Debit Meaning
Debit is defined as an entry in the books of accounts of the company due to which either there is an increase in the assets of the company or there is any decrease in the liabilities of the company and according to the fundamental concept of the double-entry system in the accounting, total of the debits should always be equal to the total of the credits for the company.
Example of Debit Entry in Accounting
There is a company A ltd. which deals in selling readymade garments in the market. It decided to purchases the asset worth $ 100,000 by paying through the bank account and pay off the expense of $ 5,000 in cash for the electricity bill. How to record the transaction in the books of accounts and what are the accounts that will be debited?
In the present case, the company entered into two different transactions, one for purchasing the assets and others for paying the expense. Below will be the accounting treatment for the transactions:
- Purchasing the asset worth $ 100,000 by paying through the bank account
Whenever there is an increase in any asset account then it will be debited and in case there is a decrease in the asset account then it will be credited. In the present case, there will be debit in the asset account as there is an increase in the assets of the company with $ 100,000 and the bank account will be credited as there is a decrease in the balance of the bank account which is used for the purpose of purchasing the asset of the company.
- Pay off the expense of $ 5,000 in cash for the electricity bill.
Whenever there is an increase in any expense account then it will be debited and in case there is a decrease in the expense account then it will be credited. In the present case, there will be debit in the expense account as the cost of the company increased with $ 5,000 and the cash account will be credited as there is a decrease in the balance of the cash account which is used for the purpose of paying off the liability of the company.
Advantages
- It helps in identifying the mistake in case if committed while recording the transaction because According to the double-entry system of the accounting, every transaction which takes place in the business is recorded in the books of accounts in at least two different accounts. Out of that one account will be debited by entering the transaction in the left side of the particular account and the other account will be credited by entering the transaction in the right side of the particular account.
- According to the fundamental concept of the double-entry system in the accounting, total of the debits should always be equal to the total of the credits for the company, so in case there is mismatch between the total of debit and total of the credit side then one can know that some transactions have been posted by the company wrongly and then measures can be taken to correct the same.
- Rules help the person recording the transaction in identifying that which account is to be debited and which account is to be credited in the books of accounts of the company.
Limitations
- In case the person recording the transaction in the books of accounts of the company does not know the basic rule regarding which account is to be debited and which of the account in any transaction is to be credited, then it would lead to the wrong recording of the transaction in the books.
- According to the fundamental concept of the double-entry system in the accounting, total of the debits should always be equal to the total of the credits for the company, so in case there is mismatch between the totals, then one can know that some transactions have been posted by the company wrongly but if the wrong amount is posted on both of the debit and credit side, then in that case also both debit and credit will be equal and the mistake cannot be identified.
Important Points
- According to the double-entry system of accounting, every transaction which takes place in the business is recorded in the books of accounts in at least two different accounts. Out of that one account will be debited by entering the transaction in the left side of the particular account and the other account will be credited by entering the transaction in the right side of the particular account.
- In case any asset is debited then it shows that there is an increase in the asset and in case liability is debited then it shows that there is a reduction in the liability of the company. Likewise, in case any income head is debited then it means there is a reduction in the income of the company whereas if any expense head is debited then it shows that there is an increase in the cost of the company.
Conclusion
Thus, in case there is Debit in any of the accounts in the books of the company, then it could be because of different reasons which include increase in the asset of the company, decrease in the liability of the company, increase in the cost or expense of the company or decrease in the revenue of the company.
As per the rule of the double-entry system in accounting, a total of the debit side in the books of accounts of the company should always be equal to the total of the credit side, so debits are balanced with the credits.
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