Differences Between Debit and Credit
Debit is an accounting entry made on the left hand side that which leads to either increase in the asset account or expense account, or lead to decrease in the liability account or equity account of the company, whereas, Credit is an accounting entry on the right-hand side which leads to either decrease in the asset account or expense account, or lead to increase in the liability account or equity account of the company.
They are the cornerstones of accounting. If you want to learn accounting, debit and credit would be the first concepts you would learn.
In business, many financial transactions take place in a financial period. As an accountant, it’s our job to look at the transactions, find out all the accounts, and then identify each account as either debit or credit.
Before we go in detail, we need to understand the double-entry system. The double entry systemDouble Entry SystemDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. means every transaction would have two accounts – one would be debit, and another would be credit. For example, if Company A withdraws cash of $10,000 from the bank, this transaction will involve two accounts under the double-entry system. One would be cash, and another would be a bank.
If you are new to accounting, you may have a look at this Basic Tutorial on AccountingBasic Tutorial On AccountingAccounting is the formal process through which a company attempts to present its financial information in a way that is both auditable and usable by the general public. .
Debit vs. Credit Accounting Infographics
Let’s see the top differences between debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. vs. credit accounting.
- In most cases, when debit increases the account, the credit decreases the account and vice versa. One of the most prominent exceptions is when cash is being introduced to business as capital. Here, both accounts are increasing, but “cash” would be debited, and “capital” would be credited.
- Debit usually denotes the usage of one account. And credit usually indicates the source of another account.
- We debit the account when the asset/expenses account increases, and the liability/income account decreases. We credit the account when the asset/expenses account decreases, and the liability/income account increases.
- Debit and credit are the cornerstones of the double-entry system. Without anyone’s account, another can’t exist.
- The debit is the effect of crediting another account and vice-versa.
|Basis for Comparison||Debit||Credit|
|1. Definition||It is the use of value for a transaction.||It is the source of value for a transaction.|
|2. Application||It is used to express the increase/decrease of assets & expenses or liabilities & incomes.||Credit is used to express the increase/decrease of liabilities & incomes or assets & expenses.|
|3. In Journal||The debit is the first account that is recorded.||Credit is recorded after the debit account, followed by the word “To”.|
|4. Placement in T-format||It is always placed on the right side.||It is always placed on the left side.|
|5. Equation||“Assets = Liabilities + Equity” is affected by debiting one account.||“Assets = Liabilities + Equity” is affected by also crediting one account.|
|6. Balancing act||Under the double-entry system, debit alone can’t balance the whole transaction.||Similarly, credit also can’t balance the whole transaction without the assistance of a debit account.|
|7. Example “Sales for cash.”||As “cash” increases, we will debit “cash.”||As “sales” increases, we will credit “sales.”|
Debit and credit exist together, like twins in accounting. If you understand one, understanding another becomes much simpler.
The rules of accountingRules Of AccountingAccounting rules are guidelines to follow for registering daily transactions in the entity book through the double-entry system. Here, every transaction must have at least 2 accounts (same amount), with one being debited & the other being credited. are obvious. If you can just remember what increases and what decreases, you would be able to identify which account should be debited and which account should be credited.
All you need to do is to take an example and try out. Pick any transaction of a businessTransaction Of A BusinessA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements. and try to record a journal entry. You will easily be able to understand the meaning and application of debit and credit.
Debit vs. Credit in Accounting Video
This has been a guide to Debit vs. Credit Accounting. Here we discuss the top differences between Debit and Credit with infographics and comparative table. You may also have a look at these following articles to learn more about accounting.