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
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. You must record credits and debits for each transaction.
What is the golden rule of debit and credit? ›
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, credit what goes out.
What is the difference between credit and debit short answer? ›
What's the difference? When you use a debit card, the funds for the amount of your purchase are taken from your checking account almost instantly. When you use a credit card, the amount will be charged to your line of credit, meaning you will pay the bill at a later date, which also gives you more time to pay.
What is debit and credit What are the rules of debit and credit? ›
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 the debits and credits quizlet? ›
Debit just means the left side of the double entry accounting, Credit just means the right side of the double entry accounting. When you hear your banker say, "I'll credit your checking account," it means the transaction will increase your checking account balance.
What is the difference between a debit and a credit on a balance sheet? ›
On a balance sheet or in a ledger, assets equal liabilities plus shareholders' equity. An increase in the value of assets is a debit to the account, and a decrease is a credit.
What are golden rules? ›
The Golden Rule is the principle of treating others as one would want to be treated by them. It is sometimes called an ethics of reciprocity, meaning that you should reciprocate to others how you would like them to treat you (not necessarily how they actually treat you).
How do you remember the difference between debit and credit? ›
DC are the headers left to right. ADE in the left column and LER in the right. Debits are always on the left. Credits are always on the right.
What is debit in simple words? ›
A debit is a record of the money taken from your bank account, for example when you write a cheque. The total of debits must balance the total of credits. Synonyms: payout, debt, payment, commitment More Synonyms of debit.
What's the difference between a credit and debit card? ›
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. Credit cards charge interest on the money the cardholder borrows (unless it's paid back within the grace period).
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. How these show up on your balance sheet depends on the type of account they correspond to.
What are three types of accounts? ›
- Personal Accounts. Ledger accounts that contain transactions related to individuals or other organizations with whom your business has direct transactions are known as personal accounts. ...
- Real Accounts. ...
- Nominal Accounts.
Credit Cards vs. Debit Cards: An Overview
Debit cards allow you to spend money by drawing on funds you have deposited at the bank. Credit cards allow you to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash.
What are the key differences between debits and credits? ›
Debits increase asset or expense accounts and decrease liability, revenue or equity accounts. Credits do the reverse. When recording a transaction, every debit entry must have a corresponding credit entry for the same dollar amount, or vice-versa. Debits and credits are a critical part of double-entry bookkeeping.
What is confused between debit and credit? ›
A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account. Each transaction transfers value from credited accounts to debited accounts.
What is the golden rule for debit the receiver and credit the giver? ›
The golden rule for personal accounts is: debit the receiver and credit the giver. In this example, the receiver is an employee and the giver will be the business. Hence, in the journal entry, the Employee's Salary account will be debited and the Cash / Bank account will be credited.
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.
What is the formula for debit and credit? ›
The extended accounting equation is as follows: Assets + Expenses = Equity/Capital + Liabilities + Income, A + Ex = E + L + I. In this form, increases to the amount of accounts on the left-hand side of the equation are recorded as debits, and decreases as credits.
Is debit receiving or giving? ›
Debit the receiver and credit the giver
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.
