Differences Between Debit and Credit
The key difference between Debit and Credit in Accounting is that 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.
Debit and credit 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 system 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.
In this article, we discuss both the cornerstones of accounting in detail –
If you are new to accounting, you may have a look at this Basic Tutorial on Accounting
Debit vs Credit Accounting Infographics
Key Differences Between Debit and Credit
- A debit is mostly the opposite of credit. 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 denotes 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 accounting are very clear. 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 business 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. Here we discuss the top differences between Debit and Credit in Accounting. You may also have a look at these following articles to learn more about accounting.
- Differences Between General Ledger vs Trial Balance
- Income Summary Account
- What Does Financial Accounting Mean?
- Bookkeeping vs Accounting | Top Key Differences
- Trial Balance vs Balance Sheet | Top Differences
- Assets vs Liabilities (Infographics)
- Financial Accounting and Management Accounting (Differences)
- Forensic Accounting | Top Skills