What Are Debits & Credits? | F&A Glossary (2024)

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What Are Debits & Credits?

Debits and credits refer to the fundamental characteristics, and the fundamental mathematics, of all transactions recorded in a business’s general ledger.

All financial transactions for the business are recorded in the general ledger as journal entries. They are recorded into specific accounts, which represent various aspects of the business’s financial activity, such as accounts receivable, cash, prepaid assets, or sales.

All journal entries will be recorded as either a debit or a credit. Whether a journal entry is a debit or a credit depends on the basic nature of the transaction and the account in which it is entered. A debit means what is due or owed—it refers to money going out. Credit means to entrust or loan—it refers to money coming in.

However, even with these definitions, the use of debit and credit in the context of business accounting is not entirely intuitive or obvious. This is because the use of the terms has a different meaning from how they might be used in other contexts.

For example, debit in reference to a bank statement or a debit card has a different meaning than it does in the context of business accounting. Similarly, credit in reference to a credit card, credit score, or line of credit is also different from a credit in the general ledger.

A Mathematical Understanding of Debits & Credits

Another way to understand debits and credits in business accounting is to look at them mathematically. A simple way to distinguish between the two is to know that a debit entry always adds a positive number to the ledger, and a credit entry always adds a negative number. Even though positives and negatives are not used in the actual journal entries, the mathematics of how they are used leads to either a positive or negative result.

The process is further explained by the nature of the account in which debits and credits are used. To elaborate, some accounts carry a debit, or positive balance, while others carry a credit, or negative balance. The effect of the debit and credit journal entries will depend on which type of the two accounts they are entered.

A debit entry in a debit balance account will increase the account balance because adding two positives always results in a positive. A credit entry in a credit balance account will also increase the balance because adding two negatives always results in a negative. Finally, a debit entry in a credit balance account, or vice versa, will lower the account balance because negatives and positives always negate each other’s value mathematically.

Which Accounts Carry Debits vs Credits?

To fully understand the logic of debits and credits, it is essential to know which accounts carry a debit or credit balance.

Accounts that carry a debit balance are assets, expenses, and dividends. Accounts that carry a credit balance are liabilities, revenues, and equity.

Following this basic logic, a debit entry in any of the three debit balance accounts will increase the balance of that account.

Similarly, a credit entry into any of the credit balance will increase the (negative) balance.

Finally, a debit entry in any of the credit balance accounts, or a credit entry into any of the three debit balance accounts, will effectively lower the balance of the account.

In What Context Are Debits & Credits Used?

The use of debits and credits is defined by the system of accounting in which they are used. Debits and credits are an element of the double-entry accounting system.

The basic premise of the double-entry system holds that every transaction has an equal and opposite effect in at least two different places. That is to say, the transaction will impact at least two accounts, and the two entries will balance out.

This is logic is expressed in the form of an equation that informs all accounting records, which is: Assets = Liability + Equity. All double entries can be inputted into this equation.

Based on this logic, a journal entry will always have a debit and a credit in the respective accounts where they are recorded. The two entries will also balance out.

To help maintain this logic of journal entries, debits are always recorded in the left-hand column of the general ledger and credits are always recorded in the right-hand column.

Because of the way this looks on paper, the double-entry system is also referred to as a T-account. The term describes the appearance of the bookkeeping entries, which resembles a large “T.” The title of the account appears above the top horizontal line of the “T” and debits and credits are listed on the left and right side of the vertical line.

FAQ

What Are Some Examples of Debits & Credits?

If a manufacturing company takes out a loan for $1,000 to purchase machinery, the loan will be posted as a $1,000 credit in accounts payable, and the machinery will be recorded as a $1,000 debit in the appropriate asset account.

As the loan is paid down, payments will be recorded as debits in accounts payable until the loan is completely paid off.

In another example, if a furniture store sells a $500 sofa to a customer on credit, its accountants will post a $500 transaction in the credit column of the sales account and a $500 debit in the accounts receivable. As the customer makes payments on the credit, the business will record the payments as credits in the accounts payable and as debits in the cash account. When the customer has completely paid off the sofa, the accounts payable item will be zero.

Why Are Debits & Credits Important?

While the use of debits and credits in the double-entry accounting system is not always intuitive, the system helps businesses accurately record all transactions and the effect they have on financial performance.

The proper use of debits and credits ensures that revenue and other forms of monetary value are never overstated and that they are appropriately offset by their corresponding costs and underlying expenses. In this way, the system provides for maximum accuracy and consistency in the business’s accounting records.

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What Are Debits & Credits? | F&A Glossary (2024)

FAQs

What Are Debits & Credits? | F&A Glossary? ›

A debit means what is due or owed—it refers to money going out. Credit means to entrust or loan—it refers to money coming in. However, even with these definitions, the use of debit and credit in the context of business accounting is not entirely intuitive or obvious.

What are debits and credits easily explained? ›

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. How these show up on your balance sheet depends on the type of account they correspond to.

What is the meaning of credit and debit? ›

The terms debit (DR) and credit (CR) have Latin roots. Debit comes from the word debitum and it means, "what is due." Credit comes from creditum, meaning "something entrusted to another or a loan." An increase in liabilities or shareholders' equity is a credit to the account. It's notated as "CR."

What are debits and credits in accounting examples? ›

Say you purchase $1,000 in inventory from a vendor with cash. To record the transaction, debit your Inventory account and credit your Cash account. Because they are both asset accounts, your Inventory account increases with the debit while your Cash account decreases with a credit.

How do you guide debits and credits in accounting? ›

Debits are recorded on the left side of an accounting journal entry. A credit increases the balance of a liability, equity, gain or revenue account and decreases the balance of an asset, loss or expense account. Credits are recorded on the right side of a journal entry. Increase asset, expense and loss accounts.

What are the golden 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.

How do you remember debit and credit in accounting? ›

The easiest way to remember the meaning of debit and credit in accounting is as follows: – Assets increase on the debit side and decrease on the credit side. – Liabilities increase on the credit side and decrease on the debit side. – Equity increases on the credit side and decreases on the debit side.

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. 3. See also direct debit.

Why are debits and credits backwards in accounting? ›

The reason this is the opposite to yours is that if you have a DEBIT card bank account with them this is money they owe to you whereas a CREDIT card will be money you owe them. Your asset is their liability, equal and opposite. However, these are your accounts and you want to portray them from your point of view.

What is credit in simple words? ›

Credit is the ability to borrow money under the agreement that you'll repay the debt later. Credit agreements typically come with repayment terms that include when payments will be due, plus any interest and fees you'll need to pay. Credit can also refer to an individual's history of borrowing and repaying debt.

Is it better to use credit or 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.

Is a purchase a debit or credit? ›

Debits are used to record transactions such as purchases, withdrawals, and expenses. For example, when a person uses a debit card to purchase something, the transaction is recorded as a debit, and the amount of the purchase is deducted from the person's bank account.

Are debits good and credits bad? ›

A debit refers to money that comes into an account. A credit refers to money that goes out of an account. It's a common misconception to think of debits as positive and credits as negative. However, these terms are only an indication of how values flow between accounts for each transaction.

What is debit vs credit easy? ›

Debits reduce revenue, while credits increase it. This is because revenues increase equity. In a corporation, revenues are closed out and transferred to the retained earnings account at the end of an accounting period.

Is debit money in or out? ›

A debit to your bank account occurs when you use funds from the account to buy something or pay someone. When your bank account is debited, money is taken out of the account. The opposite of a debit is a credit, in which case money is added to your account.

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