Difference Between Debit and Credit in Accounting

In olden times people do not have currency; they use to trade using the barter system, this system continued for a long time. But there was a glitch in the barter system as there was no measurement, neither there a pricing system. Gradually, currency was introduced and there was a huge improvement in the trading system.

Debit vs Credit in Accounting

The main difference between Debit and Credit in Accounting is that Debit is the data of all the cash which comes into the account whereas Credit means data of all the cash that is going out of the account. Luca Pacioli was the man who formulated Debit and Credit accounts in the 15th century, to keep a record to indicate what are the things used by the traders in Venice.

Debit and Credit

A Debit in a balance sheet of a company shows the data that is recorded as the outcome of either the rise in the asset or reduction of the liabilities. According to accounting principles, debits are balanced by credits, which function in the exact opposite direction. A debit statement is the recording of a payment owed or made. In the ledger account, the Debit entry is made on the left side.

A Credit entry implies that there is a reduction in the assets and increment in the liabilities. In simple words, Credit can be considered as a loan or credit agreement in which an agreement is made to borrow funds or to purchase goods or services in exchange for a future payment. In the ledger account, the Credit entry is made on the right side.

Comparison Table Between Debit and Credit in Accounting

Parameters of ComparisonDebitCredit
DefinitionDebit is the use of value for the transactionCredit is the source of value for a transaction
ApplicationDebit is used to express the increase or decrease in the assets and expenses or the liability and income.Credit is used to express the increase or decrease of liabilities and income or assets and expenses
JournalDebit is the first account that is recordedCredit is recorded after the Debit account followed by the word “To”
Placement in the T-formatIt is always placed on the right sideIt is always placed on the left side
EquationAssets = Liabilities + Equity is affected by Debiting one accountAssets = Liabilities + Equity is affected by Crediting one account

What is Debit in Accounting?

A Debit is an accounting entry that increases the assets or expense account and decreases liabilities on the Company’s balance sheet. Debit is an entry resulting from making a payment or owing one, a ledger account consists of two sides a left-hand side and the right-hand side The Debit account always reflects is on the left t side of an entry and is denoted by “Dr”.

A Debit is the characteristic of all the Double-Entry Accounting structures. All the Debit entries are placed at the top in a Standard Journal Entry, while the Credits are placed below Debits. In trial balances and adjusted trial balances, debits and credits are utilized to ensure all entries are balanced. To balance a ledger, all of the debits must equal all of the credits.

There is one more type of Debit called the Dangling debits; these are the debit balances that do not have an offsetting credit balance, so they cannot be written off. An expense of this type is reflected in financial accounting and is created when a company purchases goodwill or services to create debit. In a standard accounting transaction, at least two accounts are affected, resulting in the recording of a Credit entry against one account and a Debit entry against another.

What is Credit in Accounting?

An entry that decreases a liability’s value or increases the value of an asset is a credit entry. Credit has to be made in the books of accounts for any aspect that gives or expends benefits. In a ledger account, the credits are entered on the right side. For example, Small business owners, purchase refrigerators for their businesses, and an entry is being made to show the transaction in which the asset account is being debited to show the increase in the asset balance, and the cash account is credited to show that the cash account has decreased.

A negative balance in a Credit account is due to a loan and sets of liabilities, in other words, accounts that deal with the negative balance mainly receive the credits. These accounts are known as Credit accounts. The definition of credit is generally to receive something of worth and repay the lender at a later date, with interest, through a contractual accord. Credit is as an accord to purchase something with the promise to pay for it later or an express promise to do so; this is what we refer to as buying on credit. Also, there are some golden rules in accounting that are important to understand the basics of accounting they are as follows:

1.  We should always Debit what comes in and Credit what goes out.

2. All the expenses and losses are Debited and all incomes and gains are Credited.

3. The receiver is Debited and the giver is Credited.

Main Differences Between Debit and Credit in Accounting

1. Debit is always maintained at the left side of the ledger and the Credit is maintained at the right side  

    of the ledger.

2.  The receiver is Debited and the giver is credited in a Personal account.

3. In a Real account what comes in is Debited and what goes out is Credited.

4. All the expenses and losses are debited and all incomes and gains are credited in the Nominal

    account.

5.  When there is an increase in cash, inventory, plant and machinery, land, buildings, dividend, etc we

     see a rise in the Debit and when there is an increase in shareholders, rental income, Accounts

     payable, etc. we see an increase in the Credit.

Conclusion

The management of the financial system is the key to success in every business, if the financial system is checked there are fewer chances of losses and more chances of profit. It is the need of every business system be it a small or big company.

The accounting system provides us with all the tools and details that make us easy to understand our financial system. With the concept of Debit and Credit, it is possible to keep a check on what are the expenses and gains in our business. Hence, we can say that the accounting system is a boon to the one who is in desperate need of management of their financial management.

References

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