What are Debits and Credits?

May 8, 2013 12:06 pm0 commentsViews: 2900

bookkeepingThey may sound like foreign languages to you … but in fact, “debits” and “credits” originated from their original Latin words, “debere” and “credere”.  Debit comes from “debere”, which means “to owe”.  Credit comes from “credere”, which means “to believe”.   Hence, in accounting language, debit is abbreviated “Dr” while credit is abbreviated “Cr”.

 

In accounting terms :

  • Debits represent increases in value of assets and expenses and decreases in income, liabilities and equity
  • Credits represent increases in liabilities, equity and income and decreases in assets and expenses

“Debit” also refers to the left side of a general ledger account,  while “Credit” refers to the right side.

 
Dr_&_Cr

Every business transaction affects at least two accounts (refer to the company’s chart of accounts); hence, the accounting system is known as a double-entry system.  Under this system, every business transaction is recorded in two columns (sides) with at least two accounts.  One account will receive a “debit” entry, meaning the amount will be entered on the left column or side of that account.  Another account will receive a “credit” entry, meaning the amount will be entered on the right  column or side of that account.  More than two accounts can be used if the transaction is spread among them, just as long as the sum of debits for the transaction equals the sum of credits for it.  The initial challenge with double-entry accounting is to know which account should be debited and which account should be credited.

 

The double entry accounting system provides a system of checks and balances. By summing up all of the debits and summing up all of the credits and comparing the two totals, bookkeeping errors can immediately be detected and corrected accordingly.  The totals of the debits and credits for any transaction must always equal each other, so that an accounting transaction is always said to be “in balance.”  If a transaction were not in balance, then it would not be possible to create financial statements.  Thus, the use of debits and credits in a two-column transaction recording format is the most essential of all controls over accounting accuracy. 

 Debits_&_Credits

Here are some examples on what accounts are debited and credited in common accounting transactions :

Debits and Credits in Common Accounting Transactions

  • Sale for cash: Debit the cash account | Credit the revenue account
  • Sale on credit: Debit the accounts receivable account | Credit the revenue account
  • Receive cash in payment of an account receivable: Debit the cash account | Credit the accounts receivable account
  • Purchase supplies from supplier for cash: Debit the supplies expense account | Credit the cash account
  • Purchase supplies from supplier on credit: Debit the supplies expense account | Credit the accounts payable account
  • Purchase inventory from supplier for cash: Debit the inventory account | Credit the cash account
  • Purchase inventory from supplier on credit: Debit the inventory account | Credit the accounts payable account
  • Pay employees: Debit the wages expense and payroll tax accounts | Credit the cash account
  • Take out a loan: Debit cash account | Credit loans payable account
  • Repay a loan: Debit loans payable account | Credit cash account
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