the receiver and crediting the giver comes into play with personal accounts. A personal account is a general ledger account pertaining to individuals or organizations. If you receive something, debit the account. If you give something, credit the account.
What is DR and CR? ›
DEBIT AND CREDIT CONVENTION
As a matter of accounting convention, these equal and opposite entries are referred to as a debit (Dr) entry and a credit (Cr) entry. For every debit that is recorded, there must be an equal amount (or sum of amounts) entered as a credit.
Why do we debit the receiver and credit the giver? ›
The “Debit the receiver, Credit the giver” rule is applicable for personal accounts. When a natural or artificial entity makes a payment to a company, it becomes an inflow. Thus, the receiver must be debited, and the company receiving the payment must be credited in the books.
What are the rules of debit and credit under traditional approach? ›
Rules for Debit and Credit under the Traditional Approach
| Personal Account | Debit the Receiver; Credit the Giver |
|---|
| Real Account | Debit what comes in; Credit what goes out |
| Nominal Account | Debit all expenses/losses; Credit all income/gains |
