Briefly stated, debits (dr) record all money entering an account, whereas credits (cr) record all money leaving an account.
HOW DO YOU KNOW IF AN ACCOUNT IS A DEBIT OR CREDIT
- In your books, debits and credits are mirrored but similar entries. If a debit raises one account, a credit reduces the other.
- A debit is a transaction that takes place on the account’s left side. A drop in Equity, liability or income accounts lowers a rise in an asset or expenditure account. For example, if you bought a new computer, you would enter the asset acquired on the left side of your asset account and debit the purchase.
- A credit is a record that appears on the right side of a bookkeeping ledger. An asset or expenditure account is increased in Equity or decreased in liabilities when a transaction is made. Use your expense account to record the credit for the new computer purchase.
DEBIT AND CREDIT RELATION WITH ACCOUNTING EQUATION
Charges and credits happen at the same time in each monetary exchange in twofold section accounting. In the bookkeeping condition, as per Accounting Equation:
Assets = Liabilities + Equity
we can express debit and credit like below:
Assets (Debit side) = Liabilities + Equity (credit side)
in this way, on the off chance that a resource account expands (a charge (left)), either another resource account should diminish (a credit (right)), or a risk or value account should build (a credit (right)). In the lengthy condition, incomes increment value, and costs, costs, and profits decline value, so their distinction affects the situation.
Read Also accelerated depreciation
Debit and Credit Example
- For instance, the “cash” bucket might represent the entire amount of money in your business’ bank account.
- For example, in the “furniture” bucket, you might have the total value of all the furniture in your office.
- The “bank loan” bucket, for example, could represent a recent bank loan. Amounts in the buckets fluctuate when your company makes any purchase—from furnishings to loans to R&D spending.
- Using complete English phrases to record what happens in each bucket would be time-consuming, so we’ll use shorthand. Debits and credits play a part in this.
- To keep track of the money that comes in, we keep track of it as a debit.
- When money leaves a bucket, it’s recorded as a credit (abbreviated “cr” by accountants).
