Debits and credits are accounting terms that represent the two sides of a financial transaction. Debit is notated “DR” and credit is notated “CR”.
The word debit comes from the Latin word “debitum” meaning “what is due” and the word Credit comes from “creditum”, meaning “something entrusted to another or a loan.”
A debit (DR) is an entry made on the left side or left column, and credits must always be on the right side or right column of a ledger. Debit entry either increases an asset or expense account or decreases equity, liability, or revenue accounts. Credit entry increases equity, liability, or revenue accounts, or decreases an asset or expense account.
Debits and credits are fundamental concepts in accounting that form the basis of double-entry bookkeeping. This system is used to record financial transactions accurately and maintain the integrity of a company’s financial records.
In double-entry accounting, every debit (inflow) always has a corresponding credit (outflow). So we record them together in one entry.
The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, and credit what goes out. These rules are the basis of double-entry accounting.
The double-entry system, also known as double-entry bookkeeping or accounting, is a bookkeeping method that records financial transactions in two accounts.
Debit: The left side of a T-account or general ledger
Credit: The right side of a T-account or general ledger
Here are some examples of golden rules:
Example 1: The Company paid an electricity bill of Rs.1200000 to the electricity supply company (say“BESCOM” ) through a bank cheque.
The double-entry accounting will be as under:
Debit = Electricity expenses: Rs.120000
Credit= Bank account : Rs.120000
Here expenses head on the electricity bill amount in the ledger is increased by Rs.120000/- in the ledger and the bank balance is reduced by Rs.120000/-
Example 2: The cashier of the company paid Rs.5000 to the canteen boy in cash toward the supply of tea and snacks supplied in a meeting.
The double-entry accounting will be as under:
Debit= miscellaneous expense (Tea and Snacks supplied by the Canteen): Rs.5000
Credit =Cash account (cash paid to canteen boy for supply of tea and snacks): Rs.5000
Here miscellaneous expenses amount in the ledger is increased by Rs.5000/- and the cash on hand balance is reduced by Rs.5000/-
Example 3: If a company buys a car for Rs.2000000. The double entry transaction will be as under.
Debit =Asset (Motor Vehicle-Car): Rs.2000000
Credit= Bank account : Rs.2000000
Here Asset value is increased in the ledger by Rs.2000000/- and the Bank balance is reduced by Rs.2000000/-
The above examples are perfect instances of “debit what comes in, credit what goes out” as the company receives the car and debits what comes in.
Related Posts:
| EXPLAINED: RECORDKEEPING IN ACCOUNTING | ACCOUNT CATEGORIES IN ACCOUNTING EXPLAINED |
| CONCEPT OF DEBITS AND CREDITS | ACCOUNTING: COLUMNAR ACCOUNTING MECHANICS, AND JOURNALISING |
