Debit represents either an increase in a company’s expenses or a decline in its revenue. There is either an increase in the company’s assets or a decrease in liabilities. Debit is the part of a financial transaction recorded on the left side column.
This word is derived from the Latin, “debere,” which signifies “to owe,” therefore commonly abbreviated as “Dr” in financial transactions. In the double-entry system, every debit value is accompanied by an equal credit amount to counterbalance the entries.
- Debit is contradictory to credit. This means credit is recorded on the right side of the financial book.
- Debit is the part of a financial transaction recorded on the left side of accounting books. The records follow the double-entry bookkeeping system. Its accounting abbreviation is “Dr”
- It exhibits an upsurge in expenses. At the same time, it shows a decline in revenue.
Debit in Accounting Explained
It is an essential component of accounting. Be it journal entriesJournal EntriesJournal Entries are records used to keep a tab on every business transaction through debits & credits. The rules include having a minimum of 2 accounts (1Debit & at least 1Credit), listing debits before credits, & debit amounts always being equivalent to credit amounts. , ledger accountsLedger AccountsLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. , Trial balance, income statements, cash flow statements, or balance sheets; every accounting book has a left side or column recognized as Debit. To understand its significance, we need to understand its application as per standard accounting rulesAccounting RulesAccounting 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. .
Listed below are the account types and conditions:
#1- Increase in Assets:
Additions to a company’s fixed or current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. are recorded as debited items. These include cash, cash equivalentsCash EquivalentsCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market.., receivables, building, machinery, and stocks. For example, if a construction company buys a crusher, then it is an asset for the business and will appear on the debit side of the books.
#2 – Decrease in Liabilities:
Whenever there is a decline in bonds, loans, payables, mortgages, accrued expensesAccrued ExpensesAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited., or deferred revenueDeferred RevenueDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc. , it is mentioned as a debited item. Suppose a company pays off its bondholders, then this reduction in liability, i.e., bond, appears on the left side.
#3 – Decrease in Equity:
The owner’s equityOwner's EquityOwner’s Equity is the amount of money belonging to the business owners after deducting all the liabilities. The examples include Retained Earnings, Accumulated Profits, Common Stock & Preferred Stock, General Reserves & other Reserves etc. or invested capitalInvested CapitalInvested Capital is the total money that a firm raises by issuing debt to bond holders and securities to equity shareholders. Invested Capital Formula = Total Debt (Including Capital lease) + Total Equity & Equivalent Equity Investments + Non-Operating Cash decreases when the company goes into a loss. Equity also decreases when the owner withdraws funds for some reason. Therefore, it is shown as a debited item. For instance, if one of the partners disinvests his funds from a company, the diminished equity will be recorded on the left side.
#4 – Increase in Expenses or Loss:
A corporate expense consists of salary, rent, insurance premiumInsurance PremiumInsurance Premium is the amount paid by any individual or a corporate entity to cover themself from uncertain events resulting in heavy economic and non-economic losses., advertising, and electricity bills; all shown as debited items. Similarly, any loss incurred would be recorded as a debited item. For example, if an organization pays rent to the premises owner, the rent will be shown as a debited item.
#5 – Decrease in Income or Revenue:
RevenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. refers to income from operations and non-operating income, i.e., interest received, tax rebate, royalty, rent received, etc. The left side of accounting books records a decline in these revenue items. For example, in sales return, the sales account is treated as a debited item.
Example of Debit Entry in Accounting
To further understand Debited items in accounting, consider the following example.
A. ltd. Deals in readymade garments. The company purchased machinery worth $ 100,000 by cheque and paid off the electricity bill of $ 5,000. How to record the transaction in the books of accounts, and what accounts will be debited?
Below will be the accounting treatment for the transactions:
#1 Purchase of machinery worth $ 100,000 by check
In this case, there is an addition of one asset, i.e., machinery; therefore, the entry will show a debited item. But, at the same time, another asset, the bank account, will be entered as credit because there is a decrease in its balance.
|Particular||Debit ($)||Credit ($)|
|Machinery A/c Dr.||100000|
| To Bank A/c|
#2 Paid electricity bill of $ 5,000 in cash
Here, the electricity bill is entered as a debited item because the company’s cost increased by $5,000. In contrast, the cash account will be entered as credit as there is a decrease in cash assets.
The journal entry would be:
|Particular||Debit ($)||Credit ($)|
|Electricity Bills A/c Dr||5000|
|To Cash A/c|
(Electricity bill paid)
Debited entries are commonly made in finance and banking as well. The term has various real-world applications. For example, a debited balance shows excess debit total over the credit total.
A debit card is a form of plastic money used to withdraw funds from a checking account through an ATM. A checking accountChecking AccountA checking account is a bank account that allows multiple deposits and withdrawals. Additionally, it provides superior liquidity. is usually a savings or a current account. It can also be used to transfer money, pay loans, or buy products electronically. This expense comes from the cardholders’ balance. Whereas a credit card is also plastic money, but the user doesn’t spend the saved or deposited funds. Instead, the amount withdrawn through such a card is loaned. It is a credit offered by the financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. . This amount is to be repaid with interest within a narrow timeframe.
Debit and Credit in Accounting
According to 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. of accounting, every transaction is recorded in at least two different accounts. When assets are recorded as debited items, it signifies an increase in assets. However, when liabilities are entered as debited items, there is a decrease in liability.
EquityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet. debited represents a decrease, income debited represents income decrease. In contrast, if an expense is recorded as a debited item, the company’s expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital. increase.
Alternatively, if an asset is credited, it reflects a decrease in the asset. For example, the credit amount could be from the partial sale of the asset. When liability is recorded as a credit, it represents an increase in liability. Similarly, equity credited signifies an increase.
In banking, a debit shows the decrease in account balanceAccount BalanceAccount Balance is the amount of money in a person's financial account, such as a savings or checking account, at any given time. Furthermore, it can refer to the total amount of money owed to a third party, such as a utility company, credit card company, mortgage banker, or other similar lender or creditor.. A debit balance refers to a negative balance in the checking account. In other words, the customer has overdrawn. In contrast, credit represents the deposit or increase in an account balance. The credit balance indicates a positive or surplus fund in the checking account.
Let us now go through a simple accounting transaction exampleAccounting Transaction ExampleAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. to understand both sides. A company purchases goods worth $12500 from ABC Ltd. and immediately pays $5000 in cash. The following journal entry is made in the company’s books:
|Particular||Debit ($)||Credit ($)|
|Goods A/c Dr||12500|
|To Cash A/c||5000|
|To ABC Ltd. A/c |
(Goods purchased and $5000 paid in cash)
In the above example, goods are an asset recorded as debited items. This is because buying goods results in increased assets. Paying in cash decreases cash assets; therefore, it is a credit entry. Now ABC Ltd. is a creditorCreditorA creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties. to the company, which is a liability. Thus, an increase in liability is a credit entry.
Frequently Asked Questions (FAQs)
It is an asset or expense account that has a trial Balance. It allows the holders to deposit funds to purchase products or services. A balance shows the amount that can be spent for the purchase of products and services. For example, if a company purchases a building, then this asset is shown on the left side of the Balance Sheet.
The accounting rule says all expenses or losses are recorded on the left side; thus, any cost or loss is considered a debit.
Debit is a positive item on the Balance Sheet. In contrast, on a result item, it turns out to be on the negative side.
This article has been a guide to Debit and its definition. Here we discuss an example of the debit entry along with applications and types. You can learn more about accounting & bookkeeping from the following articles –